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26 Mar 2020

COVID-19 has put the spotlight on how directors should be balancing stakeholders’ interests in promoting the success of their company

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The coronavirus 2019 ("COVID-19") pandemic presents a number of complex issues for companies. Boards of directors are having to make significant decisions at high speed to react to the crisis. The prevalence of social media means many decisions are attracting immediate scrutiny, sometimes with the potential for long-lasting reputational damage. In addition, companies are wrestling with how to continue to comply with their existing obligations.

This update provides a high-level overview of some of the issues facing directors in discharging particular duties in the face of this crisis.

In discharging the directors’ duty under section 172 of the Companies Act 2006 (the duty to promote the success of the company for the benefit of its member as a whole), directors are required to have regard to a non-exhaustive list of factors, which include:

  • the likely consequences of any decision in the long-term;
  • the interests of the company’s employees;
  • the need to foster the company’s business relationships with suppliers, customers and others; and
  • the desirability of the company maintaining a reputation for high standards of business conduct.

Whilst the section 172 duty is owed to the company itself, this list of codified factors requires directors to consider the effect of their decision-making on others. Short-term maintenance of profit needs to be balanced against not only the need to secure the longer-term survival of the company but also giving due regard to other stakeholder interests. Business commentators now say that empathy and altruism could be the most valuable currency in responding to the crisis and that inappropriate treatment of others will not be forgotten.

So far, the highest profile issue has been the treatment of employees. Decisions will be required as to the necessity of out-of-home working; investing in remote working assets and support; relaxing rules and policies; and a myriad of other considerations for supporting a workforce that is adapting to a new reality. Whilst the financial impact may not have been alleviated in full by the UK Government’s package of support, the balancing act faced by businesses is particularly evident with respect to the decision whether to reduce employee and contractor numbers.

Recognising that COVID-19 impacts every single business and every part of the supply chain, similar thoughtful consideration must be given as to whether any enforcement of supplier and customer breaches should be taken during this time or whether the company’s best long-term interests lie in seeking alternative solutions to mitigate what might otherwise be long-lasting damage.

There is no simple solution to dealing with conflicting stakeholder interests, however directors will be required to consider which courses of action will in their opinion promote the success of the company, having regard to the long term. Decisions need to be made quickly but not precipitously. A hasty announcement by one national retailer to remain open for business against the spirit of official advice attracted immediate opprobrium and a very public climb-down. It remains to be seen what the long-term repercussions might be for ’not doing the right thing’.

Practical considerations to assist directors

We do not know how long this pandemic and uncertainty will last. Now, more than ever, it is important for boards to ensure that they stand ready to act, as well as react. Some practical considerations to help them to do that might include: 

  • Hold more regular board meetings (by telephone or video conference, as the company's articles of association may allow) at which key decisions, and the rationale for those decisions, are recorded in detail, particularly where it is felt necessary to depart from the company's usual practice or processes.
  • Decision-making at this time must be carried out with regards to the separate "section 172(1) statement" required to be published by relevant companies (large and some medium-sized) for financial periods on or after 1 January 2019 describing how directors have had regard to the codified factors when performing their section 172 duty. This is in addition to a number of other requirements such as the obligation to report on engagement with employees and other stakeholders.
  • Boards should receive more regular updates from management, in between regularly scheduled board meetings, given the rapidly changing circumstances and Government guidance surrounding COVID-19.
  • Use your NEDs (non-executive directors). While executive directors and management teams are likely to be focused on the day-to-day operation of the company, NEDs can provide an independent and more objective sounding board for decision making. They can also help to keep in mind the bigger picture.
  • The effectiveness of stakeholder engagement mechanisms should be reviewed during this time and companies should consider engaging in regular communications with, in particular, customers and suppliers.
  • Use your professional advisers. If in any doubt, seek advice from the company's appointed legal, regulatory and tax advisers.
  • Public relations advisors are also likely to be of increasing importance during this time. Social media strategy should also be reviewed to ensure consistent and considered messages are being published.
Further updates on matters affecting our clients in the face of COVID-19 can be found on our dedicated COVID-19 page
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Anthony Clare

Anthony Clare
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T:  +44 20 7809 2326 M:  +44 7711 345 399 Email Anthony | Vcard Office:  London

Tony Edwards

Tony Edwards
Partner

T:  +44 20 7809 2110 M:  + 44 7917 658 751 Email Tony | Vcard Office:  London

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