Directors’ Oversight Responsibilities in the Covid-19 Pandemic

The actions of the directors in overseeing their company’s response to the Covid-19 pandemic need to be taken in the broader context of prior case law defining and interpreting the oversight responsibilities of the board.  Most notably for directors of companies incorporated in Delaware, the standard has been established in a line of cases that began with In re Caremark Int’l Inc. Derivative Litigation and its holding that directors would be deemed to have failed in their oversight responsibilities (1) if they failed to implement any corporate reporting or information systems or controls or (2) if such a system or controls were implemented, the directors consciously failed to monitor or oversee the company’s operations, thus removing themselves from being informed of the material risks or problems that would require their attention.  As such, the first thing that directors need to do is assess the company’s existing reporting and information systems and implement such changes as might be necessary and appropriate to make those systems effective in spotting issues and potentially material risks specific to the Covid-19 pandemic.  The systems should not only monitor traditional business risks, but also should track risks to the human rights of members of the company’s stakeholder groups, such as workers, customers and the communities in which the company operates.  Systems must be expansive enough to go beyond the company’s own operational actions to include supply chain partners.

In order to meet the second pillar of the Caremark rule, directors not only need to establish the appropriate reporting and information systems, they need to demonstrate that they have acted in good faith to ensure that those systems have been implemented and that reports and information from the systems have in fact been used by the board to identify and stay informed about the most significant business, safety and public health issues and risks that the Covid-19 pandemic has presented for the company.  While the duty of oversight applies to all of the directors, the board should create a special committee that is focused exclusively on Covid-19 issues and takes the lead in evaluating the information from the reporting and information systems and developing strategies and action plans to address the actual and potential adverse business and human rights risks associated with the pandemic.  The specific scope of responsibilities of the committee, as well as its duration, will necessarily be uncertain given that so much has yet to be learned about the pandemic and its long-term impact.  Membership of the committee should include representatives from existing board committees (i.e., audit, compensation, risk management and corporate social responsibility) in order to facilitate coordination and exchange of relevant information. 

The committee should establish formal lines of communications with members of the company’s executive team, as well as other key managers throughout the organization who are involved in addressing specific issues or risks, and should make it clear to all executive and managerial personnel that they are expected to report all relevant information relating to the pandemic including (and especially) news about how the company’s response may be falling short of the standards set by the board.   Among other things, executives and managers should be assigned responsibility for keeping members of the committee, as well as all of the directors, informed about legal and regulatory developments relating to Covid-19 responses, such as recommended health and safety guidelines and protocols, and the substance and effectiveness of the company’s risk management processes.  While the board will obviously rely heavily on the committee, the committee itself should brief the entire board on a regular basis and executives and key managers should also make presentations to all of the directors whenever the board is in session.  All of the steps taken by the committee and the full board should be documented to establish that all of the involved parties acted in good faith in their attempts to fulfill their oversight responsibilities and evaluate and approve proposed steps for addressing the risks associated with the crisis.

While the primary role of the committee is to collect and analyze information from throughout the company to carry out the board’s oversight and risk management responsibilities, directors need to be mindful of all the other activities that the executives and senior managers need to tend to in responding to the Covid-19 pandemic.  Every effort should be made to design the company’s information systems in ways that allow relevant data to flow directly to the directors in a form that is easy for them to interpret on their own.  Directors should also look for ways that they can expand the managerial capacities of the company in areas that are relevant to the pandemic response.  For example, directors may be able to provide value through their own experiences in crucial areas such as occupational health and safety, labor relations and logistics.  Directors may also have relationships with external parties (e.g., investors, lenders or governmental agencies) which can be important to the company during the crisis.  The committee should also draw on the knowledge of outside advisors in the same way as other board committees and seek input on appropriate responses to the crisis not only from lawyers but also scientists, economists and human rights and public health experts who can assist committee members (and all of the directors) in understanding the unique issues associated with the pandemic and interpreting all of the information and projections relating to the economic, health and social impacts of the crisis.  The committee should also meeting with legitimate representatives of key stakeholders as part of the company’s overall engagement process to collect and share information and ideas about the company’s response to issues associated with the crisis.

The specific risks and potential impacts of the Covid-19 pandemic will vary among companies depending on their specific circumstances; however, commentators generally agreed that directors should expect to consider and address the following issues:    

• Evaluating potential disruptions to the company’s own operations and its business relationships (e.g., customers, suppliers, lenders and external service providers) and steps that should be taken to mitigate adverse impacts (e.g., insurance coverage or seeking financial assistance through Covid-19 governmental programs)
• Going beyond compliance with the letter of the law to apply the human rights due diligence framework to identify and mitigate risks to human rights and potential adverse human rights impacts as a result of the company’s actions and the actions of its business partners in relation to the Covid-19 pandemic
• Evaluating the viability and feasibility of the company’s disaster planning and making appropriate modifications in light of the situation relating to employee availability; functionality of IT systems; cybersecurity, particularly given the increase in remote working; legal/regulatory compliance and communication protocols
• Monitoring new laws and regulations arising out of the Covid-19 crisis, including emergency orders of governmental authorities, and overseeing the company’s compliance efforts including implementation of internal policies and procedures and allocation of resources required for compliance
• Assessing the company’s medium- and long-term strategies in light of the risks and challenges posed by the crisis including the impact of increased health and safety regulations, ongoing supply chain disruptions, availability of financing and the ability and willingness of customers to do business with the company
• Reviewing succession plans for directors, executives and key managers to ensure continuity in the event that one of or more of them should become unavailable due to illness related to the Covid-19 pandemic (including the need of otherwise healthy people to take time off to care for family members)
• Reevaluating compensation and rewards programs in light of the changing business conditions associated with the Covid-19 crisis including establishing new metrics and targets for the typical elements of executive compensation such performance equity and annual bonuses
• Considering long-term changes in the company’s organizational design to better align the company with the new business environment likely to emerge as the crisis evolves including reconfiguring the supply chain, entering into new strategic alliances, growing or contracting through acquisitions or divestitures and addressing real estate issues in light of pressures for more remote working
• Evaluating the company’s capacities for innovation and development or other acquisition of technologies necessary to take advantage of new business opportunities to secure the company’s sustainability in the years to come
• Ensuring that the company is effectively communicating and actually engaging with investors, workers, customers, community groups and all other stakeholders regarding the risks to the company created by the Covid-19 pandemic and the company’s responses to the challenges of the crisis

The Covid-19 pandemic is indeed a crisis that requires immediate attention; however, even when the situation has settled down it will not be a return to the world as it existed before the virus emerged.  As such, the directors need to ensure that the company’s reporting and information systems have been adequately strengthened to support effective oversight in a post-pandemic environment.  In addition, directors will be challenged to consider and balance the interests of a wide range of stakeholders as they work with management to craft both short- and long-term responses to the crisis and will be forced to make difficult choices.  For example, staffing reductions, at least in the short-term, may be inevitable for many companies in order to preserve financial resources; however, directors should be sure that layoff and furloughs are done compassionately and that there is full transparency regarding the company’s intent regarding the jobs of those workers who are displaced.

Sources:  W. Kucera, J. Simala and A. Noreuil, “COVID-19 and Corporate Governance: Key Issues for Public Company Directors”, Harvard Law School Forum on Corporate Governance (April 29, 2020),;K. Watson, A. Ramos and T. McMillen, “COVID-19 Directors’ Duties of Oversight: Reporting and Monitoring”, Corporate & Securities Law Blog (March 23, 2020); Directors’ Fiduciary Duties: Back to Delaware Law Basics (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, February 19, 2020); The Board’s Role in the COVID-19 Crisis: Guidance for Boards of Directors (Deloitte); Boards of Directors in the Tunnel of the Coronavirus Crisis (McKinsey); and Responding to the COVID-19 Crisis (National Association of Corporate Directors),

This article appears in the Sustainable Entrepreneurship Project’s library of materials on Sustainability and Corporate Governance.