The COVID-19 pandemic has had a dramatic impact on the management of organizations, including throwing managers at all levels into an “all-hands-on-deck” reactive mode.  In large measure, the immediate focus of management-level employees has been on business continuity, particularly moving the organization to a work from home workforce, workforce management including reductions in force by way of layoff or furlough programs, and client/customer relations efforts aimed at maintaining the company’s lines of revenue.  As this pandemic continues to impact directly or indirectly companies of various sizes and industries, we anticipate that the board of directors of both publicly traded and privately held organizations will increasingly consider and seek to assess their governance role in addressing, managing through, and disclosing the impact of the pandemic on the company’s ongoing operations, financial results, and general sustainability.  Similar to times of other major crisis, we recommend that company boards remain vigilant and take an active role in the oversight of these organizations during this perilous time.

In the midst of this crisis, the U.S. Securities and Exchange Commission (“SEC”) has emphasized the importance of a company’s disclosure obligations.  Addressing the issue of disclosure, the SEC Division of Corporation Finance issued a CF Disclosure Guidance which states:

The Division encourages timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies.  We also recognize that the actual impact will depend on many factors beyond a company’s control and knowledge.  Nevertheless, the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment and voting decisions.

The Guidance includes a series of questions aimed at assessing the effects of COVID-19 on a company.  These questions, excerpted below, provide a helpful roadmap for questions board members can utilize so as to engage with management about the company’s position and thereby fulfill their governance responsibilities:

• How has COVID-19 impacted your financial condition and results of operations?  In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?  Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
• How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?
• If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?
• How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
• Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
• Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?  If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting?  What challenges do you anticipate in your ability to maintain these systems and controls?
• Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so?  Do you face any material resource constraints in implementing these plans?
• Do you expect COVID-19 to materially affect the demand for your products or services?
• Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
• Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
• Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

The full list of questions, which the Division describes as non-exhaustive, can be found here.