Climate Induced Natural Disasters, Pandemics and Directors’ Duties… Oh My!

Key Points

Companies are increasingly affected by climate induced natural disasters and other crises such as pandemics, which are leading to unprecedented business interruptions.
Directors are required to consider both short and long term issues their businesses may face in order to duly discharge their directors’ duties.
The Pacific Corporate Governance Institute (PCGI) in partnership with the International Finance Corporation (IFC) has commenced its Pacific Governance Series which is shedding light on how boards can show leadership before, during and after a crisis to effectively act in the interests of the companies they manage.

Introduction

Rising sea levels. Pandemics. Cyclones. Bush fires. These are hazards we all face. They are also events that are growing in frequency and severity as global CO2 levels continue to rise – so much so that we in turn are growing accustomed to seeing them plastered across newspaper headlines. It is therefore an inescapable fact that these events are also issues that directors of companies should consider when planning for the future and fulfilling their duties. As climate induced natural disasters and global health events become more frequent, board directors need to turn their minds to planning and ensuring that the companies they manage remain successful during crises. Directors should take solace in the fact that planning for the unknown is not an unmapped path nor an unmanageable task to accomplish.

On 7 April 2021, Pacific Corporate Governance Institute (PCGI) in partnership with the International Finance Corporation (IFC) commenced its 2021 Pacific Governance Series with a webinar on “Board Leadership in any Crisis”. The webinar shed light on how directors are responsible for crisis and risk mitigation and what they can do to lead their businesses through these events to ensure they remain successful.

Legal Backdrop

Across Pacific island countries, including Fiji, PNG, Vanuatu, Solomon Islands and Kiribati, directors have a duty to act in good faith and discharge their duties with care, skill and diligence. Directors in PNG, Vanuatu and Solomon Islands also have a duty to act in a way that a director believes is in the best interests of the company.

Together, these duties place positive obligations on directors to do more than just read board papers. Directors are required to consider issues that their companies face, and act as leaders by exercising good management and judgment to put their company first (i.e. act in the best interests of the company). By ignoring the realities of climate change or issues a company may face in the wake of a new COVID-19 strain or subsequent pandemic, directors may be failing to fulfil their requirements to act with care, skill and diligence and to have the best interests of the company in mind.

In Fiji, directors are under a further obligation to promote the success of the company. This statutory duty lacks additional guidance in Fiji, but principles espoused from the United Kingdom provide that success is usually defined by having regard to a long-term increase in value. For a company to have a long-term increase in value, it will likely need to be successful during periods of crisis, so it’s important that directors give due consideration to the financial position and value of their business during the good times and the bad.

Responsibilities of the Board of Directors

So, what does this all mean for directors?

IFC Consultant, Warren Tapp during the Pacific Governance Series put it succinctly, “the board is responsible for leading the company during any crisis and ensuring recovery after.”

There are many ways for boards of directors to demonstrate leadership and ensure that they are compliant with directors’ duties during and after a crisis. However, the Pacific Governance Series unpacked some simple processes and strategies for boards to follow when preparing for and dealing with the unknown.

Before a Crisis: boards should develop a risk management framework and disaster action and recovery plan. In order to do this, directors should work out what disasters are most likely to affect their businesses. These plans should include up-to-date contact details for staff, communication plans for stakeholders, offsite backup plans and policies and evacuation plans, as well as clear forecasts, cash preservation plans and business continuity processes.

During a Crisis: boards need to ensure that they can maintain a business during a crisis period, including ensuring they can continue to access financial reporting in a timely and frequent manner, conduct board meetings, ensure cybersecurity and manage employees’ health and safety when working from home, and maintain business insurance by obtaining premium relief or deferral. During a crisis boards should meet more frequently to address these issues and make certain that minutes are passed with direct references to relevant directors’ duties.

After a Crisis: when getting back on track, directors need to check in with employees to see how they have been impacted, and should formulate short and medium term priorities realising that getting back to “normal” or to the new normal will take a lot longer than may be expected. These priorities should be dynamic and evolve as directors have access to more information.

Next Steps

As the world faces the impacts of climate change, environmental degradation and globalisation, directors are likely to face more disruptions to their businesses. In order to run successful companies, directors will need to plan ahead to avert disaster.

Directors have a wealth of resources at their fingertips in order to learn about what they should do before and during crises. To learn more about managing risks and creating safe and resilient businesses, directors and other company officers can sign up for the Pacific Governance Series which continues through 2021 here.

Pacific Legal Network’s Guide to Directors’ Duties is a free resource that directors can access from anywhere in the world to help clarify what legal obligations directors have in managing companies. The Guide to Directors’ Duties covers several jurisdictions and is frequently updated with additional content and resources. You can access the Guide at directorsduties.law.

Note: Pacific Legal Network is accredited as an observer organisation to the Green Climate Fund.