The board of directors has the ultimate responsibility for the management of the company, and is responsible for supervising the executive management and the operations of the company. The extraordinary impact of Covid-19 on the economy will increase the need for boards to exercise these duties in an even more active manner than in ordinary times.

It is of critical importance to identify new or increased risks to which the company is exposed as a result of Covid-19 and to consider how the company can best address those risks. We have listed below a number of issues which the board should consider. The list is generic in nature and must be adapted to the specific requirements of the company’s business and financial position.

Liquidity risk and equity position

1. Assess availability of debt financing

  • It must be assessed whether the company can expect to comply with financial covenants going forward. A detailed cashflow budget based on realistic assumptions should be prepared
  • Material debt agreements should be reviewed to check whether they include other provisions which restrict the company’s freedom of manoeuvre or could be invoked by lenders as an event of default
  • If the company has significant debt amortisations or interest payments in the short term it must be assessed whether the company will be able to make such payments while still retaining sufficient working capital or whether a deferral should be sought

2. Assess certainty of access to existing liquidity

  • The company should assess whether it is sufficiently comfortable that it will have access to its cash and other liquidity resources, including considering the solidity of banks where cash is held
  • It must be considered where in the group structure cash is held, including whether there is a risk that the group will lose access to cash held in subsidiaries or that subsidiaries could withdraw from group cash pools
  • Set-off rights which could be invoked by banks where the group holds bank accounts should be considered
  • The company should consider whether to draw on available credit lines

3. Assess risks related to incoming cashflows

  • Counterparty risks, such as the risk of customer insolvencies or other defaults or delays in payments, should be assessed
  • The risk of termination of material customer agreements should be considered.
  • A legal assessment should be made of the risk of customers invoking legal arguments for suspending or terminating material long-term agreements

4. Assess outgoing cashflows

  • The company should assess its ability to delay payments to suppliers
  • The risk that suppliers may start asking for pre-payments and how this would affect the liquidity position should be considered
  • The risk of suppliers invoking force majeure or similar legal arguments to justify delays in delivery should be considered
  • The company should assess whether it is exposed to back-to-back risks, i.e. does the company make payments to suppliers which it subsequently recoups from customers?

5. Derivatives

  • Potential impact on derivate agreements, including counterparty defaults, mark-to-market requirements and provisions relating to market disruption events etc, should be assessed.

6. Dividend/Buy-backs

  • The board should assess the need to cancel or reduce annual/quarterly dividends, including reputational effects of dividend payments
  • The board should assess the need to cancel any share-buy backs

7. Equity risk

  • The board should assess whether operating losses or write-downs could put the group’s equity at risk
Operational risks
  • The company should assess the risk of closure of critical business functions, e.g. due to unavailability of key personnel, and plan for remedial actions
  • The company should assess the risk of default by key suppliers and plan for remedial actions, including identifying alternative suppliers
  • Risks related to critical IT systems, e.g. due to default of suppliers or absence of qualified personnel, should be considered
  • Cybersecurity risks related to increased working from home should be considered
Contractual risks
  • The company should assess which contracts/counterparties are critical to its own business
  • An assessment should be made of whether these counterparties be at risk for bankruptcy and the potential consequences for the company’s delivery obligations
  • For material contracts, important contractual positions and material obligations for the company should be mapped, and escape clauses should be considered; such as material adverse change, force majeure or other grounds for termination or postponement
Employee and management issues
  • The company should identify and implement necessary HSQE measures to protect the health and well-being of employees and reduce the risk of contagion
  • The need for suspensions/lay-offs should be assessed
  • The company should develop a communications plan towards its employees
  • The board should consider the risk of key members of management or other key personnel becoming unavailable on short notice
  • The board should consider potential consequences for employee/management remuneration and messaging in relation to this
Regulatory risks and issues
  • The company should consider the risk of new regulatory requirements which may impact the group’s business, such as travel restrictions, trade restrictions, export controls, new HSQE requirements etc.
  • The company should develop a plan to maintain its relationship with key regulators
  • The ability to secure support under government rescue plans should be assessed
  • The company should assess insurance coverage for potential losses, e.g. losses relating to customer defaults, closures of production facilities etc.
Disclosure obligations and investor relations
  • The company should asses on an ongoing basis whether any one-off events (e.g. material customer defaults, closure of production facilities) needs to be disclosed
  • The need for profit warnings should be assessed
  • It should be considered whether any changes should be made in the company’s financial calendar
  • The need for descriptions of effects of Covid-19 in the company’s financial reporting should be considered, including identifying risks to the business, an assessment of any guiding going forwards and any adjustments to the dividend policy
  • The company should develop a plan for communications with investors in general
Board procedures and general meetings
  • The board should consider increasing frequency and contents of reporting to the board
  • The board should make sure board meetings can be held without physical meetings
  • The chair should consider the need for additional board meetings should any material events or developments occur
  • The board should consider appropriate arrangements for staging the annual general meeting under the present circumstances, and whether the meeting should be postponed