Q: “I am a board member on a board of directors and am concerned that the COVID-19 pandemic has created new obligations for our board about which we might not be aware. What should we be thinking about?”
May 28, 2020
Answered by David Solomon
Officers and directors of corporations owe fiduciary duties of loyalty and care to their shareholders. Under the duty of loyalty, directors are required to act in the best interest of the corporation and the stockholders by acting honestly and in good faith. Under the duty of care, directors must make a good faith effort to be informed and exercise judgment when making decisions on behalf of the corporation.
When evaluating claims for breach of fiduciary duties, Delaware courts, for example, will generally presume that, “in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation." This is commonly known as the “business judgment rule.”
In evaluating fiduciary duty obligations of directors in similar situations, courts have found that directors should execute their duty of oversight by adopting a reporting and monitoring system sufficient to ensure the board remains remain informed about the fundamental business issues arising as a result of the public health emergency. In a public health emergency this might include: (i) what systems the board implements, aside from mandatory regulations, in order to stay informed and ensure that the corporation is operating safely in light of the circumstances, and (ii) whether the board has made a good faith effort to monitor the system implemented. Thus, to protect themselves under the business judgment rule in exercising its oversight and risk management functions during the COVID-19 pandemic, directors should take steps to become informed and ensure that proper reporting protocols and information-sharing channels are in place.
Since the officers of the corporation manage the day-to-day responsibility for handling the corporation’s response to the pandemic, the board’s role should be to monitor management activity, to assess whether management is taking appropriate action and providing additional guidance and direction to the extent that the board determines is prudent. However, directors need to carefully balance performance of their oversight responsibilities with not unnecessarily burdening management teams that are already fully engaged during the COVID-19 pandemic. So, instead of having regularly scheduled board meetings, it may be more effective to cancel full- or multiple-day board and committee meetings and instead schedule more frequent, shorter meetings. The goal should be to ensure that the board is receiving regular reports on, and devoting appropriate time and attention to, the most critical challenges and risks facing the corporation, including those posed by COVID-19, and that the board’s efforts are appropriately documented.
Some best-practice recommendations to consider to assist you in to complying with your fiduciary duties include:
- Ensure the corporation has implemented COVID-19 reporting systems at the board level.
- Have the board form a committee to oversee COVID-19 concerns and potential impact on the corporation.
- Schedule board or committee meetings with management on a regular basis to discuss critical COVID-19 issues, especially compliance issues involving public health and safety.
- Ensure there are regular protocols in place that require management to keep the board or committee informed of risks and safety concerns related to COVID-19.
- Monitor the COVID-19 reporting system and pay close attention to any red flags that may indicate the system in place is not working properly.
- Replace reporting and monitoring systems if current systems are failing.
- Maintain appropriate meeting minutes that document the board’s oversight activities (i.e., reporting and monitoring).
In addition, as a board member of a corporation during the pandemic, you should be thinking about the following questions:
- What is the corporation doing to ensure the health and safety of its employees?
- What are the short-term and long-term impacts of the COVID-19 crisis on the corporation’s work force, and customer base?
- What is the corporation’s liquidity profile and what are the potential financial impacts of COVID-19 on the business?
- Does the corporation have a business continuity plan in place?
- What does the corporation need to do to prepare for business ramp-up after the initial wave of the COVID-19 crisis ends?
- What federal, state and local financial assistance, if any, is available to the corporation?
- What are the corporation’s financial covenants under its credit facility and what risks for breach are there?
- Does the corporation have access to additional credit under its current facility?
- How should the corporation address various human resources concerns?
- What insurance coverage does the corporation have and how might policy renewals be impacted?
COVID-19 has created ever-changing obligations on managers, officers, and boards of directors. There is no playbook for this but there are best practices, and practical considerations, you can follow to best carry out your fiduciary duties.