COVID-19 has shaken the stability of all organizations, including the most established. Companies are currently navigating the unknown waters of a global pandemic, unprecedented physical distancing, and the devastating financial impacts that ensue.
Being on a board involves a personal commitment to supporting the best interests of the organization – helping it to be successful and to be a better organization. More than ever, boards need to prepare for the governance challenges ahead and be aware of their responsibilities in the event of a crisis. (Osler has put together a checklist that boards can use and a list of questions to ask. ask due to the pandemic).
Knowing when a business is heading into a difficult financial situation is the most important factor in avoiding or successfully navigating through such difficulties. To carry out their duties and run their business effectively, boards need key information to assess potential financial risks and implement a plan to respond to them effectively.
Key information and indicators
In carrying out its oversight responsibilities, the board of directors should ensure that appropriate systems are in place to monitor the principal risks of the business, including financial risks. These systems should include regular follow-ups to the board of directors on financial indicators that can highlight the possibility of financial difficulties before these difficulties become a reality.
Receiving formalized and objective indicator reports allows the board to work more constructively with management before and as the organization faces potential challenges. The board should work with management to develop regular and objective indicator reports aimed at quickly identifying potential financial difficulties, such as those related to working capital, declining revenues, decreasing cash reserves. , capital commitments, debt maturity dates, discussions with lenders and declining profit margins.
Consider strategic alternatives
The board should work with management and rely on other information to develop expertise on the sources of liquidity available to the organization at all times. The board should clearly understand what sources of capital the organization is currently using and the potential restrictions that could reduce the availability of that capital. Understanding the organization’s liquidity options increases the chances that the organization will be able to resolve its financial difficulties without resorting to legal proceedings.
In addition to examining the company’s sources of liquidity, the organization should consider other alternatives to create value to fund different avenues. For example, an organization may be able to cut expenses, downsize, reduce commitments where possible, restructure operations, dispose of non-core assets in a timely manner, or consider a merger. or the sale of the business when appropriate.
Advance planning for a difficult financial situation
Whatever notice period the board has, it is important to have a clear plan that outlines who is responsible for what (including outside advisers); how follow-ups, confidentiality and disclosure will be managed; and what goals and alternatives will be pursued in the short and long term.
As a starting point, a financial hardship management plan should:
- Identify who is responsible for what , including a response team that is both technically competent and able to work harmoniously with internal staff and external advisors to identify areas of concern and implement solutions effectively.
- Identify and prioritize the key stakeholders whose support is needed to implement and execute a strategy to avoid or manage financial hardship.
- Identify a monitoring, confidentiality and disclosure process and delimit responsibility for internal and external monitoring and disclosure. Controlling and managing the flow of information is important to ensure successful restructuring.
- Identify immediate and long-term objectives and define the alternatives chosen to implement these objectives.
Preparing a board of directors for difficult financial situations can greatly improve an organization’s bottom line, especially as the COVID-19 pandemic continues to challenge businesses in new and unprecedented ways. Osler and the Institute of Corporate Directors have prepared a comprehensive report that expands on the topics discussed in this publication and provides practical and relevant advice on how the board can anticipate, prepare for and respond to financial difficulties.