This article is written by Anith Johnson, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “Role of Directors during this Pandemic”.
Lockdown due to Covid-19 has an unprecedented effect on the economy of India and has severely affected the small industries and the start-ups. Most of the businesses have to strategize their existing business plan in a manner which will enable them to survive in the long run. Companies are facing a financial crunch as less revenue is generated and there is uncertainty regarding the financial environment after the lockdown. The board of directors and top management has to take steps to protect their organization, employees, shareholders, and customers.
The board of directors is the decision-making body of a company and is responsible for the governance and functioning of the company. The management has to understand and oversee the potential material risks due to the Covid-19 outbreak and has to execute a crisis plan to resolve the same. The Board must work towards the success of the companies and benefit of shareholders with the available resources and limitations. Directors will be required to act in good faith and to take action to mitigate the risks arising out of Covid-19.
Duties of Directors under Companies Act, 2013
As per section 2(34) of Companies Act, 2013 a “director” is defined as “a director appointed to the board of the company”. A director is the controller of the affairs of the company. Companies Act, 1956 did not contain provisions for the statutory duties of the directors and it was governed by the general provisions of the board and precedents. Section 166 of the Companies Act, 2013 provides for the duties of director and is listed below:
- The director of the company shall act in accordance with the articles of the company.
- A director of the company shall act in good faith to promote the objects of the company.
- Exercise his/her duties with due and reasonable care, skill, and diligence and shall make independent decisions.
- Director should be aware of the conflict situations and try to avoid the same.
- Related party transactions should be in the interest of the company and directors or his relatives should not benefit from it.
- A director is not allowed to assign his office.
The director is required to act in accordance with the Articles of Association and exercise independent judgment to make informed decisions. Section 166(7) provides that a director shall be punishable with a fine not less than one lakh and may extend up to five lakh rupees if he/she does not comply with this section.
Damages faced by Companies due to Covid-19
All the companies have been affected due to this pandemic and most of the big corporations have temporarily suspended their operations. Even though the government has eased the lockdown restriction and slowly the companies have started to continue its operation but they are not able to work in full capacity as the movement of people is strictly restricted. The biggest challenge faced by small businesses is to resume their operations after lockdown. Employers will have to incur additional costs to make sure of a healthy work environment for its employees after restarting its business. Companies will have serious cash flow problems due to which companies will resort to the reduction of salaries or laying off employees. Companies will also have to incur heavy expenditure for strengthening their IT infrastructure. Data protection is very important to prevent the breach of data.
The revival of economy and job recovery will depend on the policies which are implemented by the government. Some of the industries such as aviation and tourism which have been the most affected will continue to suffer until the pandemic exists. Supply chain disruptions harmed businesses and it also led to shutting down a lot of small businesses and startups. Supply chain risks should be minimized by assessing each and every level and businesses should also try to diversify the same. Due to pandemic, there is still a lot of uncertainty regarding the performance of contracts.
Role of directors during this Pandemic
Keeping in mind the duties and obligations of directors need to take steps for the survival of business in this pandemic. Some of the primary considerations of the directors should to keep in mind are as follow:
- Health and Safety of Employees- The top priority of the directors should be the health and safety of its employees, workers, customers and suppliers. The emphasis should be given on the safety of employees rather than work. It is the responsibility of the employers to create a safe environment for the employees even if the lockdown is lifted. If the nature of work is such that the employees can work from home then they should be allowed to work from home. In the cases of extreme necessity visits to offices and factories should be allowed. Several precautions and measures should be taken before offices are opened. Social distancing norms should be followed by the employees for their as well as other people’s safety. Directors should communicate with the employees and agendas should be discussed with them. Government circulars and advisories should be given utmost priority and should be followed strictly. Data security measures should be taken to prevent data breaches or losses.
- Financial Assessment of the company- Since the company cannot function according to the business structure and operational plan so there needs to be a detailed financial assessment that has to be done to create a crisis plan. It is very important for companies to conduct a proper assessment to determine the revenues and expenditures and to understand the financial condition. Every company needs to investigate the effects, risks and opportunities associated with the current crisis. The financial assessment should be done taking the following factors into consideration:
- Revenue– In most of the businesses revenue generation has fallen as operations have been reduced or shut down. Directors should find new and innovative ways to generate revenues. There will be a lot of opportunities that can be utilized by directors to generate revenue.
- Expenditure– The businesses need to track down the expenditures and minimize expenses that are not necessary. If work from home is possible then the company should invest in technology so that operations can continue. Avoid situations such as laying off employees to reduce expenditure.
- Operational Efficiency– It is very important to invest time and energy into improving the business. Human resources should be utilised effectively and for that employees should be made accountable if work from is possible. Innovative and pragmatic ways should be considered to keep the business running.
- Liquidity– Directors and top management needs to analyze the cash flow situation of the company. Financing solutions are needed of the hour and investors should also be made aware of the financial condition.
- Crisis management plan- Based on the above assessment the company has to strategize and come up with a plan to tackle the challenges. The crisis plan should be carefully executed and communicated with the management. The board should be able to make quick decisions in a situation which requires prompt actions. Directors should be opportunistic and try to maximize the revenue of the company. The board needs to analyze the contractual disputes due to non-performance and try to renegotiate with the parties. Legal opinion should also be taken regarding the rights and obligations of parties in contracts.
- Securing the interest of shareholders- Shareholders should be made aware of the current situation of the company. Companies should be honest while communicating with the shareholders and also make them aware of the crisis plans to tackle challenges caused due to Covid-19. If the company has enough cash reserves to pay dividends to the shareholders then it should continue to pay. Shareholders always look for honesty and transparency so it is in the best interest of the company to present correct information. The board needs to come up with a communication strategy to keep the shareholders informed.
- Obligation towards staff and employees- The directors should have confidence in the management and its employees to execute the given duties. Staff should be provided with necessary assistance and guidance must be given to the employees. Management and employees should be given information about the crisis plan and each employee should be assigned specific roles. Effective communication should take place between the directors and the management to make sure that the work assigned to management and employees is done properly. Regular updates must be given by the management to the directors given the rapidly changing circumstances. This also helps the companies to retain their best talents. Directors should have reasonable expectations and should not overburden the employees with work. Maximum efforts should be taken by the companies to retain their employees.
- Making independent decisions to promote the success of the Company- A director should always keep the best interest of the company at heart. He/she should act in good faith and should promote the long term interests of the company. The director must make independent judgments and should try to do everything possible to make sure that the company can stay afloat. Directors should make informed decisions based on reliable information and their specialized knowledge. Directors need to think ahead and should not make decisions that will affect the company in the long run.
- Avoid conflicts of interest- A director should not engage in any activity which might result in a conflict of interest. The director should not have any personal interest while deciding for the company. The director must disclose all relevant information to the board as it might create grounds for a dispute with shareholders and damage the long term prospects of the company. If the director has an interest in any transaction then it should be disclosed to other members of the company.
- Long Term Goals- There are multiple ways to successfully mitigate the impact of Covid-19. The primary goal of any company is to find ways to fight Covid-19 but at the same time it should not lose focus on the long term goals of the company. Each decision taken by the company should be taken with utmost care as it will have a lasting effect and it should not depreciate the goodwill and reputation of the company.
Most of the companies were never keen on developing a contingency plan and it has affected them in a significant manner. A lot of small businesses are on the verge of shutting because of not foreseeing and preparing for a situation like this. Covid-19 should be considered as a lesson for all the directors and managers. While formulating the crisis plan the director should have the best interests of the company, employees and its shareholders. Directors and the employees should work with each other in peace and harmony and make sure that the company survives this storm.
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