The role of boards in economic crisis

The Russia-Ukraine war has worsened energy and food crises and severely dragged down global economic growth from 4.5 percent to three percent. Global inflation is high and the leftover effects of Covid-19 are laid bare for all to see.

Malawi has not been spared! The country has suffered cyclones due to climate change culminating into loss of power.

It has experienced high inflation, frequent price escalation, scarcity of basic commodities such cooking oil and sugar. As if that were not enough, a painful dosage of the devaluation of the kwacha by 25 percent came.

The last hope is equally hanging in balance as the extension of the International Monetary Fund (IMF) Extended Credit Facility is subjected to an audit on official foreign exchange reserves and engagement of a debt adviser on the soaring and unsustainable public debt.

All of the above point to an economic crisis. For company directors, the important legal reflection is “what are the key requirements of the law for managing such a crisis?”

To begin with, the Companies Act 2013 provides for the concept of “enlightened shareholder value”. This is a condition that the board must have regard to a range of interests in discharging its duties to promote the success of their company while sailing through the crisis.

Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Success entails “long-term increase in value”.

In so doing, the board must have regard to statutory mandates. Firstly, the likely consequences of any decision in the long-term, secondly, the interests of the company’s employees, thirdly, the need to foster the company’s business relationships with suppliers, customers and others, fourthly, the impact of the company’s operations on the community and the environment.

Further, the desirability of the company maintaining a reputation for high standards of business conduct. There is also need to act fairly between members of the company and the interests of creditors.

In achieving the above considerations, the board has an obligation to delve deeper into the information that management provides. It is imperative that the board undertakes stress-testing for a variety of scenarios for liquidity purposes.

The board must ensure adequate working capital.

The current economic crisis is most likely to trap cash in receivables and inventories. Customers will do their best to extend their terms of payment outside agreed terms.

The board must, therefore, ensure a sustainable balance between receivables and payables.

Under the law, a director who believes that the company is unable to pay its debts as they fall due is obliged to forthwith call a meeting of the board to consider appointment of a liquidator, failing which the board may be made liable for the losses sustained by creditors.

Cash management is the keystone to managing in economic crisis and the board needs to have a clear picture of where the cash is coming from and where it is going. Cost containment is a must and capital expenditure must be restricted to essentials.

In addition, the board’s remuneration committee has the important but complex task of deciding how to compensate management and staff.

It is only fair that staff share the losses in hard times much as they share the bonuses in times of plenty!

Risk management is indispensable considering the uncertainties in world politics, foreign currency availability, prices of goods and services, climate change and management of pandemics, which may result in sudden shocks.

All in all, the revised strategies that the board intends to implement must be plainly communicated to all stakeholders. Trade unions, for instance, are keen to frustrate crisis management strategies and if not well informed, may end up disrupting business.

Breach of statutory duty entails sanctions. Thus a director may be removed from his office; she may be liable to compensate the company; she may be ordered to account to the company for any profit made by her; any contract may be rescinded and the company may obtain an injunction against the director’s intended breach of her duties.

Lastly, in more serious cases, a director may be ordered to pay a fine or be imprisoned.

It is, therefore, vital that boards are cognisant of their legal obligations as they sail through the prevailing and unprecedented economic crisis! 

Allan Hans Muhome is a lawyer and has published books on labour laws, among others.