CORPORATE GOVERNANCE: When the Going Gets Slow – Good Directors Get Going

Governance in any organisation is not fair-weather friend; it is tool that can help firm steer through the tough times ahead. We know that many New Zealand firms are increasingly looking for new independent directors to strengthen their governance team. This is not only good idea to broaden the skill set of the existing directors, but it helps the firm future-proof itself for tough times ahead.
While management looks at the next week or the next month ahead to operate the business’ day-to-day affairs, directors focus on long-term sustainable visions for the firm.
Do directors have special x-ray vision for the future? Certainly not. Their chance of hitting the Lotto jackpot is as bad as yours – but well-crafted board brings together the many years of successful business experience that can lift business over the challenges of today, to fly towards the opportunities of tomorrow.
I live in the twilight world of corporate failures, having operated several global firms during turnarounds and recovery, and advising during crises and bankruptcies. This is when boards become the most valuable contributors – by helping management maintain perspective to focus on the truly important aspects of the business’ survival. When cashflow becomes tight and the payables grow faster than the receivables, organisations need the best support they can get. Often, this support comes from their boards.
Signs of slowing business growth are easy to spot – and not just in hindsight. Cash becomes tight, sales forecasts are written with more back-paddling than at the Olympics swimming contests, and staff talk more about doom than opportunity. This is when management is most vulnerable. To prop up failing confidence in the business takes exactly that time away that is required to operate the firm, and thus management needs extra support from the board.
While we know that directors do not become involved in daily operations, in times of worry their expertise is often the closest resource available to most managers. Effective directors step up to the challenge and share their expertise with management to work through these troubled times.
How can directors support management team when business becomes harder?

Six simple rules:

1. Be proactive.
No one wants to talk about bad news unless they have to, so take the initiative to discuss with management how events may affect the firm. If the exchange rate is on roller-coaster ride and is material factor in the business, help develop contingency plans to avoid accepting sales without proper margin. Are there activities that are not core to the business and can be stopped until things turn around? Are there alliance and networking opportunities to help the business achieve economies of scale?

2. Be present.
During times of uncertainty, critically important information might change quickly. While during usual business cycles the chairperson might speak with the CEO on the telephone once or twice between board meetings, this contact would intensify when the organisation is stressed. Through more frequent contact, the board remains informed, and the management has support available instantly, rather than waiting for the next scheduled meeting to occur.

3. Be tolerant.
When things do not go as planned, emotions flare up and discussions become tense at times. There is payroll to worry about, there are suppliers waiting to get paid, and there is the concern among management how the organisation will be able to survive. This is time when formalities pale against substance. When people spend more time dressing up their résumés than bringing new ideas to the business, it is time to connect with them to share thoughts, develop new approaches jointly and be available as sounding board.

4. Be clear.
We communicate not just through words but also how we say them. Staff and management tend to read nuances, gestures and other non-verbal communication to further interpret what may not have been clearly expressed in writing or through speech. This situation creates ambiguities that can prevent management from acting quickly and following precise instructions. In times of trouble, your communication must be unambiguous, concise and not leave any room for misinterpretation. This is not the time for flowery courtesies.

5. Be realistic.
Likely, the business plan and budgets that were devised months or years ago no longer hold true when its key expectations are shattered. It makes little sense to jump all over the fact that negative variances against budget occur every day. Once it is clear that conditions no longer allow the trading as per the prior plan, use it to wrap your fish and chips and move on. Create transition plan that addresses the needs of the organisation now and through the period of recovery, and focus on solvency and staff retention more than on future capital investment projects and other high-flying ideas that were part of the original plan.

6. Be caring.
Good people leave an organisation first, because they can. critical assignment during transition is to make sure that the staff see effective leadership and are consulted and informed about the pathway back to success. Being left to guess, to grumble and feeding off rumours rather than facts, lowers staff morale and engagement, and high level of motivation and contribution is what the firm needs to recover. Talk of bad news makes rounds through the firm, the customers, the suppliers and the competitors like bush fire, and staff who are well informed about the true state of affairs can help to put things back in perspective.

If the business takes turn for the worse, the directors usually become involved directly in cash management and investigate whether the enterprise can still trade and remain solvent. Being proactive is the only successful strategy here, and upfront discussions with lenders, suppliers and other creditors are essential to maintain relationship in which you can negotiate terms.
I know it is hard to admit to outsiders that things are not going as well as they should, but having key stakeholders learn indirectly about your problems denies you the opportunity to engage with them on jointly agreed upon recovery plan. Lenders and suppliers have seen businesses fail before, and unless there is frank discussion about options to extend terms temporarily, they usually fall back to the standard operating behaviour with bad credit risks: Cut the relationship and recover as much as possible. It is an essential role of directors to represent the firm during crisis and to help build new platform from which it can operate until normal business conditions are restored.
There is tremendous learning for leaders and their teams when crisis has been weathered successfully. Usually, great talent emerges under pressure, staff rally together, and new efficiencies are created. Be sure to work through what has happened with the management team, so that these learnings emerge and are recognised. If nothing changes at the firm after crisis, the next one is pre-programmed.
Was it key cost variable we overlooked? I always marvel at the audacity of airlines’ arguments that unexpected losses have occurred because of oil price rises. Isn’t that key cost factor to their business and thus one that would be managed proactively, nearly on daily basis? If they didn’t have an action plan to preserve profitability in light of such foreseeable event, what else do they overlook?
Was it an event that was seen but not recognised as critical? Sometimes suppliers drop hints and other stakeholders feed information into the business that could have served as an early warning system for management.
Was it lack of innovation that allowed competitor to steal key accounts? It is rare that an organisation can cruise towards superb performance without renewing itself and its products and services at an ever-increasing pace. If we fail to invest in this renewal, we a

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