May 12, 2020 / COVID-19 / Compliance
I. Introduction
There are several situations that endanger the continuity of a Legal Person. These situations often cannot be foreseen or even if they are foreseen, they cannot be avoided, such as the COVID-19 pandemic which is being faced today.
The Corporate Governance as an essential branch of the Legal Person that faces challenges in the presence of such contingency since Business Corporations are directly affected —both in capital and labor. This, in turn, generates an important impact on the local, national, and international economy.
However, Corporate Governance itself can be the essential key to the proper development of a company and, more importantly, the life of the company.
The following is a series of challenges and solutions that can be implemented in a regulatory framework of a company to counteract the effects of the current health contingency, as well as for future similar situations.
II. Background Information
Covid-19 was first reported in Wuhan, China, on December 31, 2019, hence its name; CO for Corona because the virus looks like a crown, VI for Virus, and D for disease. [1]
On December 31, China reported a cluster of pneumonia cases in Wuhan. However, it was not until later that China informed the World Health Organization that these cases were due to a new Coronavirus.
On January 13, 2020, the first case of COVID-19 outside China was officially confirmed and found in Thailand. However, it was not until January 22, 2020, that the World Health Organization issues a Statement affirming that human-to-human transmission had been demonstrated in Wuhan.
On January 30, the Director-General of the World Health Organization convenes an Emergency Committee to assess if the outbreak is a public health emergency of international concern. Consequently, the countries agree to establish that the outbreak is a public health emergency of international concern.
On March 3, the World Health Organization publishes the Strategic Preparedness and Response Plan of the international community for assiting the countries with weak health systems. It was not until March 11, 2020, that the World Health Organization determines that COVID-19 may be a pandemic.[2]
Consequently, measures to contain the virus have begun to be adopted around the world. Derived from the phases established by the World Health Organization, these are the actions that the Countries should respectively take. These measures started with handwashing recommendations, use of certain equipment, and evolved to what we call quarantine.
As a result, many areas, including the economic, labor, and social areas were affected. Additionally, there is a major problem in the corporate area since this means changes in the structure and operation of the company, not only to contain the contagion of the virus, but also for the continuity of the business of the company.
III. Corporate Governance
According to Vázquez-Palma, corporate governance should be understood as the way in which companies are managed and controlled; they are the rules, principles, and procedures that regulate the structure and operation of the governing bodies of a business corporation.[3]
It involves the relationships among the governing committee, board of directors, shareholders, and other parties, such as employees, suppliers, etc. Therefore, the rules of the decisions regarding the business corporation are stipulated.
But how does the corporate governance help with? Firstly, it helps us to ensure the proper operation of the company, and, secondly, it helps us to generate value in our company. If we have a good operation, we generate credibility and stability, which in turn is reflected in trust with our customers and employees.
IV. What rules must our corporate governance establish?
- The way in which the decisions of the company must be made.
- The corporate policies, either they are investments, mergers, acquisitions, appointments, etc.
- The control mechanisms over the proper exercise of the company management, with the introduction of a plan.
- Compliance with these rules, which is the policy and process establishment to ensure that the company people and governing bodies comply with the regulatory framework.
Therefore, in accordance with what has been established, we see that there are many problems related to a pandemic —in this case with COVID-19.
First, the problem derives from decision making. By taking measures such as the quarantine, Countries generate that companies have to establish marketing, investment, hiring, disability, meeting, committee decisions, among others. In other words, it represents a significant temporary change in the company, it even may mean stopping operations.
Second, the control mechanisms of the company changed, and, therefore, its plans are totally affected because the strategies that had been planned changed to face the health contingency; since the priority is to implement contingency actions in our Corporate Governance without putting our market and operations at risk.
Third, as a consequence of the foregoing, compliance is affected because when changing the plans, the internal rules of the company must be changed, which in turn may initially lead to confusion and even failure by the employees of the company.
Together, these points represent a major problem, which means the development and even the life of the company. As we can see, Corporate Governance, an essential element of the company, generates that the health contingency represents a new internal and external challenge for the Corporation.
V. Areas of Opportunity
The following is an example of the problems described above and a more detailed analysis of them.
As we mentioned, the first challenge we faced is decision making. The life of a company depends on its decisions —a correct decision may mean the attraction of investments or potential customers, and even a good mood in our employees. We must remember that a company is an organizational unit that requires two factors: capital and labor —being understood as goods and rights. The latter in sense of activities that the company provides to their peers (employees, suppliers, and customers).[4]
Therefore, we find the first problem because due to the health contingency, we must adopt measures such as Home-officewhich means a great change in business operations. We must take into account that if we have our rules well established, these are largely aimed to be fulfilled within our company, understanding it as the workplace. Therefore, we must know what this decision entails that two situations may happen: the first is that the productivity of workers increases, and the second, on the contrary, that it decreases. It is important to mention that the second option is more likely to happen, since the contingency affects everyone, work, in general, has a tendency to go down.
Another very important decision is to establish if the company has to stop, either due to its business line or for working capital security. This is a very delicate decision, as it may imply loss of profits, suppliers, market, even in some cases, customers, employees, and, if we do not adopt some measures in our Corporate Governance, we may lose a lot of value.
Regarding the problem derived from the control mechanisms of the company, we have a scenario in which the control of our organization is going to be different because we must coordinate in a different way than before. Considering the Home-Office example, it is not the same to coordinate people who interact in our company physically than being at distance, although there are virtual tools, these do not have the same impact as generating physical control mechanisms, from reprimanding somebody to have corporate meetings.
Regarding compliance, it is a huge area of opportunity since they are the policies and processes to ensure compliance with our corporate rules. As stated above, the rules are intended to be enforced in the workplace or in situations where either the board of directors or employees have interactions. However, by not having this physical interaction, the relationships must change, and, therefore, the ways of working.
The above two points are the root of our problem, but also of our solutions.
Now, the above problems are inherent to our company. In other words, although they originate from the contingency, they are problems that we must solve ourselves. Even if we do not create them, we can control them, but what about those that are external to our organization?
This is the case in many countries, but let us take Mexico as example.
Since March 27, 2020, a series of extraordinary actions were published to face the health contingency, in turn, in such Decree it is established that the Ministry of Health would have the power to generate other actions that it considered must be implemented, however, these actions were only aimed at the public sector.[5]. Subsequently, on March 31, 2020, the Ministry of Government published in the Federal Official Gazette a Ministry of Health Agreement in which the following is established.
“…ARTICLE ONE.- It is established as an extraordinary action to handle the health emergency generated by the SARS-CoV2 virus that the public, social, and private sectors must implement the following measures:
I.- The immediate suspension of all non-essential activities was ordered from March 30 to April 30, 2020, in order to mitigate the spread and transmission of the virus SARS-CoV2 in the community, reduce the disease burden, its complications, and death caused by COVID-19 in the population residing in the national territory;…”[6]
As we can see, non-essential activities are suspended until further notice. Therefore, many companies are affected due to this means the definitive stoppage of their activities. The foregoing is a huge problem because, as we mentioned before, it cannot be controlled by us. It is external to our Corporate Governance, and we must obey it. It also means that we have to carry out a series of actions establishing different laws —such as labor, social security, commercial, and civil laws.
VI. Recommendations
We can summarize the recommendations and, if applicable, the solutions in three categories.
The first is prevention. Although it is true that for some companies this action is very late, it is also true that this will not be the first or the last contingency that will affect our company. Therefore, it is recommended to have a section in our corporate rules to prevent this kind of situation, starting from questioning how to change our internal policies and procedures? To start with, the way in which the corporate rules will be changed must be considered, since they must be geared to the contingency. In other words, the change must contemplate the same gradualness of the problem because establishing rules at the moment or without foreseeing would be counterproductive due to it would mean improvisation, which in turn would generate the difficulty of implementing such rules. For this purpose, the different national and international regulations must be analyzed in order to know which of them are the pre-established actions to be taken in different contingency situations, and, in this way, relate them to our corporate rules and have the same gradualness as the regulations. Once we mentioned the foregoing, by creating the corporate rules gradually and prior to a contingency, we would have the following benefits:
- Change in our organization policies;
- Proper regulatory compliance;
- Greater control over the situation, even if it is inherent to our organization;
- We generate greater confidence in our customers, providers, and employees because this means we know what we need to do and what we are going to do, and that reduces uncertainty;
- We prevent any mishap that may happen; and
- The company reduces its value loss, and even if the measures are correct and are implemented in accordance with everything established, we can generate more value.
Secondly, the change of our policies. They should address to counteract the changes that the contingency brings and contemplate the way of working and what is related to, as well as to have extraordinary measures within these policies in case of official changes by the State that may affect our company in a way we cannot prevent. It is important to mention that this new regulation must not only be used in the event of health contingencies, but also in economic contingencies, force majeure cases, or acts of God, which are natural or man situations whose occurrence is beyond our control, since they cannot be foreseen or, even if foreseen, cannot be avoided.[7] In this way, we reduce the degree of risk to our company. Besides, it would not take our regulatory, business, labor, and other obligations by surprise.
Thirdly, we have the way to ensure the established rules. In other words, compliance, which is related to the foregoing. However, it means a previous stage because there is no point in having the regulatory framework if it is not complied with or is impossible to comply with. Therefore, the company has to adapt compliance to such rules. The compliance guarantee must be possible and especially adequate; it must have control mechanisms for such situations specifically and not generally; and there must be a relationship between the conduct and the normativity (fact-right).
On the other hand, we have problems external to the company. As we mentioned before, they are situations we cannot control. Fore example, the suspension of our activities. For these problems, we recommend what we have just described in the previous paragraphs, as well as trying to prevent the different situations that may occur in a section different from our general regulations: ask for professional advice because this situation generates the possible breach of obligations, which may be mitigated if we contemplate different actions in our internal regulations; have a reserve for compliance with contractual obligations in labor matters; have constant communication with customers and suppliers, and adapt the internal rules with the applicable laws, or those that foresee contingencies.
VII. Conclusion
The challenges originated by the COVID-19 health contingency represent a clear point of opportunity because although it is true that new problems are generated, it is also true that, to the extent that we prevent them, we can generate value for our company. By having perfectly established the procedures and guidelines to be taken, we mainly generate confidence in our customers, our working capital, and other third parties with whom we intervene.
At the same time, it is important to highlight the importance of establishing such rules, because it generates trust and does not destabilize the internal processes of the company, which allows the reduction of losses, and we would be effectively complying with the applicable regulations of the competent authorities.
Contact
For more information related to the foregoing, please contact any of the following members of BGBG:
Miguel Gallardo Guerra
Samuel Uziel Rivero Prado
Mario Arturo Preciado Alonso
[1] It means “disease” into Spanish translation.
[2]the World Health Organization. (2020). COVID-19: chronology of WHO action. Retrieved from https://www.who.int/es/news-room/detail/08-04-2020-who-timeline—covid-19
[3] Vázquez-Palma, María Fernanda & Vidal-Olivares, Álvaro, Application of corporate governance principles to non-listed companies in Chile. An approach from the European corporate and comparative law, 133 Vniversitas, 383-444 (2016). http://dx.doi.org/10.11144/Javeriana.vj133.apgc
[4] ARIAS PURÓN, Ricardo., (2015). Corporate Law Mexico City, Mexico: Grupo Editorial PATRIA.
[5]DECREE that establishes extraordinary actions in the affected regions of the entire national territory in general health matters to combat the serious disease caused by the SARS-CoV2 virus (COVID-19). Federal Official Gazette, Mexico City, Mexico, on March 27, 2020.
[6] Agreement that establishes extraordinary actions to handle the health emergency generated by the SARS-CoV2 virus. Federal Official Gazette, Mexico City, Mexico, on March 27, 2020.
[7] Portilla, Ruy-Diaz & Aguilar, S.C. (April 8, 2020). Canadian Chamber of Commerce. Videoconference carried out by Skype for Business.