Torys Business Brief focuses on key issues and actionable knowledge for businesses to emerge from the COVID-19 crisis resilient and well-positioned for the future. Each episode of Torys Business Brief features in-depth, accessible interviews with Torys lawyers, moderated by Munk Debates convener Rudyard Griffiths. These episodes are accredited for CPD purposes.
Are we at a moment of transition? Torys partner Cornell Wright and Chair Robert Prichard share their executive-level perspectives on how boards and management are working together to help their organizations emerge from the pandemic-and what best corporate practices they believe are critical at this high-stakes juncture. We discuss leadership in times of crisis, strategy around executive compensation and public company disclosures, and the broader economic and business sentiment as the world looks ahead to life after COVID-19.
A full episode transcript follows.
Rudyard Griffiths (00:02): Hello and welcome to Torys Business Brief, I'm Rudyard Griffiths. You may know me as the convener of the Munk Debates where we bring together the world's sharpest minds and brightest thinkers to debate the top issues of the day. As the host of Torys Business Brief, my role is to provide you, the listener, with compelling conversation about the legal challenges that COVID-19 pandemic presents for businesses and business leaders.
RG (00:27): We're all taking stock of the ongoing effects of the pandemic. As the world continues to respond, businesses have wide ranging issues to consider. This podcast will equip you with actionable knowledge your business can use to emerge from this crisis resilient and ready to thrive. To do this, I'll be drawing on the expertise and insights of the lawyers working at the firm named corporate law firm of the year by Chambers and Partners, Torys LLP.
RG (01:24): On today's Business Brief, we speak with Torys partner Cornell Wright and the Canadian corporate director and Torys Chair, Robert Prichard. We'll be discussing important governance issues for boards of directors as they help companies stay the course through the pandemic.
RG (01:46): Cornell Wright is chair of Torys corporate department and has been a lead role acting for some of Canada's largest public and private companies in their most significant strategic matters. He brings deep expertise in complex transactional governance and compliance matters. And Rob Prichard is the non-executive chairman of Torys and a prominent corporate director. As chair of Torys, Rob provides advice to clients and contributes to the leadership of the firm.
RG (02:14): Cornell, Rob, welcome to Torys Business Brief.
Cornell Wright (02:17): Thank you Rudyard. Good to be with you.
Robert Prichard (02:20): Thanks for having us.
RG (02:21): Cornell, I want to start with you and get your framing because you've been in the heat of the kitchen these past five/six weeks with Torys clients. What do you feel is the moment that we're at now? Is this a moment of transition? Coming out of acute crisis into a reflection about both what happened and also, potentially about what the opportunities are that could emerge in the months and weeks to come?
CW (02:50): I think you're right, Rudyard, that his is a moment of pivot. I think now companies are very much focused on phase two, which is planning for the various scenarios that could emerge depending on how the recovery unfolds and making sure that the company is positioned not only to continue but to optimize its operations as the next phase of this unfolds. Management has the primary responsibility for putting in place the actual action plan and leading the planning for the future and it's important that the board not interfere in the operational aspects or the day-to-day planning that management's engaged in, but this is a high stakes moment for our company and as in any other high stakes moment, there is a need for greater attention from the board and for greater engagement with management, making sure that the board is helping to make sure that the big questions are raised and addressed by management in thinking about the next phase.
RG (03:56): Rob, you have a lot of board experience in some challenging situations, so crisis isn't anything new to you as a seasoned director. But is there a danger here that ... Boards have kind of been ... For better, I'm sure, than worse ... But let off the leash over the last number of weeks to really dig their hands into their respective businesses to try to help and support management. How do you get back? What's your advice to the corporate leaders listening now, the CEOs and senior executive group, about how to get these boards back into balance so that management and the board is really working together in the most efficient and effective way?
RP (04:41): This is a really important point you're making, which is in a moment of crisis, understandably, the board and management meet much more frequently but it's not a sustainable pattern of meeting, in my view. As Cornell says, management has to be allowed to manage the business and the board should retreat to its principle duties and the sooner one can get to that more normalized pattern, I think the better for all concerned. I'm in favor of retreating from very frequent meetings to a more normal meeting cycle. I'm in favor of the board chair, if independent, or the lead director working with the CEO rather than the CEO having to work with the whole board on a very frequent basis. Anything that clarifies the relationship between management and board and puts in place a more sustainable model of performance. This isn't a one-week or a four-week or a six-week challenge. This is a six-month or 12-month or 18-month challenge and you need to have a sustainable pattern of board and management relations, not a permanent sense of crisis.
CW (05:49): And there are lots of different models. I know that I was speaking with one board chair on Friday who said that in that company they had instituted a regular board call every two weeks to update on where things were at and the CEO had been circulating a note in the interim week updating on key metrics and issues that were in front of management. I think it's right for every board to reflect on the adequacy and the frequency of reports for management and of board and committee meetings. And a critical component of the assessment has to be ensuring that there's value add and that it's not imposing an undue burden on management.
RG (06:28): Good points. Good points. Let's talk a little bit about practical things that board and management should be talking about now, versus, as you say, the heat of the crisis that we've just come out of. I think one of the issues that is clearly out there is assessing the effectiveness of the response by board and management; by the company as a whole. But maybe more importantly, is there a challenge here, Rob, of ensuring continued alignment between the board, the directors and senior management? And do you have any examples, any advice as to how you can go about ensuring that alignment is there when there are going to be some very tough decisions coming up on issues around disclosure to the market, compensation, divestment of assets or, who knows, acquisition? What's your view of best practices at this time?
RP (07:27): Generally, in a crisis like this and I think, in particular, in this crisis, the crisis brings management and board closer to alignment rather than create a divergence. Misalignment I don't think is the issue here. There will be issues down the line on executive compensation. Many business plans on which executive compensation plans have been based will no longer be achievable and board and management are going to have to rethink that. But as a general rule, I think it is difficult for managements to also get that second eye, looking on the horizon and thinking about opportunities.
RP (08:08): Markets are very disrupted. Some competitors are very weakened, creating opportunity for the stronger one. And I think the board can be effective in making sure that medium and longer term horizon is kept in mind in the conversations, and that dealing with the immediate business challenges, the operational challenges, does not take 100% of the time of management. So boards working to encourage management, define ways that some members of the team are thinking about the medium and longer term, I think is appropriate place for the board to lean in. That's not misalignment. It's simply the board is not on the frontline 24 hours a day, and can sometimes have a bit more perspective on the opportunities that are emerging.
CW (08:59): I know, certainly, Rob, in one case that I've been talking a lot about recently, the boards sat down, management had their plan for 2020 laid out. These are the six things that they're really going to focus on. And, of course, COVID happened, and the board, in effect, said to management, "Look, of those six things, I think three of them can be deferred. You've got some immediate issues in front of you. Plus, we've got some new issues that have come up as a result of COVID. Let's make sure we're allocating management's time in the best way, and not just according to what we had in mind two months ago."
RP (09:38): And it's important to have agreement, a meeting of the minds of management and the board on that. Because come the end of the year when we are assessing how do we feel about how well we did over dealing with the crisis and what we achieved in the year, it's pretty important to have shared objectives as you go through that, rather than find yourself at the end of the year, turning out that management and board had a different sense of what the key objectives were for the year.
RG (10:03): One other key issue I want to touch on with you, Cornell. You're leading Torys' overall kind of corporate practice across a range of needs that corporations have, but you have a background and expertise in capital markets and mergers and acquisitions. What advice do you have around this kind of tricky issue right now of disclosure to the market? We're seeing a lot of companies now coming out and just stopping all forward guidance, given the uncertainty. And we're seeing some very tough quarterly earnings calls where companies are having to disclose real material effects that this pandemic has had on their business. What are some of the best practices that you're advising clients, vis-á-vis the market, at this very, very critical juncture?
CW (10:55): Well, I think that there is a big question. Does the company's current disclosure provide adequate information to the market? I think the company has to ensure that it's informed investors adequately about where the company stands operationally and financially, and how the response so far has been going. I think, though, there's a second important issue, and this was highlighted recently in a release the SEC issued where they encouraged companies, with a view to the interests of investors but also the economy generally, to provide as much forward-looking information as possible. In other words, give the market a better sense about what the company's operational and financial planning shows. I think there will be real pressure on companies, as they come closer to reporting Q1, to put themselves in a position where they can give the market as clear a sense as they can what the company's next three and six and nine months looks like, depending on the different scenarios.
RG (11:57): Rob, you're on boards right now that are thinking about their upcoming quarterly earnings. What are those conversations like?
RP (12:07): I think Cornell's put it exactly right. One specific point that I think's been important for boards in the early days of the crisis was to suspend any trading by directors or senior executives. Because when the board and management are meeting every few days, or once a week, there's a lot of undisclosed information, material undisclosed information, available to the directors and the management. And I think, in those cases, extreme caution is needed on any trading by directors and officers. Cornell, do you have a point of view on the insider trading point? It was one that made me, I'll say, conservative on the point, as I was going through various board discussions.
CW (12:53): It is a critical point for boards to focus on because you really have two conflicting points of view. One is that it's a period of heightened uncertainty. The company's disclosure may not reflect what's happening in real time, and the decisions that are being made. On the other hand, at different points in this crisis, different companies have found their share prices undervalued, and they have wanted to, frankly, make opportunistic purchases. And it's been both individual officers and directors, but also the company. I think you've always got to be sensitive to the risk of second-guessing from hindsight, and so it's right to be conservative. But at the same time, certainly companies who have lots of liquidity are looking at share buybacks. And my answer is, you facilitate the flexibility to engage in share buybacks and to allow for trading where the company's disclosure is robust. So the best thing you can do is to make sure that you're putting as much out there as possible so that you minimize the risk of an argument being made that there was information that was being kept inside the company and allowing people to profit.
RG (14:21) Hi, thanks for listening to Torys Business Brief. For more information on how organizations and businesses should be addressing the challenges of the COVID-19 pandemic, visit torys.com, where you'll find a wealth of in-depth resources, analysis, and insights. Again, that website, torys.com/covid19.
RG (14:44): Let's turn to the final topic before I go big picture with both of you, because I want to leave some time to get your just thoughts on where the Canadian economy is at right now, because you're both in, I think, a unique position to provide some valuable insights. But I want to first just touch on compensation. Cornell, what do you think at this moment the strategy should be around those companies that are really having to think hard about resetting executive compensation to reflect deterioration, and balance sheets, and a set of known unknowns that could have very deleterious effects on company performance going forward?
CW (15:23): Rudyard, I think there are at least two kinds of situations that are out there at the moment. There have been a number of companies that have announced executive, in some cases also board, pay cuts as a result of the COVID crisis. Many of those companies, though, are ones that are facing very serious kind of near-term survival issues. And those pay cuts are part of a broader strategy to preserve the company's financial position as best the company can.
CW (16:00): I think at the end of the day, much of that can be addressed at the end of the year when there's a visibility on what's happened. I'm not sure that now would be the time most boards would choose to actually try and in a sense reset the company's compensation approach for the year.
RG (16:22): Rob, what's your take on that? Because some people out there saying that as layoffs are contemplated as the Canadian public as a whole could struggle with significant levels of unemployment or underemployment in the months to come, that leadership at the top on compensation can send an important and positive message both to the company's workforce, but also just its larger positioning, its brand within the marketplace.
RP (16:56): I think moral leadership, tone at the top is always important at all times. In these times in a case where the employees of a firm are taking a great deal of hardship, it will often make sense for the executives to voluntarily share in that hardship as a matter of moral leadership through the most difficult of times. But I think the much broader pattern is going to be the high degree of uncertainty which has disrupted business plans that have been set going into the year that are no longer a good indication of what the firm should be trying to achieve during the course of the year. In the cases like this, I'm with Cornell that the decisions have to be deferred and I think this is where trust between board and management is going to be particularly important.
RP (17:50): Management has to trust that the board will do the right thing come to the end of the year and will properly reflect on the accomplishments of management. At the same time, I think boards are going to have to have the confidence and courage to exercise discretion. The proxy advisors are adrift in executive compensation in recent years has all been to be formulaic and to minimize the role of discretion. I think in the uncertainty we face at present we're going to have to increase the weight put on discretion, compensation committees and boards are going to have the courage to stand behind their exercises of discretion and management teams are going to have to have the confidence the board will act wisely and fairly. Then the boards are going to have to defend those discretionary decisions come this time next year when say-on-pay votes are being taken.
CW (18:44): The other case I'd add Rob, one that I know we've been talking about separately is looking for support from government or if you're dealing with a company in the non-for-profit sector where they've got donors or other stakeholders who are looking actively at the company. I think in those cases, there is a symbolism element, as well as an actual practical element, where I think those companies are under pressure to show that management is sharing in the pain in effect. I think in those cases that visible symbol of people voluntarily adjusting their comp to help see a company through the crisis is something that we'll see more of.
RP (19:31): It's likely to be the case that as we saw a decade ago in the financial crisis in the United States, that government help will be conditioned upon limitations on executive compensation. So it's not even voluntary, that it's mandatory that executive show restraint with their compensation.
RG (20:22): I want to spend our remaining time talking in broader strokes about the economy and the business environment. Cornell, I feel a material change, even in the last week to 10 days in terms of how people are feeling about the prospects of the economic recovery. What's the tone that you're hearing in the conversations that you're having and are we right to possibly be maybe more optimistic than we've allowed ourselves to be these last couple of weeks about the future of the Canadian economy?
CW (21:02): Back in March I think people were... the people were obviously taken by surprise at how quickly things changed and it looked pretty bleak, but I think more recently there has been a greater degree of optimism. I mean certainly we entered this crisis with a very confident business community, as well as a very high consumer confidence. So you'd expect that the fundamentals were quite strong coming into this. I think people are now seeing a variety of scenarios in the near term frankly, that create more reason to be optimistic in terms of the ability of businesses to get back to a new normal and frankly some sense that consumers coming through this will be keen to get back to a new normal as well.
RG (21:58): Rob, what's your view on debt and indebtedness? A lot of people who, let's say are taking the half glass empty view point out that Canadian corporations, or subnational governments, or provinces went into this crisis with not great balance sheets, a lot of debt and now we are potentially, at least in terms of the government response, significantly increasing that debt. A lot of companies have gone to pull down their lines of credit with their banks, increasing their debt exposure. What's your view on the threat of debt?
RP (22:37): It's important in thinking about this to realize that some businesses are still thriving through this. The grocery business for example, remains a very strong business. So there are lots of businesses that are doing well despite the extraordinary circumstances, but there are others at the other end of the spectrum which are suffering terribly. Airlines, hotels, the energy companies, there're some really, really tough cases and it's in those cases where they will require more debt in order to get through the valley here. That they, I think, debt alone is not going to solve the problem and as part of their recovery I think are likely to require equity injections as well.
RP (23:27): That of course creates opportunity for investors and for private equity companies and for companies looking to consolidate. Those cases I think we're going to have to see a second phase of refinancing. The first phase being debt. The second phase is going to have to include equity. Cornell, do you agree with that?
CW (23:48): I do. I think, people in normal circumstances terrified of bankruptcy and restructuring. But you can see in the current circumstance as companies are taking on a lot of debt to see their way through this, that it might be necessary for, and indeed desirable in policy terms, for companies to look at restructuring as a way to facilitate a stronger next phase. And I think that transactions will be how a lot of companies end up getting through this, whether it's bringing in more equity or reestablishing the balance sheet by some other means. I also think there will be both opportunities and a need for consolidation frankly, in some sectors. And interestingly, you've seen competition regulators start to talk about relaxing their views on mergers where consolidation might preserve a market participant who otherwise would have disappeared.
RG (25:00): Rob, let's talk just finally about the government response. It has been extraordinary on both the fiscal and the monetary side. Do you have concerns about the extent to which our central bank, which had shown real restraint over the last decade has now really embraced the more aggressive monetary tools that we've seen in the United States, in Japan and elsewhere. With unlimited quantitative easing, with the purchasing of corporate debt, with a whole series of instruments that in the past really were not part of Canada's thinking about the role that the central bank should play in the Canadian economy.
RP (25:44): Personally, I'm very impressed by both how the Bank of Canada and the Government of Canada have performed in responding to the crisis. This is a very different circumstance than a decade ago with the financial crisis. In the financial crisis, in the U.S., the financial institutions were weak. In Canada, they were strong and they stayed strong and as a result, the Canadian response did not need to be as broad in the policy tools that were used as was as in the case in the United States.
RP (26:16): In this case, our circumstances are not weakness in financial institutions, it is this extraordinary impact of the pandemic on all businesses, which I think is properly called upon the government to respond with every tool at its disposal and is doing so in a systematic way. The Bank of Canada stood up quickly and intervened and then the Government of Canada has been rolling out program after program.
RP (26:43): I think the trick with these programs is going to be to make sure they're time limited. That they not become part and parcel of standard operating procedure of the relationship of government to the people, but rather are a response to a time limited crisis. We can't afford not to do it in the short term and we can't afford to do it in the long term. And as long as we bring these initiatives to an end as we work out through the other end of the crisis, I think we'll be fine and we'll look back and say, "This was a fine hour of leadership by the Bank of Canada and by the Government of Canada and by the provincial premiers as well."
RG (27:17): Well, Cornell, Rob, I want to thank both of you for a far-ranging, highly stimulating and just very practical conversation at a difficult moment for Canadian businesses and corporate leaders. So thank you for coming on Torys Business Brief today to share your experiences and insights.
CW (27:36): Rudyard, thank you for the conversation.
RP (27:39): Thank you very much, Rudyard.
RG (27:42): Well, that wraps up this episode of Torys Business Brief. For more information on how organizations and business leaders should be addressing the challenges of the COVID-19 pandemic, visit torys.com. Here you'll find a wealth of in-depth resources featuring the analysis and insights of the firms, partners and lawyers. Again, that website, torys.com/covid19.
RG (28:08): On our next podcast, we'll meet private equity partners, Guy Berman and Stefan Stauder and tax partner Gwen Watson. They will discuss the impact of the pandemic on the private equity industry and accessing government programs.
RG (28:44): Thanks for listening to Torys
Business Brief, I'm your host, Rudyard Griffiths.
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Article originally published on 4 May 2020
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