You heard me say that businesses in Malta need to get serious on Corporate Governance. With the advent of this crisis this need has now been amplified.

As you know, the new business environment is characterised by an increasingly complex set of pressures and demands from various stakeholder groups and radical uncertainty about the future. These factors are extremely difficult to face without having the proper corporate governance structures, whereby decisions are taken by God knows who, on what information or basis, if any at all.

However, even with any corporate governance structures in place, these factors are complicating board decision-making and challenging the shareholder-centric model of governance that has guided boards and business leaders for the past several decades. The shareholder-centric model, is the belief that the main aim of every company is to maximise profits and shareholder value.

The pandemic is putting this model to the test as issues related to the health and resilience of the company are now gaining in importance. The pandemic has made all too clear that society depends on well-functioning companies to meet its most basic needs — for food, shelter, communication, you name it — and that companies do not exist solely to maximise returns to shareholders. It follows that boards, which by law are a company’s governing body, should be concerned not just with returns to shareholders, but with the full range of factors that enable the company to create value over time.

Whether Covid-19 is truly an inflection point for corporate governance is yet to be seen, but there is no doubt that the pandemic has challenged core premises of the shareholder-centric model of governance in ways that have important implications for boards. Let me try to review a few of these.

More Structured Attention to Stakeholders
If the pandemic has shown anything, it is the importance of each and every stakeholder group to a company’s ability to function, let alone thrive and succeed over time. In the face of Covid-19, some companies struggled because their customers disappeared. Others saw their workforce reduced to a skeleton crew of essential employees. Still others grappled with supply chain disruptions, unsustainable debt, or insufficient capital to fund their operations. Since the onset of the crisis, it has become common practice for management to update the board on the situation regarding each stakeholder group and many boards and senior leaders have declared the health and safety of employees and customers to be their top priority. Coming out of the crisis, boards and senior leaders will find it even harder to say that shareholders — or, for that matter, any stakeholder group — has standing “primacy” over all the others. The crisis has demonstrated that the “primacy” of one group or the other cannot be fixed once-and-for-all. In the life of a company, there are times when employee interests must come first, times when customer interests should take priority, times when public need is paramount, and times when the interests of shareholders should be the prime concern. As reactions to Covid-19 showed, much depends on the nature of the interests at issue and the circumstances of the company. These lessons from Covid-19 imply a more active role for boards in monitoring companies’ relationships with their core stakeholders. That may mean asking management to continue the Covid-born practice of periodic reporting to the board on the status of each group or, more formally, to establish goals and a reporting process that will allow the board to track the company’s performance for its stakeholders more systematically over time. Boards will also want to take a more active role in ensuring that tradeoffs among the interests of its various stakeholders are handled in a way that is consistent with its obligations to these groups and with the long-term health of the company. For that, it will be important for directors to have a shared understanding of the company’s purpose and strategy, as well as a framework defining the company’s stakeholders and responsibilities to each. In the wake of Covid-19, boards will likely face increased pressure to incorporate stakeholder perspectives and voices, especially those of employees, into their oversight and decision processes. They will also be challenged to show that the company is performing well for all its stakeholders. External pressure aside, boards that have learned from Covid-19 will want to do this for their own purposes.

More Attention to How Business and Society Intersect
The pandemic has brought home the tight connection between business and society, and underscored the threat posed by risks stemming from large-scale societal problems that proponents of the shareholder model have traditionally regarded as outside the purview of business. The pandemic has shown that, theory aside, companies cannot so easily disconnect themselves from society-at-large. Covid-19 started as a public health crisis and quickly evolved into a financial and economic crisis of epic proportions. Some saw demand for their offerings collapse overnight, while others faced a deluge of orders. Many had to invent new ways of working in a matter of days, if not hours. Many companies rose to the occasion, retooling their production lines to make needed equipment or masks. For at least a decade, calls have been mounting for business to help address systemic concerns such as increasing income and wealth inequality, environmental degradation, climate change, racial and ethnic discrimination, declining public health and education, rising corruption, deteriorating public institutions, and, yes, increasing risk of pandemics. While some business leaders have heeded the call and found innovative ways to help address these problems, many others have looked the other way or defined the problems away as “social issues” or what economists calls “public goods” problems and therefore, by definition, outside the scope of their legitimate concern as business executives and fiduciaries for their shareholders. Covid-19 has shown that these issues are not only legitimate areas of concern for business but also, and more importantly, sources of both risk and opportunity. Coming out of the crisis, boards will want to work with their company’s leaders to ensure that the company’s risk management and oversight systems encompass the risks arising from these large-scale societal problems. They will also want to ensure that the company’s strategic planning and resource allocation processes take these problems into account, so that the resulting activities, at a minimum, do not exacerbate these problems and, ideally, help to ameliorate them.

More Deliberative Decision-Making
As noted earlier, Covid-19 has complicated board decision-making and made it less amenable to general rules and simple formulas. Indeed, the pandemic has called into question many pre-crisis decisions that were taken in the name of maximising shareholder value but that left those companies strapped for cash, saddled with debt, or otherwise ill-equipped to cope with the damage wrought by Covid-19. In this new environment, boards are increasingly having to rely on qualitative judgments in forming opinions and reaching decisions.To be sure, the decisions that boards are called on to make have always required some measure of qualitative judgment. The numbers frequently do not speak for themselves, and many issues that rise to the board are not amenable to resolution through financial analysis or other quantitative techniques. That’s why deliberation and debate have always been important in the boardroom and why the capacity to engage in such discussion is a critical skill for board members.The pandemic, however, has amplified the importance of judgment and, correspondingly, increased the amount of time that boards are spending in deliberative discussions exploring different options and weighing competing considerations and perspectives. Covid-19 has raised the bar on deliberation and judgment in the boardroom, but the underlying factors driving this development will most certainly outlive the pandemic. Companies will continue to face a complex and uncertain environment in which they are nevertheless expected to meet multiple objectives and answer to a diverse group of audiences. As boards work with management to chart the company’s post-Covid strategy and allocate resources as between current and future needs of the business, they will need to spend more time considering the claims of different stakeholders and reviewing the potential impacts of their decisions under various possible future scenarios. They will also need more and better information to support these discussions.

More Attention to Board Composition
A board’s role is to provide strategic guidance and oversight, and directors must bring the appropriate skills to address a company’s specific business needs and circumstances. The pandemic made it abundantly clear that a diversity of experience and perspective in the boardroom is also crucial for boards to do their job. Monitoring the company’s relationships with its stakeholders, assessing strategy, overseeing risk, reviewing societal engagement, assessing pay practices — these are just a few of the standard board tasks for which the insights of directors from different backgrounds would appear to be essential. Studies have shown that the addition of female directors has altered board discussions and made them more robust. For many boards, it will be necessary to develop new channels for identifying talent, new approaches to onboarding directors and more deliberate processes for building board cohesion in order to achieve their goals and realise the benefits of having a strong board composition.

Overall — A More Demanding Job
In summary, Covid-19 has made the director’s job more demanding. Since the onset of the pandemic, boards have been getting more frequent updates from management and having shorter, more frequent meetings to deal with a multitude of issues that have presented themselves. Surveys indicate that most directors are spending more time on the job. While the frequency and intensity of meetings is likely to decline somewhat as the crisis subsides, the new expectations of boards discussed above will inevitably require directors to devote more time to their role than has customarily been the case. Working more closely with management on strategy, tracking a richer set of performance measures, overseeing an expanded menu of risks, rethinking compensation policies, engaging in more thoughtful deliberation, reviewing board composition — all of these activities take time. And the ease of convening virtual meetings means that the new cadence is likely to include shorter, more frequent virtual meetings as well as periodic in-person meetings, once safety can be assured.

As boards look to the post-Covid era they will want to assess their readiness to meet the new demands, and develop a plan to address any gaps they find. At this moment, when old assumptions are being questioned, they will also want to ensure that their members have a shared understanding of the board’s role and responsibilities and of their individual role and responsibilities as directors.

At EMCS, we specialise in helping SMEs and family businesses build a corporate structure backed by a professional culture and approach to business. Feel free to contact me on: silvan.mifsud@emcs.com.mt to have a chat.