CORPORATE GOVERNANCE: When boards go bad – Chapter two – keeping your head in a crisis

When crisis faces an organisation, the board’s role is to protect shareholder interests by ensuring management actions are consistent with the organisation’s long-term value and purpose, and by holding management to account. When crisis is specific to board (such as shareholder disputes or hostile takeovers), the board needs to take the action itself.
The central premise of this series is that board can survive both types of crisis if there is excellent communication between members, management, and staff. The linchpin of communication is clarity of thought and the ability to articulate those thoughts. No board can communicate its way into and safely out of crisis unless it is thinking clearly. In this article we examine the barriers to clear thought.
The two threats to clarity of thought for board members are: insularity, which causes denial of the crisis or its seriousness; and panic, which drives selfish or short-term decision making.
In the last article (NZ Management, October 2007) we discussed how denial had allowed crisis to swamp companies. The denial came from tendency in boards to be blinkered and to focus on minutiae. To help prevent this I suggested board members should be hired not for knowledge specialities but for their ability to analyse and/or to act quickly, and that there should be wider mix of ages and experience.
Three decades of research into human reactions to physical crises has for all but the most immediate emergencies, such as an earthquake, shown the first human reaction is to seriously underestimate the magnitude of the threat (see Emergency Management: The Human Factor, Thomas E Drabek).
The more time it takes for physical crisis to emerge, the more likely it is that people will not react in time. In fires, for example, people do not react until they feel the heat of the fire. Studies have found that even though people may have had many minutes in which to escape from building fire, they die not far from where they were when the fire started.
The reason boards get overcome by ‘the fire’ of crisis is that they find all sorts of complexities and excuses to prevent them from taking responsibility and then either demand more of management or act themselves. regular excuse includes concern over exposure of confidential affairs or market sensitive information of the company.
One example is New Zealand meat company Fortex, which went into receivership in 1994, although its board would have known about massive financial losses for at least three years.
The board needed to suspect the worst much sooner and demand more information. This illustrates the importance of good communication lines between the board and all of management, and other important staff.
In contrast, Johnson & Johnson demonstrated the benefits of quick reaction when packages of Tylenol, its headache remedy, were sabotaged with cyanide on store shelves. It pulled the product immediately. Public confidence in the company rebounded quickly. Shortly after, the company was able to bring Tylenol back under new label.
In this case, the board needed to ensure management had weighed the risks to the company of withdrawal, and then unequivocally back the recommendation.
The Johnson & Johnson board’s brave backing of the boldness of management was unusual. The same group dynamics that root potential fire victims to their seats can create fear among board members of being the first to blink. The evidence is that boards, and particularly the chairman, must create an environment where any member can be the first to suggest that there is indeed crisis that requires response.
The instinct to run from crisis is natural. But board members do not have the luxury of being concerned only for themselves as individuals and group. They are appointed as ultimate guardians of shareholder interest, and every decision must be driven by that consideration.
Personal considerations are common to every board meltdown I have witnessed or studied. Board crisis meetings can be dominated by seeking to blame other parts of the organisation or attempting to “put the record straight” about which board members knew what, or had been for or against previous decision. At this stage boards have lost their unity. Everyone is out to survive with their own reputation intact, either still in the job, or able to pick up other board appointments. It is not pretty sight.
The role of the chairman is critical in such situation – to keep the team together and focused on its governance role.
I remember Sunday board financial crisis meeting of one acutely high profile business where only about 45 minutes was spent together discussing the crisis. The discussion concentrated on who was to blame, not how to fix the crisis. The chairman went AWOL and the meeting disintegrated, with each member on their mobile or computer, using staff to compile lists of how the event had come to happen in the first place. The business was still operating but customers and news media hounded staff, who were not sure if they were about to get the word to stop running the services.
Finally the three most astute board members decided to try to save the company. They came up with possible solution and organised negotiations with other parties to stitch together financial deal. One was appointed as spokesperson, and they communicated verbally and by email with the executives and senior staff, and then in turn with the news media camped outside the building.
Staff knew that someone was in control and was working on solution. Customers were reassured that their services were continuing.
As the three gave confidence to all stakeholders over the next few days, the board members began to regather in the building, and sign off the plan that had been devised.
This example demonstrates the central premise of this series: clear and decisive decision making, followed by clear communication, enabled the board to pull the company back from the brink.
A crisis-beating board must be made up of individuals with clarity and independence of thought, acting as well-led team, and maintaining open, diverse and regular communication with their company.
In the next article we will set out guide for how board should respond to crisis.

Mark Blackham is partner in Senate Communications.
[email protected]

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