Corporate Governance in the times of COVID 19 pandemic

CORPORATE GOVERNANCE: Amidst COVID-19

by Anuja Jha

Introduction

‘Corporate governance is the combination of mechanisms that ensure that the management runs the firm for the benefit of one or several stakeholders. Such stakeholders may cover shareholders, creditors, suppliers, clients and other parties with whom the firm conducts its business.’[1] In simple words, corporate governance may be a way of governing a corporation. It is a process by which the management and direction of company is affected.[2] It means the business should be carried out according to the wishes of the shareholders.

Globalization and multifaceted nature of completing business companies are significant supporters in the monetary development of a country. It is because of good corporate governance that a firm attracts low-cost capital and can meet the societal expectations as well as improves its overall performance.[3] In today’s era, to operate the business smoothly and efficiently corporate governance is a must ingredient involved, as with a good governance system there exist a proper order of functions and accountability leading to increased profitability of the firm. Undoubtedly, a good governance system improves transparency and trust leading to financial stability along with the business integrity. It is to be noted that the corporate governance practices are mainly to keep an eye on the minimization of conflict of interest between managers and stakeholders.[4] However, due to the sudden outbreak of Covid-19 there is great turbulence in the governance system of the organisation.

This article is an attempt to highlight the role of a good corporate governance system during a global pandemic due to which the global economy is suffering and most organisations are on the verge of collapsing.

COVID-19 AND INDIAN ECONOMY

The sudden outburst of the global pandemic Covid-19 has shaken the core of the social, economic and financial structure of all the countries. The situation has gotten worse to the extent that even the leading economies such as of the US, Italy, UK, Germany, China etc. are on the edge of collapsing. According to WTO, the world trade is anticipated to plunge by approximately 13% to 32% because of the sudden disruption to the normal global economic structure around the world.  Most of the economists believe that the plunge in the economy is deeper than that of the financial crisis of the year 2008-09.

Trade worldwide was experiencing a slackening even before the outburst of the global pandemic. However, in the year 2020 a few restrictions on the movement were imposed directly affecting the labour supply. Therefore, there can be two possible scenarios; (a) A significant decline in the trade followed by a recovery in the second half of 2020, or (b) a steeper fall and prolonged as well as incomplete recovery. The economic recovery is however still uncertain as the fatal disease has deeply affected almost the entire world. Hence, even the Organisation for Economic Co-operation and Development affirmed that the global economic growth might be cut to 1.5% in the year 2020  if there is similar situation of spreading of coronavirus.

For India, the economic impact has been highly disruptive. The World Bank itself has affirmed a downgraded economic growth in India for the year 2021. The Global Head of Equity at Jeffries, Christopher Wood has predicted that lockdown in countries like Indonesia, India and other developing nations can prove to be more disastrous for the economy due to lack of help to small businesses and unemployment benefits. During the initial days of the lockdown, India expected a loss of around Rs. 32,000 crores almost every day. There are four categories showing the impact of Coronavirus on India’s economy:

THE IMPACT

  • Supply disruptions: Indian economy is highly dependent on China for importing the raw materials. Due to the higher input pricing the profitability will experience a downfall, further resulting in the decline of total capacity building. However, it can be presumed this disruption is temporary and depends on the revival of Chinese production units.
  • Global and Domestic Demand: The expenditure of consumers experienced a major downgrade because of the fear of sickness as well as restricted movements. The two sectors that are highly affected in a very short duration are aviation and the hospitality sectors. Also due to major restrictions and lockdown, unemployment rate especially in informal and unorganised sector took a hike consequently degrading some of the consumer expenditure.
  •   Banking and Financial institutions: Due to lockdown and degrading economy, the number of loan defaulters have also been increasing. This increment, further results in stressing these two sectors affecting the credit growth. There has also been a significant devaluation of the rupee against the dollar consequently worsening the trade deficit. Moreover, the increasing bond yields would make borrowing more expensive, consequently reducing the bank margins.
  • Falling Oil prices: Undoubtedly, amidst all the chaos, oil prices have suffered a lot. The Brent Crude Oil took a huge plunge being US $68.5 in January to US$ 28.2 in March. However, since the nation imports nearly 85% of its crude oil, in case of Indian economy this can be considered as a boon for both the current as well as fiscal account, further giving some space to policymakers to act.

To ensure a smooth supply chain with no disruptions due to China, the government is continuously toiling hard to maintain a self-reliant India and launched ‘The Atma-Nirbhar Bharat Abhiyan’. According to this programme the government is devoting approximately 10% of the Indian GDP to help the local business of India. Amidst the chaos and lockdown, we understood the importance of the local market whether it be local manufacturing or the local supply chain. With the mission the government is planning to cut down its import especially from China, the focus is on the substitution of the imported goods along with their quality to compete in this era of globalisation.

GOOD GOVERNANCE DURING CORONAVIRUS

Corporate governance during this deadly time is not just a spontaneous but companies will have to face sharp challenges in the current system of governance. There would be struggle on every step, starting from holding annual shareholder meetings, conducting board business, engagement with investors, compiling reports periodically to engagement in the combination transactions, companies will find it difficult to run the governance smoothly.

Taking the example of Securities and Exchange Commission, USA, in March 2020, it issued certain guidelines for the companies in US regarding efficient corporate governance during the time of pandemic. The guidelines by SEC primarily focus on laws relating to virtual meetings and encourage the company board to offer shareholder proponents with other options at liberty such as through phones or video calls. Therefore, there must be certain amendments regarding the current corporate governance system so that the companies do not suffer just because of ineffective corporate governance.

During the time of this on-going crises, company’s expectations from the senior management are often high, hence, the board as well as the management should be have a clear picture of their respective roles in this pandemic. Directors are bound by the fiduciary obligations so they must ensure they are performing all of their duties with extreme caution without losing the reasonableness of the circumstances. The board must take into consideration the safety of all the stakeholders involved and place them higher in the priority list.

The directors may follow a particular plan for their survival and must communicate with the shareholders on a regular basis to make sure the smooth functioning of the company. Since there is a crisis going on all over the world, a disaster plan confirming the feasibility of the company can prove to be a boon for efficient governance. The plan may include important matters such as cybersecurity, legal conformity, communication decorum among others. Following can be some of the initiatives by the companies for efficient corporate governance amidst all the chaos:

INITIATIVES FOR EFFICIENT CORPORATE GOVERNANCE

  • Engagement of the board- The board of directors plays a significant role in the current situation of pandemic. Since there is a lot of struggle going on some of the essentials of smooth governance are tough to fulfill. Therefore, the board may conduct virtual meetings on a regular basis, which will subsequently help the company for future strategies and will provide an overall oversight of its performance. Moreover, the board must plan in such a way that there is a proper disclosure of all the decisions to shareholders, stakeholders as well as the employees.
  • Risk Identification and its Management- For ensuring a safe workplace the board must be in close contact with the top most level management on a regular basis to identify all the risks associated with the outbreak of Covid-19. The board may take two approach of risk analysis into consideration. First approach regarding the risks can be the effect of the virus on the supply chains, manufacturers, intermediaries, pricing, liquidity etc. The latter approach can be the continuous examination of disruptions as well as the legal implications involved. Meeting all the statutory obligations regarding it can help an organisation in the management of risks as well. The company must be aware of all the relaxations and obligations offered by the government and in accordance with that, it might monitor the current financial conditions.
  • Performance of Critical functions- The Company, to work efficiently even during this pandemic must keep its critical activities active and functioning. The essential activities must be keep going and the company while monitoring over some of the non-essential activities should know when to invoke them in a necessity. There may also be a proper reviewing of the third party contracts the key points of which must be assessed on the basis of force majeure, data protection etc. to have a smooth operation of the essential activities.
  • Managing Working Capital- For an efficient functioning of the company the management of working capital plays a significant role. The board should understand the short-term liquidity requirement by the assessment of short term need of cash and alternative sources such as credit line, customer advance etc. and along with the management must toil hard to fulfil those liquidity needs.
  • Cyber Challenges- Since everything is associated with the cyberspace, the risks involved also increases, and therefore the company must not forget to tackle the cyber risks. Among all the challenges there is one threat that can be highly fatal to the company and that is violation of data privacy, to protect the data privacy a company may perform in the following way;
  • To avoid such risks there must be a strict compliance of the company’s protocol regarding data sharing. However, if the company lacks the protocols, the board as well as the senior management should make certain policies to ensure the data safety.
  • IT sector in every company plays a significant role in the day-to-day communications through technology. Therefore, the companies must ensure a well-equipped IT support along with all the bare minimum requirements, which will further protect the integrity of confidential data and mitigate the cyber-attacks.

Therefore, these are some points that must be taken into consideration in the present day crisis as a company cannot prosper without an efficient system of governance and during this time of Covid-19, every company needs to amend the prevalent system of corporate governance to make profit and to boost its economy.

CONCLUSION

Corporate governance intends to add up the accountability and creditability of any organisation and a company who longs a prosperous life cycle must follow the principles of corporate governance. A company following the basic principles of corporate governance not only gains the trust of its investors but also brush up its transparency as well as the efficiency. In this article, the author tried to analyse the changing corporate governance in the on-going crisis of Covid-19. The article comprised of two major topics i.e. Covid-19 and Indian Economy and Corporate Governance during Coronavirus. It can be concluded that post Covid period would affect the organisations in a negative way. However, if managed right and with efficient corporate governance system, the organisations will lead their way towards success.

Views are personal.

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ABOUT THE AUTHOR

Anuja Jha is currently pursuing B.A. LLB. (Hons.) from Maharashtra National Law University, Nagpur


REFERENCE

[1]MARC GOERGEN & LUC RENNEBOOG, CORPORATE GOVERNANCE AND SHAREHOLDER VALUE 100-101, (1 ed. Wiley-Blackwell 2006).

[2] KAI CABRERA, ETHICS FOR GOVERNANCE 132, (1 ed. ED-Tech Press 2018).

[3]Shafi Mohammad, Why Effective Corporate Matters, 7 TAYLOR’S BUSINESS REVIEW: A CONTEMPORARY BUSINESS JOURNAL 2, 2018.

[4]supra note at 3.

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