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Your Corporate Governance Obligations Following the COVID-19 Outbreak

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31 December 2019 marked the start of the Coronavirus disease (COVID-19) outbreak

The World Health Organisation (WHO) declared a Public Health Emergency of International Concern on 30 January 2020 and the WHO Director-General stated on 11 March 2020 that they have “made the assessment that COVID-19 can be characterized as a pandemic”.

There is no doubt that the Covid-19 outbreak has impacted businesses worldwide, with the global stock markets significantly falling and countries implementing self-isolation and lockdown procedures. The Economist noted on 5 March 2020 that “fears of a pandemic have wiped $7trn off the market value of listed firms worldwide in the past fortnight.” It is imperative that companies recognise and address this continuing risk, especially following the recent announcement of a pandemic. This article will focus on the effects of Covid-19 on your corporate governance obligations.

Corporate governance

Generally, good corporate governance instils a successful culture within a company. It identifies the roles and rights of directors and shareholders and ensures that there are suitable decision making structures in place. As a result, the risk of the company is reduced, managerial excellence is achieved and the company becomes more desirable to investors.

Under The Companies (Miscellaneous Reporting) Regulations 2018, companies who meet certain qualifying conditions are required to include particular content in their annual reports. This adds to the obligations already imposed on companies for their strategic reports, directors’ report and directors’ remuneration report. If a director knowingly (or recklessly) does not comply, they will be committing an offence.

Companies with a premium listing should also have regard to The UK Corporate Governance Code 2018 (“the Code”), which simply sets out good practice. Flexibility is applied through a “comply or explain” approach, whereby companies are advised to make a statement outlining how they have complied to the principles of the Code and where they haven’t, to explain why.

Coronavirus risk disclosures

Unfortunately, as a result of COVID-19, investor uncertainty has become prevalent due to the anticipated risk associated with the spread of the disease. Companies should consider the areas of risk across the ESG spectrum for the short, medium and long term. Companies are required to disclose any risks to the business in their year-end accounts. This will, therefore, encompass the COVID-19 risk, which is likely to change over time as the disease develops, and the effects of such could be substantial following the WHO’s classification of a pandemic.

The FRC has advised companies to be vigilant and consider what they should include in their year-end accounts. This will be particularly applicable to those companies who have trading associations or operations with China, Italy and other heavily affected areas. Companies who do not have a presence in these countries but have trading links or supply chains that have Chinese-manufactured goods, for example, could also face disruption and should disclose this. Other companies will also be affected as the disease spreads further, and will subsequently need to incorporate this risk into their year-end accounts.

Disclosure of this information helps to protect investors and the company from any future legal implications following the uncertainty of the current environment. It also allows directors and shareholders to reflect on how they can mitigate the risks to the business and how they can comply with their legal obligations.

Risks to consider could include things like force majeure clauses within your contracts, which may result in the other party ceasing to fulfil their obligations, or share prices reducing due to supplier’s delay.

Section 172 of the Companies Act 2006 (CA 2006) provides that directors have a duty to promote the success of the company and under section 174 of CA 2006 they are required to exercise reasonable care, skill and diligence. Directors are legally responsible for the annual accounts, which should include the risks associated with COVID-19. Claims could be made for things like failing to mitigate against foreseeable risks, resulting in a loss of stock value. It may, therefore, be beneficial for directors to consider a business continuity plan which details the company’s risk strategy, for example.

Keeping up with the constantly evolving changes in legislation that cover all aspects of your business can be challenging, but failure to comply can often result in fines, enforcement action and potential damage to your business reputation, and your relationships with customers.

It is recommended that you seek legal advice to ensure that you are up to date with your legal obligations, in line with the COVID-19 developments, to not only benefit you from a legal perspective but also from a business perspective.