Risk and Crisis Management in the post-corona period

Based on pandemic effects that are already noticeable and expected effects, the Executive Board and the Supervisory Board have to develop an action plan or revise existing action plans.

Shortly after the global spread of COVID-19, the immediate consequences are pervasive. The Executive Board should identify and prioritize the resulting operational risks as quickly and continuously as possible and define and implement measures against them. Risk appetite and tolerance of society may need to be adjusted.

The supervisory board should advise and monitor the efforts of the management board. For this purpose, he should have regular and significantly more frequent reports on new risks, material threats, weak points, and possible effects than in the normal case. Depending on the type of risk and its impact, monitoring can be delegated to the audit or risk committee. Documentation is also important in this particular situation and should not be sacrificed to the immense time pressure. Discussion, assessment, and decisions related to combating COVID-19 should be adequately recorded in the minutes of the meeting.

Corona Crisis: Keep an eye on major risk areas and political developments

Almost everywhere, the monitoring activity focuses on the immediate consequences of the pandemic - such as scenario calculations and default probabilities in the areas of revenue recognition, bad debts, and liquidity management. However, essential risk areas should not be neglected. This applies, for example, to monitoring compliance risks, especially in highly regulated industries. In addition, sources of danger that have arisen as a result of the corona crisis should be identified. For example, the increased use of digital solutions for daily collaboration increases the vulnerability to cyber risks.

In addition, the Management Board and the Supervisory Board should regularly inform themselves about legislative initiatives, general political regulations for the protection of the population, and other regulatory and administrative developments and include them in their decisions.

COVID-19 pandemic also holds opportunities

Even if the challenges in your own company are huge, a cross-company exchange of procedures and new procedures can be helpful and provide information on previously neglected risk areas. Topic-specific webcasts and Q&A sessions help, for example. Likewise, a conscious look at potential business opportunities should be drawn. Under certain circumstances, existing production capacities for the production of urgently needed protective equipment can be converted at short notice or transport capacities made available.

On the basis of the effects of the pandemic, which are already noticeable today, and the consequences determined by means of scenario analysis, the Executive Board and the Supervisory Board have to define and continuously develop a company-specific action plan.

Scenario and inventory analysis

Various scenarios are possible in the medium term. These range from a temporary and short-term economic downturn that can recover over the summer to a global recession with a long-term recovery phase accompanied by massive government intervention. The Management Board and the Supervisory Board should analyze the effects on the business and financial situation of the company in good time for different scenarios and simulate their consequences in stress tests. In this way, liquidity, credit, and further capital requirements per scenario can be derived over time and discussions can be held with financial intermediaries at an early stage.

Scenario planning can be used as the basis for the inventory risk analysis and emergency planning. The board should continuously look for redundancies, opportunities to make the supply chain more flexible and the effectiveness of external service providers to ensure continuity or rapid replacement. This applies in particular to critical company activities and functions.

The Management Board and the Supervisory Board should critically examine and discuss together whether existing emergency plans reflect the currently identified potential risks, adjust them if necessary and adapt them continuously against the background of further developments.

The following aspects must be considered in particular:

Personnel availability and health protection

The Management Board should continuously assess the minimum employee capacities and the technological requirements for working from the home office, as well as the resources required to maintain critical operational processes and the measures that provide the greatest possible health protection for employees.

Impairment of IT and data security

As many employees switch to alternative workplaces located outside of the company, the board of directors should check the essential communication media, operating, and financial systems for resilience through remote access, data protection, and an appropriate level of IT security. The existing internal controls must also be tested for their effectiveness and expanded if necessary. The supervisory board should be informed about the measures taken.

Impairment of production and supply chains

The Executive Board and the Supervisory Board should review the risks that arise from an interruption in the supply chain for the operational process and how the company can protect itself against such risks, for example by hiring alternative providers at short notice. The supervisory board should check whether the management board has dealt sufficiently with the risks if the company can no longer meet its contractual obligations and how the management board plans to deal with these risks. Here, for example, an analysis of existing clauses in customer and supplier contracts (e.g. force majeure, delivery failures, and early termination of the contract) can be used to determine which recourse claims are threatening or which claims can be asserted.

Impairment of the financial positions and liquidity

The short-term and long-term financial effects on society due to the COVID-19 pandemic (including the ability to meet contractual obligations) must also be analyzed. It is important to take into account the effects of extreme volatility on the financial markets. The supervisory board should understand and critically question the assumptions of the management board assessment and discuss possible consequences with the management board if the assumptions prove to be wrong. The need for additional capital inflows and adjustments to the conditions for existing loan agreements should also be discussed. In the event of a serious impact on the financial situation, the supervisory board must monitor that the management board - if necessary - opens the insolvency proceedings in a good time. The relief from the pandemic law must be taken into account. For example, the obligation to file for bankruptcy pursuant to Section 15a InsO and Section 42 (2) BGB is initially suspended until September 30, 2020, provided that the bankruptcy is based on the effects of the COVID 19 pandemic and there is a prospect of eliminating the insolvency that has occurred. The pandemic law considers the two conditions to be reasonable if the insolvency did not exist on December 31, 2019.

Effects on the annual financial statements

In the management report, the course of business and the business result as well as the situation of the company are to be presented in such a way that they correspond to the actual circumstances. In addition, the forecast development must be explained in the forecast, opportunity, and risk report. In addition, the goals and methods of risk management as well as price change, default and liquidity risks, and the risks from cash flow fluctuations to which the company is exposed must be discussed.

The Management Board and the Supervisory Board must therefore already consider the possible effects of the pandemic on the company in the annual and consolidated financial statements as of December 31, 2019. For this purpose, the supervisory board or the audit committee should be in close contact with the auditor.

Risks from key functions and emergency succession planning

The supervisory board should check whether management board and supervisory board contracts expire in the current year and whether succession plans already exist or whether current contracts can be extended. In addition, the nomination committee and the supervisory board should discuss how the chief executive officer, the chief financial officer as well as the supervisory board chairman and his deputy can be replaced in an emergency in the event of an emergency, should these people fall ill with COVID-19. Possibly the quorum of the committees and the ability of the company to act can only be ensured through short-term resignation of the affected parties.

The discussion of emergency succession planning should also be held with the board about the key functions in the company. This affects, for example, the heads of the areas of risk management, IT, and internal auditing.

Incentive systems appropriate to the crisis

The Management Board and the Supervisory Board should examine the existing incentive systems against the background of the current challenges. With variable remuneration components, in particular, there is a risk that individual goals cannot be achieved through no fault of your own. With a view to ethical and desirable behavior in times of the corona crisis, the targets should be adjusted or at least sufficient flexibility in the evaluation should be ensured in order to be able to react appropriately depending on further developments. It can also be discussed to suspend the setting of the targets or the goals already defined and to postpone the adjustment until a later point in time when the consequences of the pandemic become more apparent.

Crisis management in the corona crisis

The Corona crisis is characterized by great uncertainty. Nevertheless, the Board of Management and the Supervisory Board are required to make quick and decisive decisions. Successful crisis management requires a crisis team that is primarily dedicated to fighting the crisis and is equipped with adequate resources and decision-making powers. In addition, a sophisticated crisis management plan is required that supports the Management Board and the Supervisory Board with an appropriate response. Spontaneous actions run the risk of over- or under-reactions that are perceived as disproportionate.

The Management Board and the Supervisory Board should continuously critically examine the scope of tasks, the composition of the crisis team, and the decision-making process in order to ensure sufficient capacities and effectiveness. A balance must be struck between short, medium, and long-term response measures to the crisis.

An effective crisis management plan is characterized by the following key elements:

Cross-divisional teams

A crisis team usually consists of key people from senior management as well as from the areas of public relations, human resources, law, and finance. The team should be in regular contact with the board or a specific representative. The frequency of meetings and communication with the board of directors must be intensified as the impact on society increases.

Fast and decisive action

In order to ensure swift, consistent, and decisive action, a crisis plan with response measures, communication templates, checklists, and procedural instructions should be available. These should be easy, quick, effective and flexible to adapt. The crisis team should be familiar with the plan at all times so that the appropriate measures can be implemented at short notice.

Emergency plan

A crisis is unpredictable. Nevertheless, the Management Board and the Supervisory Board should endeavor to identify all significant potential sources of danger from the pandemic to which the company is exposed and to develop emergency plans in order to minimize the need for spontaneous, unprepared decisions. For example, society should prepare for the following scenarios:

• How do we react if there is a confirmed COVID 19 case in our own company?
• How do we inform employees about a suspected case or a confirmed case? Which data protection requirements do we have to take into account?
• What measures (such as IT training) are necessary if we have to instruct our employees to work from home?
• What measures are we taking for a possible second wave of infection?

Well-considered communication

The Management Board and the Supervisory Board should keep an eye on the communication strategy in the company and steer it in a targeted manner. Clear communication and planning within the crisis team and in the corporate bodies promote prudent and emphatic communication internally and externally during the crisis.

In order to promote trust in a phase of great uncertainty and volatility, the Management Board and the Supervisory Board should underpin their management responsibility with clear communication ("tone from the top") and the example of the desired behavior. You should ensure that all crisis-related decisions, actions and internal and external communication are compatible with the corporate purpose, corporate culture and corporate values.

Stakeholder

The Board of Management and the Supervisory Board should support transparent and clear communication to stakeholders about the company's development in order to facilitate decision-making, maintain trust and prevent long-term damage to reputation.

Get in touch with us when you as a member of an Executive Board or a Supervisory Board would get pragmatic and actionable insights on how to develop and implement action plans or revised existing action plans.