DealMakers - 2020 Annual
How good governance drives business resilience and continuity
by Gasant Orrie, Zahrah Ebrahim and Fatena Ali
The environment, economy, and society within which businesses are currently operating are becoming more unpredictable and dynamic for a multitude of reasons, the most obvious of which is the ongoing COVID-19 pandemic. COVID-19 has fundamentally changed the way in which the world operates. Most notably, it has forced businesses across the globe, and in every sector, to reconsider the viability of the models upon which they operate. Not every business was able to survive the shockwave of a global pandemic and ensuing national lockdowns across the world. Only those business models centered around resilience were able to survive, and even thrive, in such circumstances.
Business resilience strategies
Resilience is generally understood as a company's capacity to absorb stress, recover critical functionality, and thrive in altered circumstances. These altered circumstances may vary drastically but often include, on the one hand, the technological evolutions that businesses may choose to adopt voluntarily or, on the other hand, involuntary externalities such as a global pandemic. Whatever the case may be, a resilient business should be able to withstand both pheno-mena, both financially and operationally.
Research shows that a successful business resilience strategy is the combination of a comprehensive understanding of strategy and value creation, sustainable corporate governance, and strong leadership and management. It recognises that the fluid and unpredictable external context within which society exists as a whole is as much of a concern for the business as issues like product quality, and returns on investments for shareholders.
More and more, companies need to look at sustainability as their foundation, find ways to move beyond short term pressures, utilise tools and approaches which prioritise business resilience in an appropriate manner, and create different business models which cater for external uncertainty, change, as well as interdependence. In many instances, these strategies are collaborative and system-based. In other words, they are primarily concerned with systemic solutions based on collaboration amongst all stakeholders of that business.
Governance and resilience
One of the most fundamental mechanisms of driving business resilience is through strong governance structures and principles, which, if adhered to, aid in creating resilience, business continuity and survival. In the South African context, companies are guided by the King IV Report on Corporate Governance (King IV). Corporate governance is defined as "the exercise of ethical and effective leadership by the governing body towards the achievement of defined governance outcomes such as ethical culture, good performance, effective control and legitimacy." These fundamental principles have, in most instances, stood the test of time, and continue to evolve in order to cater for changed circumstances, such as those brought about by the COVID-19 pandemic.
In addition to this, the King Committee has published a guidance paper titled, "Responsible leadership in responding to COVID-19". This guidance paper does not remove any existing legal obligations from companies; however, it highlights key principles relating to businesses which require specific attention and care, in light of the context in which businesses are currently finding themselves. Some of the most important components include ethical leadership, human capital, performance and oversight, and strategy and recovery.
At the very least, leaders are required to act and consider their current structures and whether they are appropriate in light of the changing market, and to play a much more significant role in promoting a sustainable business agenda. Governing bodies are now, more than ever, called on to engage with employees, customers, suppliers and other stakeholders to implement resolutive programmes and derive their own unique solutions to the existing changes. In addition, leaders must consider the crucial and interrelated component pertaining to the preservation of human capital. Responsible leaders must consider succession plans for senior members, make long-term commitments to the health and safety of their employees, invest in the multi-skilling of employees, provide alternative methods of training, as well as adaptive methods of working. As mentioned, successful business resilience strategies are collaborative and systemic and, therefore, abiding by principles that centre around employee welfare and regard for other stakeholders will create an environment in which business resilience and continuity are fostered.
Not only are governing bodies required to focus on the operational aspect of the business; they are also required to focus on the financial aspects as well. Businesses must have strategic foresight in order to deal with unforeseen risks and, in turn, ensure their ability to absorb the stress of unprecedented changes in an advantageous manner. Further, there is an additional legal burden since governing bodies are now tasked with, amongst other things, ensuring that the organisation (1) is not trading recklessly; (2) is complying with the regulations issued pursuant to the Disaster Management Act; (3) understands its contractual obligations, in light of the pandemic; (4) has mitigated any litigation risks; and (5) understands the legal obligations owed to employees, customers, suppliers and other stakeholders.
Lastly, it is important to realise that even though recovery can be slow and sometimes frustrating, change is good and forces businesses to let go of old traditional market structures which no longer work. Instead, businesses should embrace something new, which, although to some extent can be uncertain, offers new opportunities and horizons.
Orrie is a Director, Ebrahim an Associate, and Ali a Candidate Attorney at Cliffe Dekker Hofmeyr.