The imperative of ESG (Environmental, Social and Governance) has been reinforced by the pandemic. Fidelio builds and develops Boards and leadership teams that are capable of navigating and succeeding against a complex ESG backdrop. We have seen clear evidence of the ‘S’ in ESG achieving a new prominence and understanding in the Boardroom. Sustainability is also a key component. The scale of the downturn has prompted all Boards to review the strength of the balance sheet and liquidity and often to take actions to conserve cash. As Fidelio recently flagged, Cash is King in troubled times: Boards need to be acutely sensitive to the uses to which scarce cash is put, as well as to the impact of cash conservation measures on the broader business ecosystem. How Boards choose to approach cash and liquidity in the business has very real social and governance implications. Boards need to be alert, for example, that corporate actions to access funding and capital respect the rights of minority and retail shareholders. Several weeks into the pandemic crisis it is now clear that a significant number of companies find they do not have enough cash, and we are in the middle of a wave of new borrowing and equity issuance. Securing funding and capital may be a priority, but the speed at which companies are moving is leaving some Board Directors uncomfortable with a process that can raise multiple governance challenges. Board Members have a duty of informed scrutiny to ensure proper oversight of transactions and the best possible outcome for all shareholders, including retail and minority investors. Pitfalls include failure to plan for possible worst-case scenarios, non-competitive tender processes, over-priced debt with onerous covenants, and hurried share issuance at rock-bottom valuation neglecting pre-emption rights, especially those of retail investors. This is a genuine opportunity for Board Members to add value: good governance is never more important than in times like these. There are social implications often overlooked of ignoring the interests of minority investors. Employees are frequently shareholders too and most small investors are hurting because of dividend retrenchment. In this context too Boards do well to remember the ‘S’ and the ‘G’ in ESG.
POINTERS FOR BOARDS
In this Overture Fidelio explores the risks facing Directors involved in hasty capital raising and the need to reference the 'S' and the 'G' in ESG, as a guideline even for the most pressured Board decisions. This includes:
Realistic Scenarios: Raise Capital for the Worst Case
Banking Is A Highly Competitive Industry: Ensure Good Advice
Debt Issuance: The Value of Conservatism in the Good Times
Equity Issuance: Consult with Major Shareholders, Respect Pre-Emption Rights
The Value of IR: The Risk of False Economy
A Duty of Scrutiny and Preparedness
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