Corporate Governance

It Starts with Good Governance – Reminders for the “New Normal”

Joe Cancilla, of counsel with McNees, addresses timely reminders of basic corporate governance issues that he recommends keeping top of mind.

Hopefully, there are more months behind us rather than ahead of us in dealing with COVID-19. As the world has settled into some version of normalcy while facing this global pandemic, the volume of information pushed to companies from its advisors has diminished from the initial shutdown chaos of March/April 2020. But that does not mean that the potential issues for businesses have reduced, nor does it alter some fundamental management concepts that the persons operating and managing a business must follow. So, some simple reminders of basic corporate governance issues, perhaps with some practical advice, might be in order.

As we know, the business and affairs of a corporation are managed by its directors. With that come the fiduciary duties of directors to act in the shareholders’ best interests, and, in some jurisdictions, perhaps the best interests of other constituencies as well. Most public company executives and directors are well aware of their responsibilities in this area. For many smaller private companies, the limited liability company (LLC) is a popular vehicle used to organize and manage a business. From a governance perspective, similar fiduciary duties, although perhaps a bit more flexible, apply to the persons managing the LLC and should be considered as the business adapts and responds to the current climate. Regardless of the size and structure of the business and whether it is publicly traded or privately held, the same general advice holds in thinking through and being alert to changes, both large and small, in the operation of the business in response to COVID-19.

For example, how much information has been flowing to those holding fiduciary duties? And through what channel has it been flowing? For larger public companies, scheduling formal Board meetings, providing a sufficient amount of information to support detailed agenda items, taking minutes of the meetings, and providing regular updates on the business in an ad-hoc manner from the CEO and CFO is commonplace. For most if not all such companies, the number of meetings and volume of information flowing to its directors has likely increased significantly in 2020.

However, this practice may not be second nature to the smaller private companies. It is worth considering how the governance profile of the business would appear to someone on the outside looking in. For example, if your business is looking to refinance existing indebtedness or perhaps obtain new debt or equity financing, the number and quality of potential sources may be impacted by how well the corporate books and records have been maintained in 2020.

So the practical advice is that if your business has not been very structured and formal in this area, it might be worthwhile to direct some resources to shore up this cornerstone of corporate governance. As part of this effort, consider when the corporate organizational documents were last reviewed. Now might be a good time to ensure, for example, that actually holding a Board meeting on Microsoft Teams or Zoom is permitted in your jurisdiction and by your organizational documents (State statute, Charter, Bylaws and/or LLC Operating Agreement).

Similarly, consider how well each individual can at least hear and hopefully see the presentation materials during a meeting. Be sensitive to confidentiality issues, as well. If there is significant background noise on a call, it might be worthwhile from a governance perspective to dig deeper into where a director is physically sitting and perhaps provide a reminder that others may be able to see and hear the meeting that probably should not.

It is never a bad time to check in with your information technology group to ensure important corporate records are being stored, either temporarily or permanently, in secure locations.

As for a record of what was presented and what actions were taken at the meeting, is everything, including signatures, being stored electronically? Are minutes being reviewed and signed manually, then scanned and uploaded somewhere? Was the pre-COVID-19 practice to include signed minutes and other significant corporate documents in a hard-copy minute book? Is there a plan to continue that practice post-COVID-19? On a good day, records management is a painful topic for many companies and their in-house counsel. But if there is significant remote work taking place that is generating important corporate records, it is worth considering how those records are being generated and maintained, as well as how consistent that process is with past practice. It is never a bad time to check in with your information technology group to ensure important corporate records are being stored, either temporarily or permanently, in secure locations. And to close this loop, a reminder to the Board that if they are now receiving materials and attending Board meetings in a different way than they were pre-COVID-19, they should consider whether they have any records now being stored unexpectedly somewhere (on a personal device or in a different cloud-based area) that might be discoverable.

More information flowing to the Board is generally a good thing. But from a corporate compliance perspective, consider whether any personal health information is being inadvertently distributed. It seems prudent that information be regularly disseminated to the Board regarding any positive COVID-19 tests, any procedures or new policies being implemented, as well as any impact on production or operations of the business.

However, consider the sensitivity of any personal information that may be contained in the detailed appendices that support high-level summaries or presentation materials. The board should also be regularly informed regarding overall compliance initiatives, particularly if operating in an industry impacted by new and frequently changing State and Federal COVID-19 regulations (like the hospitality and food and beverage industries, as examples).

Does your business operate internationally, and does it have legal entities formed in foreign jurisdictions? Have the books and records of those entities been maintained adequately, and are regular governance meetings being scheduled and held? If a service company or local law firm has not been engaged to handle those issues, consider whether now might be an appropriate time to get that part of the house in order. And while you are at it, consider for significant operational foreign subsidiaries whether some brief local counsel advice might be money well spent to assess what, if any, fiduciary duties may exist and to whom they run, and whether there are any specific COVID-19 impacts in the jurisdiction, through new regulations or otherwise.

For most businesses, the companyʼs financial health and/ or of the industry within which it operates is, in this era of COVID-19, receiving regular and significant attention. From a governance perspective to the extent insolvency issues may be on the horizon, it is worth remembering that fiduciary duties do not go away when a business is insolvent. However, the creditors of the company likely replace the shareholders as the primary beneficiary of those duties.

In addition, consider whether it might be prudent to set up a special committee of the Board to both serve as a governance channel for specific actions the company may need to take, not only in dealing with potential insolvency issues but also in response to any specific COVID-19 operational issues. A special committee would also be recommended by most advisors when considering whether to explore a sale or other restructuring of the business. This area’s general guidance would be to engage directors independent and disinterested in any possible restructuring or other transaction to serve on this special committee. And in the smaller private company arena, consider adding a manager or director if there are insufficient resources to discharge these duties. Also, vetting all prospective committee members for ties to any controlling equity interest holders would be recommended. Outside advisors will likely be needed if the concerns are significant. If the finance group is not tuned in to this for budgeting purposes, be sure to check in with them.

On that note, some practical considerations for lawyers or compliance personnel working in-house (and for senior managers or owners in smaller private companies) might help provide early warning of potential issues that may need to be addressed. For example, stay in close contact with your finance and accounting personnel at all levels. Presumably, senior finance executives in a larger organization have processes and procedures to monitor potential liquidity concerns.

But for smaller private companies, perhaps other finance or accounting personnel may help provide clues in potential concerns with, for example, slow-paying customers and the financial impact to the company that might not surface for a while. Maybe a plant-level controller or an accounts payable manager should be a stop on your next trip around the office (if your office is open) or for expanding your video meeting skills. Similarly, check in with your friends in the procurement function, as well as inventory management and production scheduling. Issues with suppliers, expanding inventory levels, idle or excessive production scheduling all may give clues to concerns that might trigger further internal discussions. Usually, someone or some group in the organization is getting signals in advance of a financial crisis, but if everyone is scattered and working remotely, the issues may be more difficult to discover. Being tuned in to
“hidden” warning signals should help you prepare timely advice for the business that might be facing an unexpected significant event sooner rather than later.

As our friend FerrisBueller said so eloquently in 1986: “Life moves pretty fast. If you donʼt stop
and look around once in a while, you could miss it.” Hopefully, by the time you are reading this, COVID-19 is in the rearview mirror, but let us be sure to look around the corporate governance side of the house and be prepared for whatever might be quickly approaching the top of your to do list, whether you realize it or not.

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