The COVID-19 pandemic is an unprecedented global health crisis – a black swan event – which has had significant human, economic, and social impact across the globe. The shock to economies and business continues to reverberate with the rapid spread of the virus, and it is uncertain how quickly it can be brought under control. At the corporate level, the pandemic presents complex and interconnected challenges for business leaders as they contemplate how to prepare for the inevitable recession, disrupted supply chains and business continuity in general.

We understand the critical role of corporate governance in the ability of businesses to face and respond to crises. In this publication, we provide responses to questions that can assist Nigerian corporate leaders in planning their recovery and managing business risks brought about by the pandemic.

We review corporate governance during a crisis under three broad areas:

• The role of directors
• Meetings and making decisions
• Corporate compliance

1. The role and responsibility of directors in a crisis

The board of directors has a unique role to play. At this time, a company’s employees, customers, shareholders and suppliers and other stakeholders will be looking to the leadership of the company for guidance and comfort. The boards’ crisis response will be critical to a company’s ability to emerge from the crisis, and how the board sets and models the tone for the organization will influence stakeholder confidence during the pandemic.

What is the board’s role in a crisis?

The board of directors has a legal duty to direct and manage the business of a company and owes a fiduciary duty of care and loyalty to the company, its shareholders and employees. It has the paramount legal responsibility for the business. Directors delegate the management of the company to the executive management of the company on a day-to-day basis, and management is responsible for developing and implementing a company’s overall business strategy.

During a crisis, it’s not business as usual, and the usually defined line between the management and the board may become slightly blurred and needs to be carefully streamlined within in a new phase of governance. In a crisis scenario, management is responsible for developing a crisis management plan and for establishing a crisis response team. They are in the forefront of taking difficult decisions and implementing operational interventions.  The board, on the other hand, is responsible for overseeing management’s approach to the crisis, monitoring its response, and providing internal guidance and support to management’s strategy.

At critical stages during the crisis, directors may find themselves more involved than usual, but they must resist trying to jump in headfirst and possibly interfere with management’s capacity to execute its crisis plan. Creating value through critical oversight, engaging with key stakeholders and providing strong strategic support is where the board will prove its worth, and supporting the executive management in managing the crisis should be at the top of the agenda for every director.

What are the immediate areas of focus for the board?

The board of directors and management will find themselves dealing with a myriad of operational and strategic issues caused by the pandemic, which will have short- and long-term consequences. As they grapple with understanding the effect of these issues, the board will want to assure itself that:

• Management has the capability to manage the crisis;
• Leadership resolve is demonstrated;
• Decisions are put into action and communicated to stakeholders; and that
• The crisis management plan provides for the following key areas:

Health and safety

The pandemic is a health crisis and the company’s priority should be to ensure that its employees and other stakeholders are safe. New ways of working need to be explored including remote working and observing government policies on stay-at-home measures and social distancing for onsite workers. A wellness plan that includes mental health checks and support for employees will be necessary.

Crisis response team

A core cross-functional crisis team with defined responsibilities should be appointed in order to have a people who are mainly focused on crisis response. The team will concentrate on establishing protocols and decision making with respect to issues including employee welfare, business continuity planning, supply chain issues, financial modelling and communication.

Risk assessment, managing the risks and business continuity

COVID-19 is a systemic risk. Directors will need to understand the economic and human risks brought on by the pandemic and must review and interrogate management’s strategy for mitigating those risks. Besides the business impact, workforce disruption, key employee risks and succession planning will need to be considered. Due to the evolving nature of the pandemic, directors will need to be kept abreast of how the crisis management plan is developing in response to the evolving circumstances and must ensure that a business continuity plan will cover short, medium- and long-term perspectives.

Liquidity

Liquidity is going to be an acute concern for many businesses, and directors will need to ensure that the company has enough cash to ride out the storm. Scenario planning should be given high priority in order for the leadership of the company to understand the strategic variables that will impact earnings and expenditure (including workforce planning and cost cuts), and to test cash flow forecasts.

Supply chain

Businesses may be unable to balance supply and demand for a long time, and operations may possibly grind to a halt as a result of supply chain problems. Business leaders must consider if their organizations are able to fulfill contractual obligations and will need to assess the impact of the crisis on their supply chain, in order to take steps to repair or stabilize it. Broken links will need to be rebuilt and relationships with suppliers re-established. The crisis also serves as an opportunity to create safeguards, diversify supply chains, take advantage of technological advancements, and to make supply chains more sustainable.  

Strategy

Directors should challenge management’s thinking on how the pandemic has permanently shifted the company’s strategy, and how the company will adapt to a new way of doing business in the short and long term. There may be discussions on pivotal changes to business models to take advantage of new opportunities, and to prepare the business for recovery.

Communication

A clear and transparent communication strategy is essential at this time, both internally and externally. There is no need to allow employees, customers and suppliers to worry unnecessarily, and any financial disclosure requirements need to be considered. The company should receive up-to-date and authoritative information on the pandemic and communication with stakeholders needs to be adequate and timely. Tough decisions need to be made with empathy and compassion and all available communications channels should be assessed for appropriateness and efficiency.

The board can advise on strategies, and three critical communications pathways can be used to transmit information without burdening management – pathways between:

• The CEO and the chairman
• The CEO and the board
• The chairman and the board

The board may also consider if an ad-hoc committee would better support management at this time.

Are there any legal implications for the board for failure to adequately consider and mitigate risks to the company arising from the COVID-19 pandemic?

These are unprecedented times and companies may face practical insolvency where, for instance, they are unable to pay debts, or fail standard cash flow and balance sheet insolvency tests. This may call on directors to carefully consider the business decisions they make during the pandemic within a legal context.

Under Nigerian law, directors are under a statutory obligation to always act in good faith and in the best interest of the company and must have regard to the interest of the company’s employees as well as its shareholders. They are legally required to exercise a degree of care, skill and diligence that a reasonably prudent director would exercise in comparable circumstance, and failure to exercise such reasonable care could render a director liable for negligence and breach of duty. Directors can also be held criminally liable if the business of the company is carried on with the intent to defraud creditors.

While there is a presumption that directors will be given some leeway in the interpretation of how a “reasonably prudent director” would react to the extraordinary and unpredictable business landscape that we find ourselves, it would be prudent for directors to ensure that losses are being minimized in a near-insolvency scenario, they must make certain that they raise their concerns formally and that business decisions are properly documented by valid resolutions. Non-executive and executive directors are reminded that they are they are all individually responsible for the actions of the board, even if they were absent from the board meeting, unless their absence is justified, or their dissent formally recorded.

Meetings and decision-making

Can valid decisions be taken at virtual board meetings?

It depends. Boards need to hold regular meetings, and to call a special meeting to review the impact of the pandemic and plan a response. Due to the evolving nature of the crisis, boards may be required to hold meetings more frequently or at short notice, particularly if the company is in a financial crisis, but they need to ensure that they comply with the company and statutory regulations.

Virtual meetings

Nigerian law is silent as to whether the Articles must specifically authorize electronic communication, and common law principles would appear to allow virtual board meetings in the absence of specific authority in the Articles.

Directors are able to regulate their meetings as they see fit under the law, and valid virtual board meetings can be held with valid board resolutions passed at short notice insofar as:

• The company’s Articles dispense with the statutory 14-day written notice for board meeting;
• All directors receive notice of the meeting; and
• The video conference facilities for the meetings allow the directors to debate, vote and offer dissenting views.

Notice for meetings

In the event that there are no provisions in the company’s Articles enabling valid meetings to be held by shorter notice, the Articles may be altered to enable meeting at short notice by passing a shareholder’s special resolution with a 75% majority vote. The new Articles take effect immediately and valid board meetings can be held without delay.

Can an Annual General Meeting of a company be validly held via teleconferencing facilities?

No. Companies are able to hold physical Annual General Meetings (AGMs) during the pandemic. The Corporate Affairs Commission (CAC) has issued new guidelines permitting public companies to hold their AGMs by allowing the shareholders to attend the meeting through pre-selected proxies that satisfy the company’s quorum condition. Shareholders are not allowed to attend in person under the guidelines in a bid to comply with state regulations on social distancing and stay-at-home measures. However, such meetings must have a representative of the CAC in attendance and the prior approval of the CAC must be obtained by the company before scheduling the meeting.

Smaller private companies that are able to conduct AGMs within the constraints of the government restrictions on social distancing and stay-at-home measures may hold valid physical meetings in accordance with the law.

Nigerian law requires a quorum of a general meeting to be present in person at a place in Nigeria designated by the meeting notice to be the venue for the meeting. It is however entirely possible for the members to agree for members to join the meeting by videoconference, but they would not be considered as being present at the meeting and would only be able to vote by proxy through a member physically present at the meeting. The law does not currently envisage completely virtual general meetings and it is difficult stretch to read technological advancements into the language of the law as it is presently.

What is the role of the company secretary in ensuring smooth proceedings for virtual board meetings?

The Secretary is the host of virtual board meetings, and is responsible for:

Attendance & Quorum

S/he ensures a meeting is chaired, roll call is carried out, ground rules established, and a timed agenda set.

Technology

S/he deals with technical matters, ensures login details are distributed, and that all participants are familiar with the technology and understand the mode of communication during the meeting; it may also be necessary to supply any technological hardware to directors to enable virtual meetings.

Advice & Minutes

S/he is responsible for documenting the meeting, supporting the directors and ensuring that all presenters join and leave the meeting appropriately.

In view of the government’s stay-at-home measures, how can resolutions be effectively passed by both the board and shareholders?

In the event that valid virtual meetings can’t be held, there are other alternatives to physical meetings.

Written resolutions

Written resolutions of the members or the board of a company represent valid decisions of the members or the board as long as all directors sign a written board resolution and all members sign a written shareholders’ resolution in the case private companies.  Public companies can only pass shareholder resolutions at meetings held in line with the prescribed regulatory guidelines.

Delegation to committees

A board may resolve to delegate a matter to a committee made up of two or three directors who are able to take decisions on behalf of the full board.

Subsequent ratification

Sometimes, emergency meetings may need to be held which do not satisfy validity requirements, but with the intention that decisions taken will be ratified at a subsequent and validly held board meeting or written resolution. Decisions taken at such emergency meeting will not be valid until so ratified.

3. Corporate administration and compliance

Have there been any changes or new requirements on regulatory filing obligations and financial disclosures for companies?

Corporate Affairs Commission

Guidelines on holding public companies’ AGMs by proxy have been provided by the CAC, but there does not appear to have been any other pronouncements from the CAC relating to corporate filing requirements. Some challenges are apparent. For instant, certain resolutions filed at the CAC are required to be original and signed using wet ink. This will be difficult to achieve during the pandemic, and time bound filing requirements may incur penalties to the company. Further guidelines are awaited in this regard.

Securities & Exchange Commission

The Securities & Exchange Commission (SEC) requires all public companies to be transparent and to continue to make material disclosures to investors in respect of the impact of the pandemic. Public companies are required to disclose the trends and company’s outlook, including updates on the implementation of business continuity plans.

All issuers of securities are required by the SEC to submit and process all regulatory filing, returns and applications electronically, through dedicated email addresses. The SEC has also approved a 60-day extension, in the first instance for public companies and capital market operators to file their 2019 annual reports and Q1 2020 reports.

All public company holding AGM’s are required to conduct general meetings in accordance with SEC’s rules and regulations, state health guidelines and Nigerian company law.

Conclusion

Good corporate governance matters in a crisis, and directors should ensure that the executive management is not constrained by their oversight role, and that management has enough latitude to respond to this unprecedented crisis and fast-changing business landscape. A director’s role as a critical sounding board to executive management regarding significant strategic decisions cannot be overstated and may be critical to the success of the crisis management plan.

It is possible for the role of the board to shift if the executive crisis management team is unable to lead. It then falls on the board lead the company through the crisis by establishing and directing a new crisis management team.