Founder: Turnaround Talk
Since 2020, the rhetoric in the media is that the Covid-19 Pandemic has introduced a level of disruption that has fundamentally changed industries and the way that people to business.
The sad reality of this is that most companies won’t be able to survive this disruption. While the Companies and Intellectual Property Commission (CIPC) points out that the number of liquidations in the country are remaining stable – for the time being – the reality of this that these are reported cases, how many companies have been forced into liquidation that the /CIPC knows nothing about?
Addressing the Zondo Commission of Inquiry into State Capture, the Institute of Directors in South Africa (IoDSA) pointed out that the only way that we are going to rebuild South Africa is off the back of well-run companies. Over the past two months, Turnaround Talk has been focusing on a McKinsey report which points out what companies need to do to adjust to the new normal that they face. Today, we will focus on the final element of that report, the mobilization of C Suite in the current environment.
Boards in the time of coronavirus
The report points out that never before have CEOs and their teams been more in need of the foresight and seasoned judgment that a well-functioning board of directors can provide. Likewise, never before have boards needed more carefully to balance providing support to management teams operating in highly stressful conditions with challenging them to ensure that they make the best decisions throughout a crisis for which no playbook exists. This may well turn out to be the moment when your board proves its value—or shows its flaws.
In a recent article, our colleagues have called on management to act across five stages—Resolve, Resilience, Return, Reimagination, and Reform— both to address the immediate crisis and to prepare for the next normal after the battle against coronavirus has been won.1 At the same time, many board chairs and CEOs are looking for guidance on what role boards should play in these challenging times. Just as every organization faces different challenges during this crisis—some are reaching new levels of growth, while others are struggling to survive—there is no one-size-fits-all answer for what a board should do. While management teams focus on making rapid decisions to protect employees, address customers’ needs, and communicate with stakeholders, boards need to balance oversight of the crisis response with thinking beyond the immediate challenges. Time is a scarce asset for most board directors, requiring them to make deliberate choices about where they focus their attention.
The report adds that, in hindsight, the early 21st century may be seen as divided into two periods: the time before the coronavirus outbreak and the post pandemic era. That era could be characterized by different consumer behaviors, new ways of working, altered industry structures, and value pools redistributed across existing and new ecosystems. What does that imply for your organization and for your board?
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Resolve and Resilience: Support through the crisis
Everyone is looking to an organization’s leaders to serve as role models in protecting people’s health and safety while acting decisively and with purpose amid chaos. The board’s priority should be to support the management team’s crisis response without encroaching on its operating role while also safeguarding longer-term shareholder and stakeholder interests. Management needs board directors to act as both sparring partners and empathetic counselors at a time when many leaders are seeking candid advice and personal support.
The McKinsey report points out that your organization likely already has a crisis response team in place. The team takes care of employee safety, shores up the balance sheet, and interacts with suppliers and customers to ensure business continuity.3 But that is not enough. The scale of the economic crisis that is unfolding is unprecedented in living memory. Organizations need a crisis operating model that can scale as issues escalate, with a plan-ahead team that develops strategic responses to multiple scenarios across all time horizons. Boards should frequently review and discuss the strategic crisis-action plans that plan-ahead teams develop to stay ahead of the evolving crisis.
The report adds that a board can ease the pressure on the management team by reviewing communication plans and reputation-management strategies and engaging with select external stakeholders. Importantly, directors should help manage investor expectations in light of financial decisions, such as dividend cuts and changes to share-buyback programs, that may draw negative reactions. And since Covid-19 may affect board directors or managers personally, establishing clear succession and leadership contingency plans is more critical than ever.
Board directors with experience in managing external shocks, such as the aftermath of the 9/11 attacks and the 2008–09 financial crisis, will be particularly valuable sounding boards for a management team as it crafts response plans amid high uncertainty. Board directors’ insights from earlier crisis situations can help them constructively challenge business-continuity plans, for example, or supply-chain strategies. That said, the current crisis is uncharted terrain for all executives, making intuition and experience unreliable guides and cognitive biases particularly dangerous. As such, boards should urge management to use techniques such as red and blue teams or premortems to ensure that their decisions weigh all relevant factors.
The report points out that, while a board needs to protect all shareholders’ and stakeholders’ interests by weighing key operational risks and ensuring effective cash management and financial stability, it cannot lose sight of the organization’s long-term priorities, even as it focuses on short-term crisis response.
Preserving the foundation of the organization’s competitive advantage, such as maintaining investments in a digital transformation or customer experience improvements, should be a key point of board attention.
Return: Lead into the reconstruction phase
As business conditions start to stabilize, a board should strive to lift management’s ambitions and position the organization to ride the waves of uncertainty rather than be overpowered by them. The severity of the disruption of this crisis suggests that the path out will feel more like a reconstruction than a recovery. Boards can add value by pushing early for scenarios and robust plans to be prepared for the reconstruction phase.
The report adds that many organizations will have to rethink their product market focus, customer engagement, or pace of technological innovation. During this period, a board should encourage management to undertake a broad strategic reevaluation that could entail embracing some bold moves. It can foster this process by requesting regular, joint strategy sessions with management to discuss various alternatives and scenarios.
A new strategy may require a broad review of an organization’s operations. The board should trigger the discussion, share external perspectives on the operating models of comparable organizations, and provide constructive challenges. It should also encourage management to match critical talent to key strategic initiatives, especially new leadership talent that may emerge during the current crisis.
The report points out that maintaining an ongoing, open dialogue with key shareholders and other stakeholders should be a key board responsibility as business conditions change. Managing interactions with governments and regulators may be particularly vital at this time, especially if an organization receives a stimulus package or other public assistance that entails commitments. Major investors, including activists, may also offer ideas for repositioning the organization for the post pandemic era that the board and management should consider.
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Reimagination and Reform: Stay ahead of the next normal
As businesses will shift focus on preparing themselves for the next normal, some changes adopted during the current crisis may become permanent. This might well have implications for the purpose and overall positioning of the organization that a board should closely monitor.
The report adds that our world will almost certainly look different after the coronavirus crisis. Industries and supply chains will be reshaped, value pools will have shifted (some irreversibly), and new behaviors may become the norm. Getting ahead of such trends by developing privileged insights can make the difference between leading or lagging in an industry for the subsequent decade. These changes may be profound enough to require a reassessment of an organization’s value proposition—and even its fundamental purpose.
The board should also closely monitor how competitors are evolving and where they are investing (for example, in vertically integrated supply chains to fill gaps left by bankrupt suppliers) and make sure these realignments are factored into management’s long-term plans. By connecting management teams with the larger ecosystem of innovative players (including ones outside the organization’s traditional business), the board can widen leaders’ understanding of shifting business conditions.
The report adds that it is never too early to plan a response to future shocks. A board’s role makes it well positioned to ensure that key lessons from the current crisis are captured and synthesized. The importance of remote-working technology and enterprise wide action plans, for example, can guide new governance measures that make organizations more resilient during future disruptions (including potential later waves of the Covid-19 outbreak).
Importantly, a board should challenge the management team to address a critical question: Is the risk-management approach sufficiently robust to respond to another “black swan” event?
