During a Crisis, You Need A Different Board

During a Crisis, You Need A Different Board

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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Listening to a recent Tim Ferris podcast, Tim was interviewing Adam Grant and asking him about his success, which is impressive. Adam said that he used Challenger Groups for success. According to Grant, “Your challenge network should be the people who will tell you that you’re not quite where you need to be. These are the people that will push you because they care about helping you get better.” Also, “So if in the last six months somebody has given you really harsh feedback, you’ve probably done everything in your power to drop them from your life. In the short run, that might feel good, it might help with your motivation, but it destroys your opportunity to learn. I think we all need to embrace that challenge network if we want to reach our potential.”

Reflecting on this, (Apologies for unabashed self-promotion as I run Vistage groups), that is what a Vistage group does. As I tell prospective members, we are here to:

  • Challenge your assumptions

  • Prevent your hubris

  • Provide advice; and

  • Have carefrontational conversations – we will tell you, your baby is ugly.

The group is not dependent upon you for a paycheck, or income, or anything other than to know you will help them if they help you. Many prospects tell me, I don’t need such a group, I have friends, a board, customers, or father/father-in-law who does this. However, let’s examine these groups.

 

Friends

Our friends are our Cheerleaders and Supporters. They help us when we are down and tell us how wonderful we are. They are unlikely to have carefrontational conversations with us. If they keep telling us that our baby is ugly and our ideas are wrong, the friendship will not last.

 

Customers

Really!! You will tell your customers that your largest customer has just declared bankruptcy, and you are not sure you have enough cash to last a week! Or, that your product is failing and you are considering the following three plans to fix it, which do they like?

 

Your Board

Your board is the right place, but how often do you meet, and how often can you go to them. Also, can you go to them when you don’t know? Can you bring a personal crisis to them? If you are having a personal crisis as a member did where his wife gave him an ultimatum on their marriage, you know he was not focused on his business, but need a place to talk this through.

 

Your Father/Father-in-Law

Well, one issue you can’t bring to your father or father-in-law is that you want to fire or get rid of him. A couple of other areas that may be difficult are:

  • What if you want a divorce?

  • What to do about getting rid of your sibling?

  • What about killing off the division, product, they started?

 

So where to?

Find a group of people that have no reliance on your for a paycheck or income, and who will help you if you help them, but will challenge you and enter into those confrontational conversations when needed. If not Vistage, then some similar group, but one that will do the above, as Vistage members on average outperform their non-Vistage peers by 2.2x revenue growth, and higher profit margins.

 

© 2019 Marc Borrelli All Rights Reserved

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Many privately owned businesses don’t have Boards of Directors since they don’t have outside shareholders there is no need to. However, having a Board of Advisors has been shown to result in a 3x greater growth in sales and profits than companies without them.

 

What is a Board of Advisors?

A Board of Advisors comprises 3 to four high-level executives who provide the CEO with advice and are focused on the CEO’s success. However, unlike a Board of Directors, the CEO doesn’t have to take their advice. Their role is to:

  • Hold him and the management team accountable. We all believe we can hold ourselves accountable but fail miserably;
  • Act as a coach;
  • As the difficult questions or the questions no one is asking;
  • Enable the CEO to focus ON the business and not IN the business – to stop the tyranny of urgency taking precedence over the important;
  • Validate the CEO’s ideas and strategy; and
  • Bring their experience to the company.

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What is a Board of Advisors not! It is not a group of people to make introductions to potential sales targets.

 

Who should be on the Board?

The Board of Advisors is there to help you and should not have other interests, so it should not include advisors or consultants that you already use, i.e. your accountant or lawyer. Also, it is not necessary to get a marquee name that has retired. More useful is to get middle to upper management that has real experience with the issues the CEO is facing and from a range of industries. That way he can get the benefit of best practices across all industries and learn of new solutions to problems in the industry. As times change and the company faces new issues, the board should change to have a membership with experience with such issues.

Like a marriage, you need the right partners. These are people the CEO can rely on to provide good advice and like your doctor will see you “naked”. Ideally a group with different skill sets that complement the CEO’s skills and deal with issues currently facing the company.

 

How should they be compensated?

People often joke that Board of Advisors is just paid coffee, water and a bagel. Typically they don’t work for much; however, it is advisable to pay them a stipend, i.e. $20k, even if it is a contribution to a charity in their name. Why? Because you are asking them of their time and commitment, and if compensated, they are more likely to return that urgent call when you have a crisis. Also they should all be paid the same.

Sometimes they also get equity; however, since many of the companies seeking a Board of Advisors are private, the company doesn’t want to give equity. However, synthetic equity works such instances. In addition, if you have a Board of Advisors and are raising equity capital, all the Board members need to have purchased equity in the business, as most Angel and Venture Capitalists will not see it as positive the Board of Advisors is not willing to invest.

 

How often should the Board of Advisors meet?

Typically, they should meet between four and six times a year. Not less than four, and if over four maybe the additional meetings should be telephonic. The meetings are often 4 hours as well as some preparation time of maybe 10 hours, so if you are asking for six meetings per year, you are asking for a commitment of 84 hours a year or two weeks.

 

When do you need them?

A small company can always use the independent outside input; however, they are especially useful when going through inflection points in the company’s life, or the marketplace is changing dramatically. When dealing with something the company has not faced before, the Board of Advisors can be invaluable to the CEO as he navigates a new course. If you realize you need one it is often too late. However, most important is that the CEO must believe that they will be beneficial, and the CEO must be coachable. If not there is no point!

 

Who should attend?

The senior management I believe to be best. However, not necessarily all at once! They can each attend as their area is discussed and reviewed. As a result, they are receiving coaching too, and the benefit of the Board’s expertise as strategies are proposed and discussed. However, there should be just a time for the CEO as there are only things that can be discussed with the CEO, i.e. the perceived performance of a senior manager or the CEO’s failure to live up to his deliverables.

 

Should there be agreements with them?

While they are not a Board of Directors, you should have agreements with them. These agreements need to set out, among other things:

  • Pay – They know what they are getting.
  • Time Commitment – They know what they are committing to.
  • Liability – They know what to expect.
  • Term – They can let them go when the company needs different skills with no difficulty
  • Nondisclosure terms and non-competes as relevant – protects all parties.

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