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The coronavirus and crisis management

EOS Insight
19 March 2020 |
A public health crisis often leads to regulatory changes, as well as shifts in cultural expectations and human behaviour. In the first of a series, EOS at Federated Hermes looks at how the coronavirus outbreak is impacting global trade and businesses, and the role that boards can play in crisis management.

Fast reading

  • Board members should take a proactive role in crisis management
  • Manage the complexity as the crisis unfolds
  • Consider establishing a clear business purpose statement to guide ethical behaviour

Public health crises can be exceptionally fast-moving, and their severity is unpredictable – this is particularly relevant to the current coronavirus (COVID-19) outbreak. Governments have imposed travel bans and locked down cities, global trade and social interaction are being disrupted, and stocks, oil markets and even typical safe havens such as precious metals, have sold off hard. Many businesses have asked their staff to work from home where possible, and death tolls continue to climb.

This is having a far-reaching impact on businesses and individuals around the globe. For example, AP Moller Maersk, the world’s largest container shipping company, has warned that the outbreak has affected first quarter earnings, due to lower production at Chinese factories. Mid-market fashion brands with supply chain exposure to China are raising concerns about the potential disruption to manufacturing and dispatch delays, while some tech firms may delay the launch of new products.

What can companies do to mitigate the worst impacts of a major crisis? There are several areas for board members and company executives to consider. By managing these key environmental, social and governance (ESG) issues adequately, companies will be well positioned to weather the storm and potentially create long-term value for their shareholders and other stakeholders. First, we look at the role of boards.

We recommend that board members take a proactive role in crisis management.

Board directors have a fiduciary responsibility to protect shareholder interests and must therefore oversee governance controls and risk management in a crisis. A good crisis response should swiftly address what has gone wrong and what management can do about it, while learning lessons for the future. It is also about communication and engagement – with customers, suppliers, staff, regulators and the public using social media and other communication methods.

An alert system should be put in place to identify when crisis management should take effect, at which point a company should follow its established Business Continuity Plan (BCP). We recommend board directors and management teams consider updating their BCP with public health scenarios, taking into consideration global supply chains, international operations with staff travelling worldwide, and customer needs in time of crisis.

Board directors and senior executives should consider the following as the crisis unfolds:

1) Manage according to the momentum of the crisis

The board should ensure that the company has established a 24/7 communication platform so that key personnel can be kept informed. The company should provide regular updates on its corporate social media account to maintain engagement with stakeholders.

2) Manage the complexity as the crisis unfolds

The board should maintain close communication with the executive management team to understand and anticipate the impact of a crisis. It may mean an interruption in the supply chain, for example, and a running down of inventories. During a public health crisis, employees may be required to self-quarantine and may not have strong enough broadband access, adequate equipment or access to materials. Companies should anticipate the chain of impacts – for example, how would school closures affect working parents? Other unintended consequences may include the psychological impact of the crisis on employees and workers.

3) Document learnings to enhance innovation and crisis resilience

The lessons learnt during a crisis, from emergency board meetings to tactical responses that are not in the current processes, should be documented for future analysis to improve business processes, competency, and inform long-term strategy and risk management planning. A crisis also enables companies to review their revenue resilience, plus that of their operations and supply chain. Industries that rely on in-person attendance and a flow of travellers, such as events hosts, venue hire, hospitality and airlines, should be diligently reviewing their options for revenue diversification.

We recommend that boards consider establishing a clear business purpose statement to guide ethical behaviour.

Amidst the coronavirus outbreak, prices of some healthcare products have rocketed – for example, face masks were sold at HK$90 each in a Hong Kong pharmacy store in late January. Meanwhile, as governments advise the sick to self-isolate, people have panic-bought hand sanitisers, toilet paper and dry foods, emptying shelves in supermarkets.

According to conventional economic theory, prices increase when there is a supply shortage. In extreme scenarios, short-term arbitrage opportunities emerge for healthcare products and other in-demand items. However, this prompts questions about business ethics.

It is our strong belief that companies can only create and preserve long-term value if they profitably provide goods and services that they believe will solve societal needs. We urge companies to issue a statement of business purpose to ensure better, more transparent and more socially responsible corporate governance.

In the next article, we will look at supply chains and human capital management.

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