COVID-19: Good governance breeds resilience

Carolyn Gelling from The International Stock Exchange Group takes a closer look at how to remain focused on longer term strategic direction whilst dealing with the ramifications of the COVID-19 crisis. 

The COVID-19 pandemic has touched every business on the island to varying degrees and its ramifications present ongoing and significant challenges to business owners, company executives and their boards, particularly within small to mid-sized companies.

Business continuity Vs long term strategy

Unsurprisingly, business continuity has been the foremost priority for boards and their management teams over the past two months, with the most urgent commercial considerations featuring closely alongside. Many businesses have been fighting for survival, facing one or more challenges such as restricted short-term cashflow, rapid adaptation of their operations to secure alternative forms of revenue, adoption of the ‘new normal’ working practices to comply with social distancing and then progress away from ‘lockdown’ and into another ‘new normal’. Therefore, the reality is that there may be limited capacity to reflect upon medium to long term business objectives and strategic aims.    

It is obviously difficult to balance these short-term imperatives, yet still keep sight of the wider picture.  This is a challenge that requires resilience, astute leadership and comprehensive planning in adopting measures that preserve long term value for shareholders and other stakeholders. For many businesses and particularly those of a certain size and capacity, established corporate governance practice and processes will facilitate decision-making and the corresponding drive for accountability and transparency to stakeholders. These foundations are critical in uncertain times, when a structured process will support executive activity and drive performance.

Corporate governance codes

The UK Corporate Governance Code (“UK Code”) is not law in the UK or Isle of Man, therefore compliance is not compulsory. However, it is not followed only by the premium listed companies to which it directly applies but also by many other companies keen to follow best practice. At TISE, as a listed company ourselves, we have opted to follow the Corporate Governance Code of the Quoted Companies Alliance (QCA), of which we are also a member. We have always advocated for businesses to embed and maintain good governance within their organisations from their early years, as best practice and, particularly where there are aspirations for growth and expansion, to ensure that they are best placed for the future.

The UK Code is split into five areas: board leadership and company purpose; division of board responsibilities; (board) composition, succession and evaluation; audit, risk and internal control; and remuneration.  Similarly, the QCA Code has ten principles of corporate governance which cover similar areas but  is specifically tailored towards small and mid-size companies. 

Within the UK Code, the first area of board leadership and company purpose in itself directs attention to long term strategic considerations. It outlines that a successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.  The company must understand its purpose, establish its values and strategy, and satisfy itself that these and its culture are aligned.  Whilst some of these considerations may require more attention to agree and adopt than may necessarily be available at present, the principle that all directors must act with integrity, lead by example and promote the desired culture is most critical at this time.  

The board leadership and company purpose section also stipulates that the board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them, thus aiding decision making processes and the review of ongoing strategy. It also includes a principle that the board should establish a framework of prudent and effective controls, which enable risk to be assessed and managed – a particularly important area for executive teams to remain fully versed and mindful of, especially in times of change and crisis.  

Further, this first section of the UK Code requires that in order for the company to meet its responsibilities to shareholders and other stakeholders, its board should ensure effective engagement with, and encourage participation from, these parties. In addition, the board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success, a key area of focus in light of the aforementioned challenges posed by COVID-19, and the workforce should be able to raise any matters of concern.

Good corporate governance can help a business negotiate a crisis such as COVID-19, attract new customers, recruit and retain staff, meet regulatory requirements or attract investment from outside investors. Indeed, it feeds through to the standards and information that a variety of prospective stakeholders will expect to see when conducting their due diligence on a business, especially one which is seeking additional capital from external investors, or facilitating that journey with an exchange such as ours.

Breeding resilience

In conclusion, sustainable success over the long term requires a careful balance of applying due considerations to a variety of sometimes competing priorities. By adopting a more formalised framework, from the principles of good corporate governance, senior leadership teams can remain focused and provide themselves with tools to facilitate their highest level of performance at the most challenging of times.

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