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Crisis Management

Corporate Shield: What You Need to Know to Protect your Organization in the Upended Risk Climate

According to Morrison & Foerster’s Coronavirus (COVID-19) Business Impact Survey, COVID-19 is poised to profoundly impact the business climate over the next six months and into the coming years. FEI Daily spoke with Morrison & Foerster Partner David Newman on what organizations needs to know on navigating legal risks over the coming months.

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New normal, brave new world and a host of other buzzwords have been used to euphemistically characterize this period of intense uncertainty and economic distress.

For any wondering when the reprieve of normalcy will return, the answer appears to be disheartening according to Morrison & Foerster’s Coronavirus (COVID-19) Business Impact Survey in which 110 in-house general counsels responded that they expected the current levels of impact from the pandemic to continue into the next six months (i.e., 7.2 out of 10 impact severity today and 7.1 out of 10 impact severity six months from now). Over the next 12 and 24 months, expected impact tapers off – but lingers.

In discussing the perceived and expected impacts of the COVID-19 crisis, David Newman – Partner at Morrison & Foerster comments “I think for a lot of companies this [in reference to the outbreak of COVID-19] has been a wakeup call to how they are looking at enterprise risk and their supplier network.” Newman continues, “my sense is that when we all emerge from this companies are going to be different, and those differences are going to endure.” Newman names supplier network, workforce management, capital structure and data security among the notable areas that business leaders will need to re-examine moving forward.

What Companies are Doing Right Now

In responding to shelter-in-place and stay-at-home orders, companies have most frequently turned to remote work arrangements (98.2% of respondents), internal and external event cancelation (94.5% and 89.1% of respective respondents) and full or partial travel restrictions (90% of respondents).

Of the three levers companies are most frequently utilizing, the rise in remote work arrangements merits the most significant attention from financial leaders. “Clearly there are a significant number of issues in the short-term that increase cybersecurity risk in the current environment,” Newman comments. “The bad guys know that companies are allowing telework and remote operation at an unprecedented scale. They know all these things are happening very quickly. They know that there are a lot of first-time teleworkers who are understandably confused on other priorities. All that adds up to an area of significant opportunities for bad guys.”

To effectively respond to their newly escalated risk profile, Newman advises organizations make cybersecurity a front-of-mind priority. Newman suggests that financial leaders can do this in three ways:

  1. Promote proper cyber hygiene practices – e.g., being mindful about using secure networks, utilizing effective passwords and ensuring that they’re patching their system.
  2. Devote sufficient resources to cybersecurity – as painful as it is to invest further into IT and cybersecurity during a recession, it is significantly less costly than a major ransomware attack or cyber breach.
  3. Update telework policies – on this topic, Newman reminds organizations to re-examine their telework policies to ensure they reflect current realities saying, “it doesn’t help anyone to have policies on paper that don’t correspond to what people are actually doing. You want your policies to be security conscious, but you also want them to be realistic. Otherwise people will evade the policies, and you’re creating a compliance trap or a litigation trap.”

Legal Risks to Consider Moving Forward

Survey respondents indicated that the top three legal risks for their organization relate to employment/human resources, contracts and supply chain disruption. While it is important to consider these risks in the short-term, Newman advises companies to take a long-term approach when evaluating these issues.

Employment and Human Resource Risks

For employment/human resources, Newman is advising his clients to consider what it’s going to look like when people start coming back to work; he comments on the considerations business leaders need to make saying, “they might need to start preparing for how they are going to allow some of their workforce to return even at a time when – at least in many parts of the world – the virus might not be under control and there may still be a persistent public health risk. They need to consider what their policies are going to be and how they’re going to navigate potentially conflicting and inconsistent guidance from different government authorities.”

Contract and Supply Chain Disruption Risks

For risks related to contracts and supply chain disruption, Newman postulates that we’re soon heading for a phase in which companies are going to see sensitive, significant litigation over Force Majeure and Material Adverse Event clauses – among all the other questions about how much you can hold contractual counterparts to their obligations in this current situation.

“You have to be prepared on two tracks,” Newman says. “On the one hand you are preparing yourself for the scenario of litigation and doing the things that companies do if they are about to engage in very significant litigation. On the other hand you’re doing everything to reach out to your suppliers and your customers and try to come up with constructive solutions that reflect the business and health realities of the environment in which everyone is operating.” With all of these considerations, Newman is advising his clients to prioritize collaboration and open communication in avoiding litigation stating, “There’s tremendous opportunity to renegotiate and come up with arrangements on both sides that is vastly preferable to the cost and uncertainty of litigation that also requires a degree of collaboration, transparency, and flexibility.”

Re-Evaluating Risk-based Strategies 

The risks mentioned above represent a portion of the upended risk landscape, which necessitates a broader discourse between business leaders and senior in-house counsel. As they re-define a risk-based strategy based on business realities in the near and longer-term horizons, as well as public health and safety considerations, their strategy will have to thoughtfully consider the following three key risk-based considerations:

  1. how they’re complying and navigating with conflicting obligations under shelter-in-place or stay-at-home restrictions and the contractual obligations they have with customers or suppliers;
  2. how to navigate the balance between workforce privacy and promoting health and safety; and
  3. how to simultaneously continue to operate the essential parts of the business, while being mindful of possible tort and litigation risks that can come from continuing operations in the midst of a pandemic.

In re-examining risk-based strategies and other vital decisions Newman underscores the importance of companies remaining true to their values stating, “at the end of the day a lot of these circumstances are conflicting. Companies need to take a step back and ask themselves who they are, what they stand for and make decisions that they are comfortable with and can explain to their workforce and to their customers – and that are true to their identity.”

Leadership through the Crisis 

Drawing on his experience serving as chief of staff to the U.S. Government’s Ebola response office, Newman reminds us that there are so many uncertainties around how viruses can change, and many unknowns remain. Contextualizing all of this, Newman concludes “here we are four months into what is a truly unprecedented global pandemic, and there are so many basic questions that are unknown – and the guidance about which is changing significantly. As important as it is for organizations to plan and think ahead, they also have to be flexible and humble about the fact that many of the best assumptions they are going to make today are going to have to be revised one or two months from now. If you think about how different things look today compared to how people thought they were going to look 30 to 45 days ago, you appreciate that there are going to be things 45 days from now that are beyond the ability of even the most sophisticated organizations to anticipate. They are going to have to constantly go back and re-examine their strategies and plans to ensure it corresponds to the most up-to-date thinking and understanding about where all of this is headed.”