Due to COVID-19 there was a need to move to different governance routines so much so it created almost a new governance environment, and the line between management and the board shifted out of necessity. Almost a year on, many of these changes have remained firmly in place. It’s now time to move back from some of these governance changes in a thoughtful way, the question is how far back should we go and which changes need to remain.
Almost a year on, many of these changes have remained firmly in place. It’s now time to move back from some of these governance changes in a thoughtful way, the question is how far back should we go and which changes need to remain.
Changes to governance were necessary
When the pandemic arrived in Australia, regulators quickly stepped in to allow companies to meet their obligations through virtual meetings and the ability to provide digital consent and content. Companies also did the same with their policies, processes and procedures. These decisions were all made very quickly and often in the absence of full information in a volatile developing pandemic situation.
We didn’t have an understanding of how the pandemic was going to unfold, what the infection rates were and what the long and short term health consequences would be. We also didn’t know how the government would react because their behaviour was very different to what had been experienced in the past. All of sudden things that had been protected, like a budget surplus, became unimportant.
The ability to gather information and feel certain about decisions changed radically. Directors had to know when to stop asking for more information and pull the trigger. Management was doing this every day. In that situation, people suddenly seemed to have a different view of what constitutes accountability, but accountability survives the virus.
Board meetings were different in both form and substance
As COVID forced organisations to change how they operated, companies had to make quick decisions about whether to send their people home and how to serve their customers. To make these decisions, board meetings became more frequent and were of a much shorter duration. Many of the meetings tended to be single decision-focused and the time from decision to evaluation shrunk.
For example, I am on the board of a school and one meeting was about whether we keep the campus open. It was a single purpose conversation so that we could make a decision. We then had another meeting to discuss how to communicate that decision to people. A little later there was another meeting to discuss the experience and reaction from the community about the decision.
A potential downside to this process is that people think that the decision has been evaluated so they don’t need to do a full retrospective on it. If organisations don’t do that, they’ll potentially miss closing some gaps or loopholes and they’ll miss the lessons learned.
While it was necessary to move to virtual board meetings, there is still a need for in-person meetings. Most professional directors have a portfolio of directorships and they learn a lot from each. So when you bring a group of directors together, you have experience from a lot of companies in the room. That’s best facilitated in person as it’s an informal activity and many directors miss that interaction. I certainly do.
I think we should move to a hybrid model for board engagements. If you’re prepared to deal with something in a single purpose meeting, that meeting should be short, time bound and backed with circular resolutions. Another way to achieve this is to use sub-committees, formal and informal. Then you can have very tight board meetings that are more effective.
I think we should move to a hybrid model for board engagements. If you’re prepared to deal with something in a single purpose meeting, that meeting should be short, time bound and backed with circular resolutions.
Budgeting and forecasting has become a different game
An area that still requires a different approach is budgeting and forecasting. It’s very clear that the level of certainty that you would normally have around budgets is now very different. Forecasting has become a different game. We still see so much volatility because there is uncertainty on top of uncertainty. It’s really hard to understand how companies are likely to be traveling because they don’t understand themselves. Guidance ranges are much wider than they have been in the past and that’s very sensible.
The concept of a prior comparable period will get a lot of attention as we move into reporting season. And then budgeting for FY22 – any company that does not take an explicit approach to this question and merely dusts off the old process is fooling themselves.
Companies need to go back to the assumptions that they may have held as unchallengeable, like inflation and population growth, and review them – just as the government had to ‘release the agenda’ on the budget surplus. We know the economy is currently challenged for many reasons. We’ve got a point coming in March when JobKeeper and JobSeeker will look different and the employment relationship for a lot of people will change. We also know that much of our economic growth in the past has come through population growth and that won’t be occurring in the future. Population growth also delivers workers, so the labor force dynamic will now change. These are big drivers that are as impactful as the notion of the virus, and companies will be dealing with these for at least the next 12 months.
To address this, companies need to review how they forecast. Many large companies do rolling forecasts, but all companies now need to determine if they should consider reforecasting every quarter or even move to that rolling reforecast every month. This will clearly affect the level of governance required.
Companies have mingled management and governance more than ever before for good reason but it’s time to step back, the question is how far. There is always going to be a tension between management and the board as to where the line needs to be drawn. That’s how we build a robust system. Moving on from COVID, we should still be agile in the boardroom and that agility comes from using all the different mechanisms of engagement that are available to us. We shouldn’t go back to the same formats we used before because the world has changed, and we can benefit from the new mechanisms that were put in place as a result of the pandemic.
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