As we move forward to the next stage of the lockdown, with most businesses now being able to return to work, it’s more important than ever for boards and shareholders to take stock of where they find themselves and to carefully evaluate the road ahead.
What has become evident to me in recent times is how few company directors and public officers (essentially, senior management in larger companies) are aware of their potential exposure under the Companies Act.
Simply put, they can be held personally liable for the totality of losses and damages suffered by any organisation or individual as a result of their failure to properly exercise their duties. In this context, I am assuming the owners are also involved in the business as directors, as is the case with most SMEs.
So, what is it they need to do in order to both ensure the sustainability of their businesses (so far as is possible in these difficult times) and avoid severe financial, and other, penalties if things go wrong?
Probably the simplest measure is to discuss the “Going Concern” status of the business by looking firstly at whether assets continue to exceed liabilities and, as important, whether you can expect the business to be able to meet all of its debts over the next 12 months, given your business and cash-flow forecasts. I recommend this be looked at monthly, and the discussion minuted, as we are living in such turbulent times.
We then need to turn to strategy. Often, a company drew up a strategy document fairly early on, which then lived in a drawer, untouched, for years. Board meetings seldom discussed strategy, being largely focused on financial results and cash-flow.
However, in this fast-paced and disruptive world, strategy is a cornerstone of your business and should form a significant part of board discussions – typically, past periods’ financial results should occupy no more than 20% of the time, with the majority of time spent looking ahead at where (and how) to take the company forward.
Just as a ship at sea will change its route to take account of changing conditions, so a company needs to do so too. New competitive forces, changing market conditions, fresh opportunities and challenges all need to be discussed and strategy adapted as necessary – it’s a “living document.”
Another key component is risk management. Again, in the past, this was infrequently looked at in a broad manner with discussions often limited to the risk of defaulting debtors or payments to creditors.
Boards should maintain a risk register and it’s recommended that risks be categorised by the possible impact a risk could have on the business and the likelihood of it occurring – a table, in effect. Risks will be added to, or removed from, the register as circumstances change, and their placement within the table changed as their likelihood of occurrence and/or impact changes too.
Of course, there are many other areas for discussion at board meetings, so companies should ideally draw up a detailed annual calendar to ensure that all issues get appropriate consideration during the year. But the above three issues are especially critical at the moment and in the short term, at least, I would suggest company boards meet formally on at least a monthly basis – and not be afraid to call special board meetings to discuss issues of a more urgent nature.
Now more than ever, it really is important for boards to step up to the plate and take an active role in governing the business.