New directions for governance?

Article published at the Brazilian reputable business newspaper “Valor Econômico”

On October 23rd, 2020

Written by Maristela SA Rossetti

The COVID-19 pandemic has affected not only the economy, but also various social, political and cultural dynamics in Brazil and worldwide. The adoption of confinement as one of the main strategies to combat the spread of the virus has brought up different structural issues. These issues required, in addition to reforms promoted by different Governments on an urgent basis, deep changes in the business, personal and professional environments.

The ability of people to reinvent themselves and adapt was put to the test and proved essential in this new context, especially in the corporate environment. As the health crisis evolved, it demanded from various economic players the almost immediate establishment of new dynamics in order to make business continuity feasible, forcing companies to accept digital and remote solutions to devise strategies and decision-making processes, making remote work possible. 

In addition to the unprecedented challenges faced by the business world, there was therefore an unavoidable factor: the mass of consumers who suddenly lost their purchasing power (or whose purchasing power has been severely weakened). People had to face unemployment, pay cuts or reduction in working hours, more difficult and challenging working conditions. The impact on entrepreneurship is evident. 

In view of this scenario, never before have companies, especially small and medium-sized companies, needed so much access to financial resources (to preserve cash, honor commitments and, above all, guarantee the feasibility and survival of companies, preserving jobs and income), which requires not only the creation of lines of credit, but also required the legal environment to structure legal tools for their effectiveness and safety.

In addition, corporate governance has taken on an even more fundamental role in organizations, since these had to be ready to align and maintain sound transparency rules in all their relationships, which were previously filled with human contact and are now predominantly physically distant.

The idea behind the establishment of corporate governance is that the structure benefits companies themselves, their shareholders, employees, consumers and the institutional framework as a whole. The balance among the four pillars of good governance practices – transparency, equity, accountability and corporate responsibility – needs to be maintained, especially at critical times such as now. 

In fact, any asymmetry can lead to structural insecurity, affecting not only the players involved, but the very context in which the governance rules are inserted. 

In addition, we note that other fundamentals have been added to these basic principles by corporate practice – such as risk management, investor activism, shareholder engagement, the imposition of limits, the alignment of conduct, ethics and socioenvironmental responsibility. What is noticeable in relation to this novelty is that these principles are usually treated as abstract concepts, that is, there is still no univocal provision in terms of adjusting the rules and ensuring compliance therewith.  

Another recent reflection involves the notion of business purpose. If the corporate governance purposes were traditionally centered on the interests of shareholders and on maximizing their financial return, this scope focused exclusively on profit has evolved. Even before the pandemic, a movement called ESG (Environmental, Social and Governance), which advocates the inclusion of factors associated with environmental preservation and social inclusion practices as part of companies’ objectives, was already on the rise.

In this sense, the pandemic can be seen as a catalyst for an internal process within a specific structure. If governance is tailor-made, that is, adjusted to a unique reality, the governance rules developed in the context of the health situation could reflect the structural diagnosis of a system. 

With the spread of remote work, technology has opened up space for new forms of hiring, impacting the labor market. Employees are required to adapt and be resilient, but we should not forget that, during the pandemic, reports of loneliness, stress and mental health deterioration abounded. Companies are responsible for reinforcing, at a distance, hierarchical monitoring and adequate training, the reference to their code of conduct, clarity regarding the autonomy of each employee and access to the reporting channels or the ethics committee, as well as a clear and direct communication channel.

The role assumed by innovation is essential at this point. Not so much because of the changes themselves, but because of the speed of their implementation. A company’s ability to quickly adapt becomes an extremely valuable asset. The more agile, effective and less bureaucratic the alternatives, the greater the company’s responsibility. 

The convergence of interests is no longer limited to a company’s financial return, but that does not mean that companies need, in the “new normal”, to forgo profit. Here, performance is understood as a return encompassing values – other than financial – that guarantee sustainable results for companies and their surroundings.

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Maristela SA Rossetti

Lawyer. Partner, Rossetti Advogados.

LL.M. from the University of Pennsylvania School of Law, Philadelphia, PA, USA.

Bachelor of Laws from the Law School of Universidade Mackenzie.

Counselor, Former President and Founding Associate of the Institute of Applied Corporate Law – IDSA

State Counselor of the Brazilian Bar Association, São Paulo Chapter (2019-2021)

Chairman of the Permanent Budget and Accounts Committee of the Brazilian Bar Association, São Paulo Chapter (OAB/SP) (2019-2021)