| No denial that the impacts of COVID-19 are far more severe and long lasting than initially estimated. Some of the effects and risks are related to Governance, Environmental and Social (GES) aspects and hence to be managed accordingly for GES and similar issues affecting the investment portfolios and traditional financial factors. |
COVID-19 started during March 2020 in India as a health crisis and soon took into its grip the economic and social governance aspects.
As the process of unlock is started and we are in ‘Unlock 2.0’, the pandemic is spreading to newer area and becoming more lethal in old hotspots. The virus is definitely going to test our abilities to manage workplace safety. In this era, occupational safety and health considerations will influence financial and operational performance and profitability of business concerns.
Recent History
Outbreak of SARS in 2003 forced many companies to formulate, review and revise their business continuity plans (BCPs). Most companies used services of specialists to forecast possible impacts, identify risk reduction measures, and plan for future occurrences.
Using the work done by those specialists can help understand the current situation of COVID-19 and strategize for what’s to come.
We can employ the GES approach to examine the corporate vulnerabilities and evaluate why the existing plans prepared as per SARS did not meet requirements to manage COVID-19.
Following perspectives areas may be included for performing the review:
- Comprehensive coverage of risks in risk registers.
- Expertise and skill sets of officials creating and managing risk registers.
- Effectiveness of specialists in risk identification, assessment, and exploring suitable risks mitigation methods.
- Appropriate consideration of risks originating outside the entity.
- Due consideration of whistleblowers’ inputs while spotting new or emerging risks.
- Regular and appropriate updating of the BCPs.
Entities may also like to explore the following while reviewing substantial impact of the crisis:
- Adequacy of provisions for paid sick leave.
- Pressure on employees for coming to office during their sickness.
- Entity’s over – dependence on one vendor for a key input (material or service).
- Elasticity of just-in-time supply chain.
- Existence and effectiveness of communications networks and feasibility of their usage by employees.
- Encouraging fearless opening up in the organization.
- Mechanism for addressing audit recommendations and suggestions.
Long Term Solution: To Be Provided by the Board
Management needs to prepare the entity for long term by providing suitable strategy, plans, and direction especially on the aspects:
- Learning made and steps the organization is taking to deal with COVID-19 and similar crisis.
- Identification of critical interim and long term risks – financial and non financial (including GES).
- Methodology for identification, assessment, and mitigation of such risks.
- New/emerging risks noted—global and macro levels — and their impact on the relevant sector and entity.
- Opportunities arising in interim or long term and plans to make use of such opportunities.
- Plans for financial and non-financial reporting and disclosures of COVID – 19 impact on business profits, diminution in value.
- Effectiveness of systems and controls for reporting under dynamic environment.
- Mechanism for monitoring of and responding to stakeholder reactions.
How to Mitigate the Downsides
New normal being accepted are revealing new risks to operations, compliance, and organizational reputation. Management need to address the following concerns pertaining to short-term:
- Positive contribution of employees working from home.
- Availability, adequacy and appropriateness of entity’s technology and management equipment to support working from home.
- Keeping the employees engaged to prevent fading of cultural norms and engagement.
- Integrity issues like theft of intellectual property of the entity.
- Addressing any new compliance requirement or changes in existing requirement. The requirement may be regulatory (pertaining to new or changed laws) or contractual (towards vendors, contractors and employee).
- Capacity constraints due to alteration in workspace capacity caused by new regulations (on pandemic management) dealing with workplace safety.
- Revised expectations for external reporting (financial and non-financial).
- Managing social media on entity’s activities and responses to the global crisis.
Following types of new concerns and risks may arise even when the economy has started opening up:
- Health related concerns amongst the employees and they are afraid of return to work.
- Inadequate systems and controls due to which adapting to new compliance requirement is difficult.
- Early initiatives by competitors in seizing opportunities with products, services, markets, or employee benefits.
- Increased expectations of stakeholders for disclosure of risk management practices.
Opportunities Created – The Possible Upsides
Risk is not only the loss but also includes failing to grasp opportunities created by the pandemic. No doubt that there are challenges but there will be upsides also – may not be that obvious or immediate. The opportunities may get created by fundamental shifts in market forces, or competitors being too reactive and short-sighted. But equially important is to get hold of these opportunities in time as the entity may also be suffering from the same syndrome which is ailing the competitors.
Certain sectors are going to witness positive impact with growth – like telecommunications, video streaming, eCommerce and home-office equipment etc. An organization’s reputation may be improved because of its pandemic response efforts or its ability to adapt to new market needs.
| Difference Between Impact and Risk Many entities are too cautious or hyper reactive as they fail to recognize the difference between impact and risk. Pandemic has ‘impacted’ us in the following ways: – Strained health care systems with severe resource deficiencies. – COVID-19 infections and deaths and news related thereto. – Lockdowns / containment zones created by Government. – Adverse financial impact to business sectors: manufacturing, retail, transportation. – Increase in unemployment and loss of health care. – Disruption to education at all levels and almost a session is at stake. Entities are responding to these ‘impact’ in certain manner which – in most ways are short-term, reactive measures designed to mitigate losses that do not always consider long-term risk. – Reduction in workforce – Leave without Pay or terminations. – Reduced / suspended salary and benefits to remaining workforce. – Removal of contract labor. – Cutting on non-core activities (specialist, technical, and compliance support functions). Management’s immediate response to COVID-19 is to cut costs to ease the impact on earnings. Noteworthy that, this strategy addresses only impact while risks remains intact or rather increases. A prudent risk management needs: – Assessment of impacts and the immediate response accordingly. – Re-defining the corporate risk tolerance in the face of significant disruption. – Re-aligning the strategies to observed and potential impacts with risk tolerance and potential value and opportunity. |
Effective Use of Resources
Risk management is not a static concept which is done once and effective later. Risk and risk tolerance are changing and so is the response for risk assessment and mitigation. With unprecedented confluence of risks and impacts the world is facing due to COVID-19 pandemic, reacting to the impacts will leave an entity unprepared for the challenges, expose the vulnerability sooner than estimated and put the company as a failed venture.
Companies have started visualizing and readying for a post-COVID-19 world. There is a growing need that assessing risks and building risk-based audit plans should be carried out by people with expertise having skill sets needed for these critical times. Appropriate alignment of short- and long-term factors and awareness of growing influence of GES aspects will be pivotal in mapping of entity’s needs with the right skill set.