When a company is in a crisis, you need to make sure you have a board that can meet the task. Some crises develop over time due to shifting markets, deteriorating profitability or lack of access to capital.  As we are seeing today, the other form of crisis can be characterized as a Black Swan Event (low-probability, high-impact).  In either event, the crisis threatens the survival of the organization and is characterized by obscure causes, effects and a lack of apparent solution.  There will be a demand for fast track decision making as a crisis creates moments of truth for an organization and is often existential.  It is important that the C-Suite and the Board acknowledge that the company is in crisis, which threatens the company’s viability, and have a plan for dealing with the challenge.

Boards often fail to have the right complement of directors with crisis expertise for fear of sending stakeholders the wrong message: that there is something wrong.  However, a crisis is the ultimate test of resilience for any institution, its board, and its top executives. Senior executives and directors have exposure to continuous external scrutiny from the media, the legal profession, regulators, and other stakeholders for months or even years during and after a crisis. These compounding pressures force boards and senior management to act quickly to appease anxious or angry stakeholders. However, uncertainty compromises the ability to respond promptly due to the lack of information regarding the cause and the effects of any action.

If a board does not have directors with the right skills to address a crisis or there are conflicts of interest that may interfere with addressing a crisis, it becomes critical to add independent directors with those skills and who are free of conflicts.

McKinsey identified four critical fault lines that pose a severe threat to a board’s effective crisis response.

  1. Overreliance by the board on the CEO or senior management. A board that is unwilling to check or challenge senior management for fear of crossing the line into operational activities is failing in its governance. Candid, or as some call “Carefrontational,” conversations enable the directors to avoid poor judgment calls by management and better able to take an independent stance when a crisis comes.
  2. Micromanagement by the board. An equally significant and opposite problem is micromanagement by the board. Board members seeking a direct say in the management process because of their prior executive positions can cause chaos in the organization. While there is pressure to act quickly and decisively, a board’s role is one of oversight and not management. If it is apparent that the leaders are not up to the task, the board members must reserve the right to step in and steer the organization. In such circumstances, boards will take on some operational responsibilities and make decisions that would otherwise fall within management’s purview.
  3. Complicated dynamics within the board. Crises are an accelerant to all relationships. Thus, a crisis can expose an existing board dysfunction or lack of clear leadership. Boards tend to spend too little time addressing such issues before a crisis hitting. Given the few times that directors meet, there may be a lack of trust and questions of everyone’s different strengths and weaknesses. If the CEO is the leader of the board, rather than one of the directors, it worsens board dynamics.
  4. Imperfect information flows between management and board. 
    During a crisis, there is a conflict between the board and management. The board wants more data to meet their fiduciary duty of staying informed to make decisions and demonstrate a duty of care. Management, who are seeking to fix the problem and minimize distractions, don’t to commit the time and energy to meet the board’s demands. Too many board demands stop management performing, and too little information for the board damages trust.

Assuming that your board doesn’t have any of the above potential fault lines, the next issue is dealing with the crisis.

While many boards and C-Suites have crisis plans in place, the problem with Black Swan events is that by their nature, they are unpredictable, and as Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” Crises fundamentally change the terms of engagement between boards and senior management, forcing both groups to make difficult decisions, including whether the senior-executive team or the board itself requires significant changes.

In a crisis, some of the tough calls that the board needs to make are:

  • Who should lead the nuclear crisis response team?

  • What decision authority should the crisis-response team have to ensure the right balance of speed and oversight?

  • Is the senior management team up to the task, or are significant changes necessary?

  • Is the board’s broader composition right? Should members who can’t add value leave? Are additional, independent member(s) to help the company respond and recover required?

  • What are the immediate shifts required within the board’s composition and roles?

  • Does the board need to establish the principles to guide the organization’s response and recovery?

To manage these calls and other tasks, Boards need to consider the following.

  • The Buck Stops with You. Responsibility for proper crisis response rests squarely on the shoulders of the board and the management. If heads roll, not only will management heads roll, but the board’s will as well.

  • Does each director understand their fiduciary duties?  The primary duties here are Duty of Care and Duty of Loyalty.  Legal counsel should be consulted if only to remind directors and help avoid problems down the road.

  • Proactivity is needed. The board must get out in front of the problems on their own. It looks and is terrible when the board is only reactive.  Reactive boards are failing to exercise their proper governance function. To be proactive, board members need experience in dealing with a crisis similar to the one the organization is facing. A PR crisis is not the same as dealing with a financial crisis. Thus, the board needs to ensure that among its members, it has supply chain, HR, turnaround and restructuring expertise.

  • Determine levels of intrusiveness vs. hands-off governance. The old governance mantra used to be “noses in, thumbs out,” no longer applies. Every board must find its new balance with management on how to increase its oversight to appropriate levels and provide expertise where needed.

  • Risk committees are insufficient. Boards need to look not only at-risk metrics but include room for anecdotal data and information that percolates up through the org
    anization. The committee must be open to all these data sources, rather than be guided only by management’s statistical reports and data.

  • Monitor emerging risks. Reporting on emerging risks is essential not to be caught flat-footed, and thus appropriate expertise is critical. A CFO that has not experienced a financial crisis can better respond with input from a “restructuring” expert on the board.

  • Timing: Immediacy is the rule. In this new world, boards and management aren’t allowed the luxury of time to make decisions. Responses have to quick, even if only “We don’t know yet, but are doing everything in our power to find out immediately. We will stay in close communication with you as we do.” Besides, direct experience is essential during a crisis, as the time element is now critical. Having resources that have real-world experience can make the difference in executing plans and knowing what is time-critical and what is deferrable.

  • Provide a firm moral center for the organization. The board can inspire the right kind of action and attitude throughout the organization, and help the organization recover from the crisis not only with its reputation intact, but more robust than ever. Laying off employees and not paying suppliers raises issues. The manner with which the organization handles this is critical for the firm’s reputation. Mishandling it may result in the inability to attract start talent in the future, or obtain exclusive deals from critical suppliers.

  • Expertise. The board is not to step into managements’ role but to: carefully question management regarding the reliability of known facts and its plans, assess and advise management on its handling of the crisis, and provide assistive feedback to management as appropriate. If the board lacks experience in dealing with the impact of the crisis, it cannot fulfill these functions. Only with experience can the board probe management to discover hubris and blind spots.

So, does your board have these qualities? If not, consider adding independent directors with the right skills and experience.

 

Copyright (c) 2020, Marc A. Borrelli

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