Suits The C-Suite

The World Health Organization (WHO) has declared COVID-19 a public health emergency of international scale, impacting governments and businesses alike with unprecedented disruption and risks. Companies continue to feel the business and financial shocks caused by the pandemic. COVID-19 has become a black swan event, unpredictable and with potentially severe consequences.

As companies navigate the COVID-19 crisis, there are a number of key issues corporate leaders should be thinking about, as well as steps they can take to reshape their business and plan for recovery.

Global companies have to be predictive and proactive in their decision-making to preserve continuity and build resilience. As global companies grapple with an ongoing and evolving situation, we have identified five priorities for them to consider.

Ensuring the safety and well-being of employees in the workplace is essential. People look to their employer, community and government leaders for guidance. Addressing their concerns in an open and transparent manner will go a long way towards engaging them and reassuring them of business continuity.

One of the adjustments companies have to make is to initiate or expand flexible work arrangements and other policies that allow people to work remotely and safely. Depending on the sector, companies will want to reorganize teams and reallocate resources. Additionally, companies will want to produce regular communications that align with current government and health authorities’ policies to help employees remain engaged as they and the organization navigate through the crisis. Finding ways to reimagine a business-as-usual environment that minimizes disruptions for the organization requires a fine balance.

Where telecommuting or flexible work arrangements aren’t possible and companies must have workers on site or in direct contact with customers, it is important to provide measures to protect against infection.

As mentioned, almost all businesses are likely to experience significant disruption to their business-as-usual operations and will experience underperformance throughout the duration of the COVID-19 crisis. This is especially true for companies that either operate in or are exposed to countries with significant outbreaks of the coronavirus. These companies will experience disruption to their supply chain and production commitments. To help address these challenges, companies must:

Evaluate short-term liquidity. Companies have to instill short-term cash flow monitoring discipline that allows them to predict cash flow pressures and intervene in a timely manner. They will need to maintain strict discipline on working capital, particularly around collecting receivables and managing inventory build-up. Additionally, it will be important to be creative and proactively intervene to lighten the working capital cycle.

Assess financial and operational risks and respond quickly. Companies will need to monitor direct cost escalations and their impact on overall product margins, intervening and renegotiating new terms where necessary. Just as companies need to monitor their in-house vulnerabilities, they also will need to monitor the pressures that may be impacting some of their customers, suppliers, contractors or alliance partners. Finally, they need to be aware of covenant breaches with banking facilities and other financial institutions relating to impairment risks in asset values, which may impact the health of the overall balance sheet.

Consider alternative supply chain options. Companies that source parts or materials from suppliers in areas significantly impacted by COVID-19 must look for alternatives. Such quick moves will create the temporary capacity to meet customer obligations. Companies that have arrangements with agile manufacturing facilities to make spot buying decisions — or have loose contractual arrangements with various service providers and logistics providers — should consider the initial disruption as well as post-crisis scenarios given the potential for demand spikes.

Determine how the COVID-19 crisis affects budgets and business plans. Companies will want to stress-test financial plans for multiple scenarios to understand the potential impact on financial performance and assess how long the impact may continue. Based on the outcome of the assessment, companies may need to look at near-term capital raising, debt refinancing or additional credit support from banks or investors, or policy supports from the government. At the same time, companies will need to review overall operating costs and consider either slowing down or curtailing all non-essential expenses.

Clear, transparent and timely communications are necessary when creating a platform to reshape the business and secure ongoing support from customers, employees, suppliers, creditors, investors and regulatory authorities.

Customers. Keep customers apprised of the impact on product or service delivery. If contractual obligations cannot be met as a result of supplier or production disruption, it is important to maintain open lines of communication to revisit timelines or invoke “force majeure” or “act of God” clauses. Such proactive action will help to mitigate punitive damages or liabilities associated with disrupted customer obligations.

Employees. Find the balance between cautioning your people and maintaining a business-as-usual mindset when communicating with employees.

Suppliers. Maintain regular contact with suppliers regarding their ability to deliver goods and services and their own recovery plans. This helps enable the company to consider alternative supply chain options in a timely manner.

Creditors and investors. Review terms and conditions on loan contracts to identify and avoid vital technical debt breaches. These reviews will have the added benefit of giving companies a chance to proactively manage the dialogue and communications with creditors regarding any necessary amendments to existing terms or refinancing arrangements.

Government and regulators. Consult with legal and risk management teams for advice on potential exposures.

Companies should monitor government and organizational opportunities for support and how they may best serve the individual circumstances of their organization. For instance, the Department of Labor and Employment (DoLE) has said that a P1.3-billion financial assistance program will be given for workers affected by the enhanced community quarantine in Luzon. Under the COVID-19 Adjustment Measures Program, each worker will receive P5,000 in cash to be processed through the companies’ payroll system. Companies should monitor the availability of these kinds of programs and use them to mitigate the risks they face.

Once companies have solidified strategies based on stress tests and communicated any new directions with relevant stakeholders, they will need to execute revised plans while monitoring what continues to be a fluid situation. Senior management should report any material deviation from the plan in a timely manner so that their companies can take additional action to avoid further negative impact. Once the COVID-19 pandemic is controlled, companies will want to review and assess business continuity plans. If there are deficiencies, identify root causes, whether it’s timeliness of action, a lack of infrastructure, labor shortages, or external environment issues. Companies will then want to consider putting new internal guidelines in place based on lessons learned, as well as solid contingency plans to build resilience and better respond to future crises.

As a black swan event, the COVID-19 crisis is impossible to predict. However, there are many lessons companies can learn and carry forward once the crisis has passed and a chance is provided to analyze their response. In the meantime, companies should be making decisions and taking action during this crisis with recovery in mind. When the crisis is over, it will be clear which companies have the resilience and agility to reshape their business strategy to thrive in the future.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.


Editha Viray-Estacio is a Partner from the Transaction Advisory Services of SGV & Co.