Corporate governance and COVID-19

Like many legal leaders, Lachlan McKnight needed to make changes fast to managing his company’s operations when the COVID-19 pandemic struck Australia. McKnight, the CEO of LegalVision Australia, says luckily, as a fast-growing tech-enabled law firm, his business was able to respond quickly to the new business environment.

“Unlike a traditional law firm, which operates in silos based around each partner, we work as one team. Fortunately, before the outbreak of COVID-19, we implemented several cloud-based collaboration tools across the business, including custom-built tools as well as Slack [a messaging and collaboration app for business],” McKnight tells LSJ.

“In my view, that’s made a real difference in our ability to share information and collaborate instantaneously across workgroups whilst in a working from home set-up. From a management perspective, we emphasise the importance of over-communication.”

McKnight says the pandemic has also impacted the firm’s approach to people management, culture and stakeholder engagement.

In particular, he says, the firm has worked hard since coronavirus hit to maintain the value it provides to staff, which he describes as the firm’s employee value proposition.

“This is centred around the opportunity for much more rapid learning than in a traditional firm; the ability to take control of client relationships from day one; a non-hierarchical work culture; and an opportunity to experience the legal business model of the future from the ground floor,” McKnight explains.

“Over the remote working period, we’ve had to continually seek feedback from team members to understand if we’re hitting our employee value proposition goals … it’s been a matter of over-communicating with team members on these questions and seeking super regular feedback.”

McKnight is one of many leaders in the legal profession – and the broader corporate world – grappling with how to maintain best practice when it comes to the structure of rules, practices, and processes used to direct and manage their organisations in the pandemic.

The COVID-19 governance ‘journey’

Karina Marcar, the principal of Sydney-headquartered consultancy Brabourne, which focuses on board effectiveness reviews and related governance services, has examined how COVID-19 has impacted corporate governance, with an emphasis on boards and directors.

As part of the research undertaken with Brian Freestone from ArkTalent, a firm that advises organisations on how to engage human capital, Marcar spoke with directors of major organisations listed on the ASX, NYSE and LSE stock exchanges, as well as those on the boards of private groups, government organisations and not-for-profit entities.

The research points to a key development for governance arising from COVID-19 as more importance for “corporate purpose”. It found that clearly articulated values around purpose critical to effective decision-making, particularly for large organisations.

Organisations are also revisiting risk, including risk lead indicators and risk correlation, while board and management succession are now seen as risks requiring mitigation, it found.

Another part of the “journey” the organisations report, according to Marcar, is greater information flows between boards and management. Specifically, she says that at the height of the pandemic in 2020, boards came to understand that “more can be done with less”.

“The requirement for timely and targeted information and single-issue board meetings led to tighter board papers in 2020, with more actionable insights. Where more detail was required, there was a healthier dynamic when challenging information with management,” Marcar tells LSJ.

Marcar notes this as a positive impact of the pandemic. However, she warns that as it has dragged on more timely information has, at times, become a negative for boards.

She points to firms during the worst of the virus outbreaks receiving more frequent reports between board meetings on cash flow if necessary.

Marcar adds that once the acute crisis phase is over, some are reluctant to say, “we don’t need that any more”.

“So the information load has increased, plus they’ve gone back to their business-as-usual settings for board packs,  except that the meetings are virtual,” she says.

“I think if boards and management can remain focused on getting value from  their way of communicating with each other, that will be
incredibly beneficial.”

Another key development, somewhat linked, is the re-setting of how boards and senior management interact. Along with boards communicating more with management there’s also been increased leveraging of each other’s skills and experience, according to Marcar.

This means management is gaining deeper insight into directors’ technical skills and experience derived from managing through previous crises as senior executives, she says.

“Senior management are recognising the experience of the directors who have been through different economic cycles” she says. “They have pattern recognition in a crisis.”

While more honest and open communication between management and boards is another plus out of the pandemic, the challenge is to maintain the new status quo as the pandemic wears on.

Marcar says this is especially the case in organisations where executives now have more confidence in operating within “general frameworks” rather than deferring back to a board. “That’s, I think, a real space to watch,” Marcar says.

“Boards and management have this strange situation where they did this fantastic job last year in building trust with each other and having this open exchange of information and challenging of ideas, and now how do you balance that with incredible management fatigue.”

Risk governance in the spotlight

Elizabeth Sheedy, a risk governance expert based in the Department of Applied Finance of Macquarie University’s Business School, picks up on the report’s theme of risk, saying there’s a renewed focus on risk governance at board level as a result of the pandemic.

Professor Sheedy, whose recent book Risk Governance : Biases, Blind Spots and Bonuses examines how organisations can better manage risk, says COVID-19 has emphasised to everyone, including those on company boards, “what an unpredictable world we live in”.

“It’s a human tendency to be over-confident and assume everything is going to be fine, but an experience like the pandemic gives everyone a jolt and does highlight the need for more of a focus on risk governance,” she tells LSJ.

“Risk governance is a big thing in the financial services industry but in other industries it’s perhaps not as well understood but hopefully people are moving in that direction.”

According to Sheedy, an increased appreciation of risk governance flowing from challenges caused by the pandemic has led to more boards establishing board risk committees as well as appointing a high-status chief risk officer to executive management level.

It has also prompted more focus from boards on what she terms “financial resilience”. At a financial level, this includes organisations guarding against carrying too much debt and ensuring they have sufficient liquid assets to withstand  shocks impacting cashflow.

“All of this financial resilience is helpful against any kind of risk,” Sheedy says.

There’s also “organisational resilience”, which Sheedy argues boards are increasingly turning their attention to in the wake of COVID-19.

That means things like having business continuity plans developed and tested for various possible disaster scenarios, as well as looking at cost structures to ensure costs can rapidly be scaled back in the event of a crisis.

This, she says, often means where possible trying to minimise fixed costs in the normal course of business to make it easier to stay afloat if and when a disaster strikes. It’s having that agility to respond to circumstances as they change.”

Companies curbing risk

At the profession’s coal face, law firms report seeing boards that are increasingly keen to minimise risk, which is in turn driving a pick-up in demand for services in the risk space.

At Law Quarter, a firm headquartered on the NSW Central Coast, partner Jacqui Jubb tells LSJ that during the pandemic period, the firm has provided more advice to clients on compliance and corporate governance “to help them steer their companies out of crisis mode”.

Jubb says COVID-19 has been a period that has strengthened the firm’s resolve to support clients through the economic challenges presented by COVID-19.

“For example, advice on distribution and supplier arrangements, business structures, insolvency risks and how to manage their employees and teams in a remote working environment,” Jubb says.

She says clients, in their governance considerations, being more mindful of risks related to things like disruption to supply chains, employee absenteeism and access to technology.

As Jubb puts it: “directors of companies and boards need to ensure they are considering and mitigating risks and managing principal stakeholder relationships, by implementing strategies to help their company navigate the commercial impacts of the pandemic and adhering to their legal obligations”.

For the firm itself, Jubb echoes McKnight’s view that COVID-19 has brought a renewed focus to the importance of all stakeholders, beyond just shareholders. To this end, Jubb says a priority of the firm’s governance during coronavirus has been staff engagement.

“I think a lot of companies are now taking a less ‘shareholder-centric’ approach to their business and focusing more on employees, customers, and all stakeholders,” she says.

“We’ve lost the ability to meet face to face and sit down as a team in one room, so using technology effectively has been important in making sure we’re all on the same page, and our team feels supported and motivated to do their best.”

Katie Richards, CEO of telelaw platform Law on Earth, agrees, telling LSJ that COVID-19 has put the mental health of its team of around 10 lawyers and support staff front and centre.

Richards, whose company is based in Brisbane and operates nationally, says she’s made a “deliberate effort” to use Slack to communicate with staff working from home, in addition to checking in via phone with remote team members on a regular basis.

The company has also encouraged staff to come into the office from time to time, when possible given government restrictions, to help alleviate feelings of loneliness.

While Law on Earth has kept all staff on full pay throughout COVID-19, Richards attributes a surge in sole practitioner numbers to firms failing on people management at the pandemic’s peak.

“In the legal space, a lot of people have set up as sole practitioners now because they don’t feel as though they had any security during that and so they’ve gone out and given it crack to become sole practitioners.

“Now none of us can get staff because there’s so many sole practitioners.”

Companies both inside and outside the legal sphere that are keen to learn the lessons of COVID-19 on governance must act fast, according to Sheedy.

She says there’s currently a window of opportunity for companies, including those in the legal profession, to govern better on risk, but warns that it “won’t last forever”.

“People will eventually get back to being apathetic and overconfident like normal, but that’s why I think we do have a unique opportunity to, in this
window,  really deal with some  long-term strategic issues.”