Corner Office-When S * * * Happens

Corner Office-When S * * * Happens

Boards need to be prepared for "predictable surprises."

I recently asked a ballroom full of directors from various companies a question that only two could answer affirmatively. This was not a question about corporate social responsibility related to the environment. Nor a question about corporate governance or oversight. And it was not a question about Sarbanes-Oxley (barf, barf).

Give up? It was this: “How many of your boards have a crisis-response plan?” I’m embarrassed to say that even in our post-dot-com, post-9/11, post-Enron, post-tsunami, post-Hurricane Katrina, cover-your-%#* era, it’s apparent that we still haven’t learned our crisis lessons.

Peter Drucker, in one of his nuggets of wisdom, said it better than I can: The primary task of a company’s leaders is “to make sure of the institution’s capacity for survival—to make sure of its structural strength and soundness, of its capacity to survive a blow, to adapt to sudden change, and to avail itself of new opportunities.”


Death, Taxes, and Crises

As the old saying goes, “Nothing is certain but death and taxes.” But to that we should add “and crises.” So many potential sources of crisis exist that business leaders, especially corporate directors, must accept the cold fact that experiencing a crisis is inevitable.

• Financial Issues—These include the draining of assets (cash, securities, receivables, inventory); hidden or surprising liabilities; loan covenant defaults; loss of a significant revenue source; unplanned material expense; a shortage of raw materials; lower-than-planned income resulting in operating losses; liquidity and capital problems.

• Operational Issues—Examples are a sudden growth in sales that causes an inability to meet customer demand in a timely way; losing key salespeople or major customers; racking up excessive overtime, work in process, inventory, or scrap; product recalls; or unforeseen environmental problems.

• Managerial Issues—Among these are the resignation, death, or termination of key executives; and the inability of management to correct financial or operational problems.

• Disasters—Remember 9/11 and Katrina? Storms, earthquakes, hurricanes, terrorist attacks, and other disastrous events can threaten a business in an instant.

• Third-Party Issues—To name a few, takeover attempts and proxy fights by shareholder-advocacy groups; federal or state government interventions in a business (e.g., actions by the Securities and Exchange Commission or Department of Commerce. And remember Allina?).

• Reputation Issues—These could come from the dramatic failure of products or services; unethical behavior by management; or violations of law or social norms. All can materially damage a company’s reputation when publicized.

Predictable Surprises

If the risks are so numerous, why are so many companies caught off guard? It’s true that some crises are unpredictable, but most aren’t. Most are actually “predictable surprises.”

Local, state, and federal government agencies knew, for example, that a major hurricane would be big trouble for New Orleans, as did anyone who ever visited the below-sea-level city. Various agencies also were aware well before September 11, 2001, that militant Islamic groups were plotting an attack against the United States using airplanes. And anyone who worked in the airline industry or was a passenger on a plane probably realized how easy it was to sneak simple items on board that could be used as weapons.

In both of those examples, people in charge were too concerned with political and financial ramifications to fix the problems when they were small risks, but taking action might have avoided the mammoth-sized crises that eventually unfolded.

Hindsight is always 20/20, but when I examine all the business crises I’ve seen in my lifetime, I find the same pattern of vulnerabilities over and over: 1) self-serving biases that make people see the world as they’d like to see it, rather than as it truly is; 2) organizational silos that keep bad or potentially embarrassing information from reaching management and other parts of the organization; 3) a dispersal of responsibility that makes everyone assume that someone else will take care of the problem; and 4) flawed decision-making processes created by an imbalance of power when strong personalities and politics interfere.


The Role of the Board

Unfortunately, many corporate directors aren’t aware that there are financial, legal, and ethical reasons to be prepared for the inevitable crisis. One of the most important jobs of the board of directors is to assure that management takes preventive measures to avoid a crisis and to lessen its damage when it happens.

The first step directors should take is to identify by name those in the company who have risk-assessment and -management responsibility. Have them report to the board regularly about the probability of crisis events and the estimated costs and benefits of proposed responses.

Use the information to create a crisis-response plan. With an advance plan, you can resist the impulse to just “do something.” A plan also keeps decision making focused so it doesn’t devolve into finger pointing and self-serving agendas.

And—I say this all the time—if you truly want to avoid a predictable surprise, you must encourage everyone to speak up—and then listen! Don’t pooh-pooh it when someone brings an issue to you. Don’t shoot the messenger. Don’t be too busy to pay attention to the what-ifs.

When the inevitable happens and a crisis does hit, the most important thing to remember is that the damage will be deeper and broader and last longer than represented by management. Murphy’s Law operates in the midst of crisis. Directors must deal with the facts and know that underreacting is much more damaging than overreacting.

Managers in a crisis will be overwhelmed, in denial, and worried about keeping their jobs, so the board must implement a crisis-response plan immediately and remain deeply involved in its execution. (Be prepared to defer compensation, by the way.) If there isn’t a plan in place, form a special committee of the board to create one and take control.

Being in control means getting outside help when it’s needed. Engage legal counsel that has appropriate experience in crisis situations. Employ a public relations firm with crisis-communication experience. And hire a corporate-renewal specialist (yes, that’s what my firm does; please forgive me, but it wouldn’t be responsible not to mention that aspect of crisis response).

This column can only scratch the surface of a complex topic. But an excellent handbook with more detailed information is available from the National Association of Corporate Directors, titled Board Leadership for the Company in Crisis. It is well worth the nominal price.

Living through a corporate crisis is something many directors will have to do. Taking steps to avert a predictable surprise will make your company the master of its destiny, rather than the victim of circumstance.

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