CORPORATE GOVERNANCE : When boards go bad – Chapter three: don’t be bad

The central premise of this series has been that board can survive any crisis if there is excellent communication between board members, management, and staff.
We have seen that very human factors contribute to poor board decision making before and during crisis – such as inflexibility, denial and self-interest.
We have also seen how even these factors can be overcome if board members communicate in their everyday functions, on the eve of crisis and during the crisis.
This last article will draw on the previously discussed lessons and examples to put together set of principles for managing board crisis.

Before crisis
1. Choose smart, analytical people Choose greater mix of talents. Appoint specialist expertise only when if it will help understand and analyse difficult material in front of board. Choose people who think well and have broad range of experience. Include people who are younger than usual board appointees and/or have higher threshold for risk-taking.
2. Obsess on governance Run induction courses for new members, train existing members, clarify everybody’s roles, and seek outside evaluations of your board performance. Continuously state the governance purposes of the board. Consciously choose to make, or not make, decisions on matters based on whether they are in the governance domain.
3. Meet, talk and contribute as group often Get the group to meet and correspond as often as possible – so you improve the way the group works together. Share information about the organisation and its sector regularly by email.
4. Set up committee structure Assign responsibility for important areas (audit, risk, business development, and human resources) to concentrate members on certain tasks and fields of work.
5. Simulate crises Be part of your organisation’s crisis training sessions (or get them to run them), and as group assess and discuss the activities of other boards you see in crisis.
6. Appoint good management Choose your people well. Require good measurement of and by them.
7. Communicate with the organisation Talk to the management and directly with other staff as often as possible. Be seen by staff – ensure they are conscious that there is board guiding the organisation.
Information technology is an example where modern boards are coming unstuck by not asking the right questions or requiring the right information. The National Australia Bank lost around $200 million in 2004 to the activities of rogue trading staff who were not restrained by computer technology which would have better verified the trades. It appears that the board did not have an affinity for technology, so did not request policies or measurement of the company’s decision-making on information technology.

Eve of crisis
You rarely have the luxury of knowing when you are on the eve of crisis.
Sometimes it may have been hidden in the CIO’s explanation about why extraordinary expenditure made the annual figures lower than you expected.
Sometimes the crisis will be clear; shareholder about to sell to rival company or the exhausting of cash reserves or borrowing capability for subsidiary running at loss.
• Ask the un-askable Your board members must be able to, and feel able to, ask tough questions of each other, and management in particular. Never settle for flannel or broad statements. Insist on fact-based explanation. When you have determined that decision is based on professional judgements and acknowledged risk-taking, back management. Boards are not there to be better at the executive’s roles. Practise investigatory or questioning techniques in simulated situations.
• Be wary of denial No one needs panic merchants, but they are less risky than ‘deniers’. Listen carefully to the arguments – denial or panic needs fact-based justification and accurate assessment of the risk and costs at stake. For proven board members, gut-feel is often accurate, but is not reliable basis for most arguments. Gerald Meyers, crisis lecturer at Carnegie-Mellon University says, “The most frequently made mistake is denial, and it’s the biggest one you can make. Denial then gives way to anger… then panic sets in.”
• Listen to dissent Allow dissent at the board table over the reality or extent of problems facing the organisation.
• Role play the crisis When you know you have big problem, play out the possibilities. How will this problem affect others inside and outside the organisation? How will customers and other stakeholders view the problem and how the organisation handles it?
Boards can fail to appreciate the reality or extent of the impending crisis. In 1995/96, America’s AT&T decided to cut 8500 jobs and then another 40,000. The severity and manner of doing it infuriated staff and customers alike. AT&T came to represent corporate insensitivity. The board would have expected that management’s downsizing was great response to financial imperative. But they should have thought through the possibilities of impact, and insisted management deal with the feelings of remaining staff, and customers.

During the crisis
When you realise there is crisis, the first task is to work out its nature; is it financial, ethical, reputational, or legal? Is it caused by management, staff, the board, or external parties?
1. Determine who will lead the company through Is this job for the CEO, their team, the chairman, or the board? If the crisis has possibly been brought about by the CEO or parts or all of the management team, then they are not the best people to handle recovery.
2. Designate board crisis team It would put you step ahead of crisis if you have permanently convened board crisis committee. If not, you will definitely need one when crisis arises – people empowered and competent in making the sort of quick and decisive decisions needed under crisis. If the CEO is managing the crisis, the board will approve key decisions, be sounding board for the CEO, give advice, demonstrate confidence in the CEO and ensure there are no resource problems hindering management’s efforts to resolve the crisis.
3. Designate board spokesperson This is not necessarily the chairman but rather the person best able to persuade and be trusted by wide variety of stakeholders. An advantage in not using the chairman is that they can remain focused on decision-making rather than worrying about talking to media. That said, even if the chairman is not good media performer, it is they who should be talking to other stakeholders, like staff, business partners, suppliers and maybe customers.
4. Restate organisation’s purpose at the outset Boards must set clear, succinct vision of the organisation’s purpose and its future, and require management to provide an equally simple business plan for carrying out that vision. At the start of the crisis, the board must restate this position unequivocally and plainly to themselves and/or management. The purpose will make clearer the choices available to respond to the crisis. It will make these choices inviolable by self interest and desperate thinking.
5. Emergency room The board needs to be present or readily available on the premises or with management. This will enable regular dialogue, transfer of information and guidance. Keep the board together as much as possible.
6. Use expert advice Call in external advisors to help you on legal, financial and communication matters. Do this especially if the board is handling the crisis itself. The company’s own staff experts in these areas are almost always compromised when there is conflict between the board and management.
7. Communicate Stay informed and keep everyone informed who is on the board, works for the board or relies on the board. Talk even when you are not sure there is anything to say, but use agreed consistent messages.

This series has shown how boards can respond to company crisis, even

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