This newsletter’s Table of Contents is as follows:
1. COVID-19: Five ways boards can help businesses improve their ‘business RISK resilience’
2. Lessons from China: 5 “financial” ways to navigate the COVID-19 crisis
3. COVID-19: Considerations for Companies That Have OR Have Not Already Established Their 2020 Incentive Compensation Programs
4. The Caribbean WILL survive!!
1. COVID-19: Five ways boards can help businesses improve their ‘business RISK resilience’
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2.Lessons from China: 5 “financial” ways to navigate the COVID-19 crisis
When they are juggling so much already, and have so much information to absorb, how can Boards ensure their management team is focused on the right priorities? Fortunately, they can learn from their peers in China who are now coming out the other side of the crisis. In a recent video conference hosted by CIMA, eight members who are Chinese business leaders shared their perspectives. Five important themes emerged:
Protect cash. “Cash is king” might be a cliché among finance professionals, but this cliché is now more relevant than ever before. The Chinese leaders that we spoke to emphasized that cash preservation was critical to enabling their organisations to survive. They explained that alongside the protection of people, the top priorities for Management during this time should be to minimize spending, hold off capital expenditure, freeze headcount, and secure credit if it is needed.
Reprioritise. In a rapidly changing environment, it is essential that finance acts as a business partner to the organisation. This entails working with departments such as operations and marketing to refocus the organisation’s strategy and its marketing plans. Once finance understands how strategy has been affected by the crisis, it can help the rest of the business to ensure that money is spent in the right areas. It can also undertake financial modelling to support top-line growth.
Plan for different scenarios. No one knows quite how the COVID-19 crisis will play out or what the nature of the recovery will be. On the one hand, we might see a sharp recovery and a fairly rapid return to business-as-usual conditions. On the other, there might be waves of infection later in the year that cause economic conditions to deteriorate further. In light of this uncertainty, Management should plan for best-case and worst-case scenarios with regard to customer demand and sales, as well as the supply of raw materials. They will then be able to forecast how these scenarios could impact their organisation’s cash flow. It is also important to develop a list of actions to mitigate the risks that arise in different scenarios.
Wear a commercial hat. When confronting the COVID-19 crisis, finance professionals should take a broad commercial perspective and not focus solely on cost cutting. That means helping to identify trends, such as changing consumer behaviours, or suggesting new products or services that could enable the organisation to develop innovative, digitally based revenue streams.
Embed crisis–related behaviours in business-as-usual practices. The COVID-19 crisis has forced organisations to operate differently — for example, by replacing face-to-face meetings with video conferences. These new ways of working can be very cost-effective and good for organisational productivity. Management should consider how they can embed them within their practices in a post-crisis world. For example, should they recommend that, going forward, staff cut back on nonessential travel and work from home, at least some of the time? This might help the organisation to control better its costs during the recovery phase.
Source: FM – Financial Management
3. COVID-19: Considerations for Companies That Have OR Have Not Already Established Their 2020 Incentive Compensation Programs
1. Should companies revise their performance criteria and/or goals now? Maybe, but maybe not. It is still in the early days, and most companies are delaying affirmative adjustments to their performance goals to avoid adjustments that may result in inappropriate windfalls to executives or require further adjustments as the consequences of the COVID-19 crisis continue to unfold.
2. For companies that have not adjusted their performance criteria and/or goals, what other actions can they consider taking now? Here are some actions that can be considered now:
- Clearly communicating to employees the company’s intent to continue to monitor the situation over the coming weeks and months and make any appropriate adjustments at an estimated “hold date” later in the year.
- Assessing whether the terms of current incentive compensation programs, plans and awards provide sufficient discretion for the compensation committee to adjust the performance metrics later in the year and whether a framework is needed for how discretion will be exercised, considering all relative performance metrics.
- Ensuring the compensation committee has sufficient discretion (including upward discretion) to adjust performance metrics. If taking this action, consider including appropriate guardrails to reassure shareholders and other external stakeholders that management will not unfairly benefit from the exercise of such discretion. o Include discretion to further adjust awards throughout the performance period for unexpected changes related to COVID-19, but be cautious of making changes that could result in a high required payout amidst unsatisfactory annual results.
3. Are there alternatives to modifying the performance metrics to ensure that employees remain motivated and engaged? Yes. If a company wishes to leave the current metrics in place for the time being, below are some actions that a company can consider taking to continue to motivate and incentivize its employees, including:
- Clearly communicating the intent to take the current-year hardships into account in making compensation decisions for future short-term and long-term incentive award cycles once there is more clarity. o For multi-year incentive grants, this could also include modifying performance goals or metrics in future years of the performance period. In some cases, it may be more beneficial to terminate existing long-term awards and replace these awards with new grants that have more realistic long-term targets.
- Granting time-based equity or cash awards in future years after assessing results under the existing plans. o Employees are likely looking for stability in the short term, so providing some degree of certainty regarding incentives may be worthwhile given the decline in share prices and potential decline in future payouts under existing incentive plans, particularly since the vast majority of companies are facing similar concerns. This approach may be more appropriate for companies with employees who have talent that could be in demand, especially in the current market. As an alternative, also consider granting discrete and justified time-based retention awards now.
- Establishing a new short-term incentive plan. Some companies have established or are considering establishing a plan with short-term goals (such as quarterly or biannual goals) and realistic targets, including goals relating to important strategic or recovery targets relating to COVID-19 response. These new plans often do not replace existing incentive plans, but would be a supplement to such plans in order to motivate executives to work towards important, but attainable, goals in the near term. If a company takes this approach, the new plan should be structured so that the total payouts under the new and existing plans combined cannot exceed the maximum payout that could have been achieved under the existing plan alone. Also consider the appropriateness and type of cap on payouts (e.g., at target if other objective measures such as shareholder return are flat or negative). As noted above, regardless of the approach that is taken, companies should be cognizant that institutional shareholders and the proxy advisory firms will be paying close attention to changes made to executive compensation arrangements and should ensure that any changes would not come at inappropriate further expense to shareholders and rank-and-file employees.
Source: Davis Polk
4. The Caribbean WILL survive!!
From our governmental and health care professionals to the front-line workers at testing sites, grocery stores and pharmacies, to the millions practicing social distancing, we are witnessing a truly exceptional level of commitment that is helping to navigate the Caribbean through an anxious time.
The challenges facing our businesses and our economy in the coming weeks are significant. We will get through this, but government cannot do it alone. The burden on every business leader is heavy, but so it is for every Caribbean citizen worried about their home, their livelihood and their family’s health. Caribbean boards and directors oversee billions of dollars of market capitalization and touch virtually every community in the Region. In these times, it is more important than ever that they and their senior management teams not only lead, but be seen to be leading. Here are some steps you may want to consider:
Show compassion:
All employees, clients and vendors are feeling anxious and it is important that leaders demonstrate their compassion. Have conversations with your stakeholders and explore options to diversify the economic burden.
Support their community economy:
Small business has been and must continue to be the lifeblood of the Caribbean economy but community establishments such as restaurants, clothing shops and many others are at great risk. Corporate leaders should ask what their companies can do to actively support small business in the communities in which they operate.
Support local health care providers:
Not every company can re-purpose their manufacturing process to produce masks or ventilators. For those that cannot, their leaders should ask how they can support local health care workers by funding the purchase of needed supplies. Alternatively, organizations may want to consider matching their underutilized staff with social service agencies facing a volunteer shortage.
Support public policies that will safeguard Caribbean jobs:
There is no playbook for this situation but corporate leaders should coordinate within their sectors and with government and continue to be vocal in support of public policies that are aimed at keeping Caribbeans employed through this crisis.
Be clear you see beyond the crisis:
Communicate to your employees, your investors, your donors and every other critical stakeholder that you are working each hour to sustain your organization through this event so that you are prepared to deliver your service when this is over.
Source: adapted from the ICD Newsletter
