Corporate Governance: Succession Planning & Continuity During COVID-19

“Corporate governance is the system by which companies are directed and controlled.”

-The Cadbury Committee (U.K.)

The current crisis of COVID-19 is unprecedented and marked by uncertainty. The present situation has adversely impacted the world economy and continuity of most of the business organisations is under radar and the sustainability of the business organisations is under grave uncertainty. The board of directors of a company (“Board”) need to ensure that the crisis is tackled in a proper and an organised manner. In such a scenario, the corporate governance practices play a key role. It is imperative that the Board adopts the best corporate governance practices to ensure the sustainability and continuity of the business and effective crisis management. For instance, the companies need to ensure that there is accurate and transparent review of the financial forecasts as well as the earning disclosure owing to the current scenario and financial environment.

Scope

The present article analyses the concept of succession planning and continuity in terms of corporate governance in the backdrop of COVID- 19 scenario. The Section I deals with the importance of corporate governance in the present scenario. The Section II deals with the importance of emergency succession plan in case a Key Managerial Person (KMP) contracts COVID- 19. The Section III deals with the measures to be taken to ensure smooth functioning of the Board and. whether a company can substitute virtual meetings in place of physical meetings.

Analysis

Section I: Corporate Governance: A Key Player During Covid-19?

Corporate Governance in India

Corporate Governance has always been an issue of paramount importance in the Indian economy. [1]The Indian corporate governance framework focuses mainly on protection of the shareholders, accountability of the board and management of the company, timely reporting and disclosure requirements, corporate social responsibility[2], etc. Securities and Exchange Board of India (“SEBI”) and Ministry of Corporate Affairs (“MCA”) are the regulators in this regard. The COVID-19 outbreak has created multiple hurdles and challenges for the Indian companies. There are several corporate governance issues to be dealt with in order to effectively tackle and respond to the challenges posed by COVID-19.

Why is Corporate Governance important during COVID-19?

In the backdrop of current pandemic, there is a dire need of risk identification and assessment resulting into effective management of the same. The Board need to be in constant close contact with the management to ensure the security and well-being of the workforce and the stakeholders. A proper strategy needs to be devised paired with constant monitoring for management of the risks and minimising and mitigating the adverse consequences. The Board needs to take into consideration the financial health of the company and stress on the factors such as the indebtedness of the company, the financing policy, the liquidity risk (short term and long term), etc. amongst others.

During the present scenario, the need for complete disclosure is of utmost importance. The Board needs to be in compliance of the various mandatory disclosure requirements such as under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (as amended from time to time) (“LODR”)[3]. It is imperative for the companies to provide full and fair disclosure to ensure that the investors’ and the shareholders’ interest are not being compromised[4]. The mechanism with regard to succession, appointment, etc. needs to be updated. The corporate governance policies need to be updated and modified in light of the current scenario for the efficient functioning of the company.

Section II: The Need for An Emergency Succession Plan During Covid-19

Provisions relating to succession planning under law

Succession Planning is an important element of corporate governance in a company. It is an on-going process and there needs to be a planned mechanism in place to ensure the continuity of leadership in key positions as well as securing the future of the company. The Board is entrusted with the responsibility of overseeing the succession planning. The recent Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 (“Amended LODR”) brought about amendments in the board and their strategies with a view to strengthen the aspect of succession planning.

The definition of the term “senior management” was mended vide the Amended LODR so as to include one level below chief executive officer/managing director/whole time director/manager (including chief executive officer/manager, in case they are not part of the board) and specifically include company secretary and chief financial officer. Thus, it states that the Board of the listed entity shall satisfy itself that plans are in place for orderly succession for appointment to the Board and senior management[5]. This amendment has ensured that the succession planning needs to be undertaken by the Board for a wide array of employees and is not limited in its application.

Further, under section 178 of the Companies Act, 2013 (“Act”), the Company is required to constitute a nomination and remuneration committee which amongst other things is entrusted with the responsibility of development of a succession plan for the Board and senior management.[6] Countries such as United Kingdom, Japan, Italy, etc. have similar corporate governance policies regarding succession.

In case of a private company, the LODR and provisions under Section 178 is not applicable. However, it is advisable for a private company to have a succession policy in place. In case of an unforeseen situation, if the private company does not have an emergency succession plan, the operation of the company might come to a standstill. A private company cannot ignore succession planning just on the ground of lack of regulatory compliance. The consequences of lack of a succession policy resulting in vacancy in the office of key personnel will have an adverse impact on the company’s ability to achieve its targets and ensure sustainability and survival. The Tata Group has been a prime example of the need of a proper succession plan on the backdrop of sudden departure of Mr Mistry as the chairman.

Succession Planning on the backdrop of COVID-19

In the current scenario, it is of utmost importance that the company (both private and public) has an efficient succession policy. The Board is responsible for the succession of the CEO and the other KMP’s. If in case of an unfortunate event wherein the CEO or any of the KMP is contracted with COVID-19, the Board needs to have a well-planned succession policy so as to tackle any unforeseen situation. The succession risks pertaining to the entire senior management needs to be considered. The Board can incorporate a separate team to oversee the change in leadership, if any. The roles and responsibilities for the management team needs to be demarcated in a proper and well-defined manner. The company needs to have a robust emergency succession plan in case of any unforeseen situation.

As discussed in the above paragraphs, there are legal provisions under the Act as well as several regulations dealing with succession planning. The importance of succession planning in case of private companies has also been discussed above. However, the implementation of the same is a major hurdle even in today’s time.

Section III: Continuity During Pandemic: A Key Challenge

Measures for continuity of the Board

During the current pandemic, it is imperative that the Board remains intact and functioning if such a situation arises wherein the continuity is threatened[7]. The Board needs to be proactive while dealing with such a scenario.

Adoption of succession plan and emergency by laws

The Board can ensure that an effective succession plan as discussed above is in place. Further, a set of emergency rules can be adopted by the company during such an unforeseen situation.

Regular meeting via virtual mode

The Board needs to ensure that meetings are conducted on weekly basis or more frequently as required, via video conference or telephonic medium.

Undertaking critical functions

Even though the companies are being managed remotely, the company needs to undertake the critical functions such as IT system, cyber security, regulatory compliance, functioning protocols in a proper manner. The key support mechanisms such as IT services need to be operative since the entire workforce including the Board are working remotely and need access to the files and data to function[8].

Formation of a monitoring committee and expert advisory committee

A committee can be set up for the purpose of monitoring the entire situation. The committee can evaluate the situation and adopt necessary measures to prevent and tackle the impact of the pandemic.

Virtual Meeting: A Substitute For Physical Meetings

There is a set of legal framework in India which governs the regulations pertaining to board meetings as well as shareholders meetings, namely as:

1. The Act and Rules thereunder

2. The SEBI Regulations

3. The Standard Listing Agreement

4. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI)

There are many policy decisions which require the approval of the Board or the shareholders, for which it is essential to conduct the meetings.[9] In the present scenario due to the pandemic, it is not possible for the Board or the management or the shareholders to be physically present for any of the meetings. However, in the judgments of “Wagner v. International Health Promotions[10]” and “Byng v. London Life Association[11]”, the English Courts have held that virtual meeting via telecommunication or other modes are considered to be valid.

The Ministry of Corporate Affairs vide circular dated April 08, 2020 and a clarification issued on April 13, 2020 has permitted companies to convene their Extraordinary General Meetings (“EGM”) through video conferencing or other audio-visual means. Such relaxation is available until June 30, 2020. The decisions can be taken through e-voting or simplified voting (as the case maybe). E-voting[12] is mandatory in prescribed companies only[13]. As per the circular, the companies which are required to provide e-voting[14] or have opted for it shall conduct the voting via video conferencing (“VC”) or other audio visual means (“OAVM”).However, in other cases, the shareholders can approve or reject the resolutions by sending emails at the registered e-mail ID provided by the companies. The detailed procedure has been mentioned in the circular pertaining to convening of the EGMs. Further, the MCA vide circular dated March 19, 2020 amended the rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 thereby permitting the companies to conduct board meetings via video conference or other visual means until June 30, 2020. Thus, it is permissible that the companies can hold board meetings and the general meetings via video conferencing or other modes.

The Board must ensure that the ability of the shareholders or the Board members to put forth resolutions and give opinions at the virtual meetings or vote on such matters or raise concerns should not be hampered in any manner. Virtual meetings can be a way of life in the near future rather than just an exception.

Conclusion

Corporate Governance plays a key role in ensuring the sustainability of the companies. It will play a vital role in the near future and will emerge as an essential mechanism to tackle the crisis. This will help in effective planning, reassessing the goals, long term sustainability, risk mitigation, etc. The Board plays a major role during the current crisis since it is entrusted with the responsibility of implementation of the corporate governance rules. The Board needs to adopt various techniques to ensure that the financial well-being and continuity of the company is not threatened. For attaining this purpose, it is imperative that the Board functions in a proper manner and the functioning of the Board is not disrupted. There are certain regulations in place with regard to same. However, even in case of companies such as a private company, wherein there are no regulatory compliances in place, the company should adopt the corporate governance polices such as succession planning for the effective and efficient functioning and continuity of the company. A company can ensure the continuity, crisis management and sustainability only if it focuses on adoption of the best corporate governance practices.

References

Books

· Geeta Rani & R.K. Mishra, Corporate Governance: Theory and Practice 74-78,(1 ed. Excel Books, 2008)

· M.Y. Khan, Indian Financial System (10 ed. McGraw Hill Education, 2018)

· A.C.Fernando, Corporate Governance: Principles, Policies and Practices 17 (1 ed. Dorling Kindersley (India) 2006)

· G K Kapoor, Sanjay Dhamija, Company Law: A Comprehensive Text Book on Companies Act 2013 (20 ed, Taxmann, 2017)

Report

· Report of Expert Committee on Company Law, Management & Board Governance Ministry of Corporate Affairs

Articles

· William Kucera, Jodi Simala, and Andrew Noreuil, Mayer Brown LLP, COVID-19 and Corporate Governance: Key Issues for Public Company Directors, HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE (https://corpgov.law.harvard.edu/)

· Jennifer Buchanan Et Al., A Digital workplace and culture: How digital technologies are changing the workforce and how enterprises can adapt and evolve, Delloitte(https://www2.deloitte.com/content/dam/Deloitte/us/Documents/human-capital/us-cons-digital-workplace-and-culture.pdf)

Statues

· Companies Act, 2013

· Companies (Management and Administration Rules), 2014

· Companies (Meetings of Board and its Powers) Rules, 2014

· Securities and Exchange Board Of India (Listing Obligations And Disclosure Requirements) (Amendment) Regulations, 2015

Cases

· Wagner v. International Health Promotions

· Byng v. London Life Association

Endnotes:

[1] D. Geeta Rani & R.K. Mishra, Corporate Governance: Theory and Practice 74-78,(1 ed. Excel Books, 2008)

[2] Report of Expert Committee on Company Law, Management & Board Governance Ministry of Corporate Affairs (May 27, 2020, 10.30 A.M.), http://www.mca.gov.in/MinistryV2/management+and+board+governance.html

[3] M.Y. Khan, Indian Financial System (10 ed. McGraw Hill Education, 2018)

[4]A.C.Fernando, Corporate Governance: Principles, Policies and Practices 17 (1 ed. Dorling Kindersley (India) 2006)

[5] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 regulation 17 (4)

[6] G K Kapoor & Sanjay Dhamija, Company Law: A Comprehensive Text Book on Companies Act 2013 (20 ed, Taxmann, 2017)

[7] William Kucera, Jodi Simala, and Andrew Noreuil, Mayer Brown LLP, COVID-19 and Corporate Governance: Key Issues for Public Company Directors, Harvard Law School Forum on Corporate Governance (May 22, 11.00 A.M.), https://corpgov.law.harvard.edu/

[8] Jennifer Buchanan et al. A, Digital workplace and culture: How digital technologies are changing the workforce and how enterprises can adapt and evolve, Deloitte (May 22, 2020, 11.30 A.M.), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/human-capital/us-cons-digital-workplace-and-culture.pdf

[9] G K Kapoor & Sanjay Dhamija, Company Law: A Comprehensive Text Book on Companies Act 2013 (20 ed, Taxmann, 2017)

[10] (1994) 5 ACSR 419

[11] (1990) 1 Ch 170

[12] The term “e-voting” refers to remote e-voting or voting by electronic means.

[13] Companies Act, 2013 s.108;

[14] Companies (Management and Administration Rules), 2014 rule 20

Author Details: Devika A. Gadgi is currently working at ANB Legal.