03 February 2021 by Sara Drake
We are all experiencing the tribulations that the pandemic has caused.
This year is likely to be another big year for governance and governance professionals as the impact of the COVID-19 pandemic continues to reverberate around the globe. The economic fall-out and knock-on effect of businesses failing or experiencing cashflow issues is looming large. In addition, regulatory and legislative changes that are on the horizon mean that governance professionals will have more work to add to an already heavy load.
In the UK, the Financial Reporting Council will be transforming into the Audit, Reporting and Governance Authority, with all the associated changes to accounting rules that this will bring. The UK government is also looking at Companies House and considering what its future might look like so there are likely to be changes there that governance professionals will need to get to grips with.
In the Republic of Ireland, there is the future introduction of legislation to establish the Office of the Director of Corporate Enforcement – currently an office within the Department of Business, Enterprise and Innovation – as a stand-alone agency, to be called the Corporate Enforcement Authority. The changes are intended to enhance the status of the body tasked with enforcing company law in Ireland, by increasing its independence and giving it more control over its resources. The proposed legislation is seen as a key element of the Irish government’s package of measures to strengthen Ireland’s response to white collar crime.
The biggest issue for Irish businesses in 2021 is Brexit. European Economic Area (EEA) Irish company law requirements mean that if a Northern Irish or UK company has an Irish subsidiary they can no longer rely on a Northern Ireland or UK director to meet the Irish company law requirement for the Irish subsidiary to have one EEA director. Brexit is weighing elsewhere too. The Cayman Islands’ international business and banking, financial and associated sectors will have to follow Brexit, OECD and FATF very closely this year for new legislation, business opportunities and reporting requirements. Additionally, the political situation in the US with the transition from a Republican to a Democratic Administration may have implications given any potential differences in governance styles. With an ever-increasing requirement from all of these authorities, governance professionals are having to weigh up very closely the cost and implications of doing business in the jurisdiction versus the profits realised.
Across the globe there is real concern about the negative impact that the pandemic is having on the global economy. Travel restrictions continue to have a massive impact on some of the countries where we have a presence. In Barbados, tourism is one of the main contributors to the economy, employing thousands of people who are now largely unemployed. In the Cayman Islands, where an estimated 70% of GDP and 20-30% of government finances come from tourism, the continued loss of tourism is affecting and will continue to affect a massive number of businesses in the jurisdiction as well as local government funding. The impact is also slowly spreading to second and third tier support structures. Governance professionals in Cayman are having to take a very close look at their strategic plans in order to determine the best, if any, way forward in a very uncertain climate of change and financial considerations.
Not-for-profit and sports organisations in Cayman are also struggling to raise funds through their normal channels such as memberships, donations, spectator income, event fundraising and sponsorships which has led to serious financial problems for many of these organisations. The government has put some support structures in place for those not-for-profits which meet their criteria but governance professionals are having to look at how these organisations can best survive and adapt to this new economy. The Cayman Islands are not alone in this.
Travel restrictions equally have an adverse impact on business development. It is more difficult to bring in new business if you can’t meet new clients face to face. Restrictions on movement are also undermining current business practices. Guernsey, for example, has maintained its prominence as an offshore finance centre by having legislation and regulations in place which require decision makers (i.e. board members) to be physically in Guernsey for key decisions thereby ensuring ‘management and control’ or ‘mind and management’ are demonstrably in Guernsey. The current restrictions make recently introduced Guernsey Substance Requirements far more difficult to implement.
In the UAE, there are concerns about a potential rise in accounting fraud or mis-stating revenue and profit and a lack of experienced governance professionals who are senior enough to raise issues or identify red flags. Added to this is the concern that the ripple effect in the next nine to twelve months will lead to many businesses downsizing or not investing in their governance functions.
This would be unfortunate. Governance professionals have been worth their weight in gold this past year, finding solutions to important statutory duties such as how to hold AGMs with lockdowns in place. In the UK, temporary legislation was introduced last year to help, but not all countries are in the same position. In Jamaica, for example, the law has not yet been amended to allow virtual AGMs. Any company with shareholders exceeding the limit allowed under Jamaica’s Disaster Risk Management Act have to apply to the Court for an order on how to hold their AGM. This is extremely problematic for smaller companies with those that cannot afford to go to court risking a breach of the law.
Hybrid AGMs have been useful during the COVID-19 pandemic, but the virtual and physical mix is not without its challenges, a subject that our West African Region explored in detail in a webinar on 28 January. Shareholder engagement is a continuing issue. In Zambia, feedback from shareholders suggests that the reduced interaction means fewer shareholders can attend AGMs or EGMs and hence their contribution will be very minimal.
The challenge of holding virtual or hybrid meetings in not specific to AGMs. Board and committee meetings have also moved online since the pandemic hit, raising questions of ‘netiquette’ and additional cyber security responsibilities for governance professionals. The preference is for physical meetings to resume as soon as they can so that board dynamics are not adversely affected over the long term by NEDs not meeting in person.
In many countries, 2021 is likely to be another year of on-off remote working, which brings its own issues. Home workers need to be more aware of data security than they would be if working from a secure office. Care needs to be taken that confidential phone calls cannot be overheard and client documents should remain in the office.
However challenging this year looks set to be, it also presents opportunities. Market disruption last year led to great innovation and the acceleration of countries’ digital transformation. In the UK, e-commerce reputedly advanced ten years in the space of one year. In countries like Barbados, which relies heavily on external commodities, there is potentially the opportunity for a more long-term domestic sustainable solution to be found.
Sri Lanka is also a market of opportunity with a new government trying to stamp out corruption and a lucrative higher education market. Almost all the big universities and major professional bodies around the world are represented in Sri Lanka and the portability of our qualification makes it a good option.
2021 looks set to be every bit as busy as 2020 was. As work pressures build and the lines of separation between work and private life risk becoming blurred, mental wellbeing will be important. For some people, working-from-home fatigue has set in, with the continued lack of contact with colleagues and friends increasing the risk of burnout. We must recognise that we are all in the same storm but not the same boat (some have yachts, some canoes and some are drowning). Taking the time to be kind to ourselves and others would be as good a resolution for 2021 as any.