“Company Insights: How are Boards & Companies Responding to the Crisis “ By Dr. Punita Kumar Sinha, CFA

Speaker : Dr. Punita Kumar Sinha, CFA, Founder and Managing Partner, Pacific Paradigm Advisors

Moderator: Vidhu Shekhar, CFA, CIPM, Country head of CFA Institute in India

Contributed By : Shivani Chopra, CFA, Public Awareness Committee of CFA Society India

Webinar Notes:

Corporates are navigating through unprecedented times as the Covid-19 scare has shut the world down for businesses. A number of dynamics have converged against the companies and the situation remains chaotic. Consequently, the senior management and board members of a company are discussing a wide array of issues to tide over these turbulent times. In this interactive webinar, Dr. Punita Kumar Sinha, CFA, shared her insights on ways in which companies and boards are responding to the crisis. Key themes emerge as follows-

Capital Allocation and M&A

Senior management and boards are trying to ensure sufficient liquidity, exploring alternative sources of raising cash, taking capital allocation decisions regarding dividends and reviewing M&A possibilities:

• Liquidity- The first and foremost priority of every company is to ensure that there are sufficient liquid reserves. On one hand, there is a partial or complete loss of revenues during the lockdown and on the other hand, organizations have to bear significant operating costs. Servicing debt has become a challenge but thankfully many governments have announced supporting schemes to ease the burden
• Alternative sources of liquidity- Such as rights issue from the existing investors, refinancing of loans, tapping credit lines, selling investment portfolios, etc. Companies are being advised to draw down all their available credit facilities even if the cash is not needed now. This will help later as the recovery is expected to be arduous
• Capital allocation decisions- Whether to pay dividends now or defer to a later date
• Emergency reserve fund- Key lesson is to have an emergency reserve fund in place at all times
• Mergers and acquisitions (M&A) – The idea is not to have an aggressive M&A strategy in place right now but to be ready for the time when the situation normalizes. Managements can utilize this time to identify potential targets available at distressed valuations

Business Models

In order to stay relevant and survive the crisis, many businesses are venturing into unchartered territories. Looks like agility and adaptability is going to be the only way forward:

• Pivoting of business models-Governments in every country have identified a list of essential and non-essential businesses. It is observed that the firms are pivoting (changing) their business models where possible to supply essential goods. For instance, several manufacturing firms globally are trying to use their facilities to make masks and ventilators. In some situations, the idea is to contribute towards society as well
• Several departments like IT and HR are busy ensuring the safety of workers to further ensure that the current supply ecosystem remains healthy
• People are working harder than ever and thinking of novel ways to continue business operations. This may be a lockdown of physical world but not of virtual work environment

Personnel

Companies are debating about salary cuts, lay-offs, work from home constraints and succession planning:

• As revenues come under severe pressure, it is becoming difficult to bear employee costs. While lay-offs are being considered by some firms, there are others who would only like to implement salary cuts for the time being
• There are instances where even if firms are keen to retain workers, many are leaving for better pay structures. For instance, Amazon has experienced an overwhelming demand in US and to mitigate the shortage of staff, it is willing to hire and pay more to those willing to work amidst the Covid scare.
• As many people are compelled to work out of home, constraints relating to bandwidth issues are also being resolved
• Succession planning is going on for Key Management Personnel(KMPs) given the risk to lives due to corona virus

Risks

There is a need to manage risks due to a rise in cyber attacks, client confidentiality, etc. as most of the employees work out of home.

Board Format

Board meetings are being conducted in a different set-up to address more near term issues:

• Earlier a minimum number of in-person attendance was required and an all virtual board meeting format was unheard of. But now the regulators have relaxed the conditions and most of the meetings are being held online
• Conferences are of shorter duration with a greater focus on immediate key issues. A typical march quarter meeting would mostly discuss the financials, in contrast, it is being admitted that it is difficult to forecast & build annual budgets during this time (due to the severity of the lockdown). Hence, it is prudent to shift gears and show readiness to overcome current matters

Communication and Investors

Boards are encouraging companies to have a robust communications strategy with all the stakeholders on matters such as business continuity for building greater confidence in the corporate ecosystem

Conclusion

The virus has spotlighted the need to address several new challenges which the corporate honchos could not envisage before the global pandemic. CFOs are busy looking at their cash reserves to ensure that they are able to pay the bills, pivoting of business models is being tested and IT & HR personnel are ensuring the safety of the workforce. Several decisions regarding employee costs, mitigation of risks and business continuity are being taken. Lastly, having an effective stakeholder communication plan is the need of the hour.

The crisis has undoubtedly unveiled the dark side of globalization. Going forward, the governments & corporates will have an inward focus i.e. domestically oriented manufacturing base to mitigate disruptions in supply chain and changes in many other policies. Coming out of the Covid-19 outbreak, the entities are going to have a wealth of lessons learned but for now, they are more fixated on sailing through it.

Watch webinar at: https://www.youtube.com/watch?v=5Q8zniv5mQI