STRATEGY: Recession – A Strategic Issue For Boards

The impact of the recession has become the key strategic issue for current boards. Directors are grappling with uncertainty of magnitude few have experienced before. To meet the challenges many boards must change the way they work.
The most important aspect of dealing with the impacts of the recession is the mindset of the directors – their reaction to the situation the organisation faces will determine how the board considers the issues and how it acts.
Director reaction is influenced by:
1. Their perception of their ability to influence the future of the organisation in the new environment they face, and
2. Whether their concentration is on survival of the organisation or on revitalisation of the organisation.
The following model depicts the factors involved.
Individual director reaction will range from feeling they are just the victim through to taking an active leadership role in bringing about revitalised organisation.
Where the focus of directors is primarily on survival with feeling they don’t have much influence, they see themselves as victims and tend to complain and criticise the situation the organisation faces but actually do little. They leave it to management to take action, and hope the environment will improve.
Where the focus of director is primarily on survival and they feel they have high ability to influence, downsizing or such like will be their concentration. Putting employees off, reducing activities, cutbacks or close-downs will appear to be the only way forward. The board will make decisions that will help the organisation survive but do little different or new to enhance the long term.
When directors are committed to revitalisation of the organisation but perceive they have little ability to influence, they can best be described as followers. They tend to be passive about the problems the organisation faces, accept them as something the organisation can’t do much about, and go along with management recommendations for operational changes and improvements that will help.
The reality in all organisations is that the directors and board are in the position of highest influence and their primary responsibility is leadership. As such, considering the consequences of recession such as we currently face is not the time for directors to abdicate their responsibilities – it is time for governance leadership. The directors and the board must think and respond strategically.
Directors must rise above day-to-day operational matters when considering strategy. They must think conceptually and envision the future that could be, and discover ways the organisation can get there.
The board must ensure the organisation’s strategies, as well as performance, protect and enhance long-term shareholder/stakeholder interests – that is the primary responsibility of the board. While acknowledging that for some there may be few options, the board’s responsibility and role is identifying any long-term strategic options to protect interests of those they serve and their employees.
It’s not bad news for every organisation. In times of turmoil there also arise some opportunities.
Companies with diversity of products and markets, and organisations with diversity of services will inevitably be more resilient to the impacts of the recession. While the demand for many products and services has declined because of the recession, there is an emerging interest in new and different products and services. Successful organisations diversify and respond to such changing needs.
The board and management must not get locked into their past business model when it no longer is relevant. The world has changed – they have to discard the old and create new business concept. They’ve got skilled employees, knowledge and facilities. The most successful organisations will position themselves for the future by continuing to fund training and development of critical competencies and innovation. Those boards will lead strategic thinking that uses and builds on their assets to respond to new and different future.
But the reality of the situation must not be lost. Boards need to consider what is the worst case scenario, what is the least expected issue, and how can they prepare for it. Scenario planning can be used to explore, learn and consider how to address the different future environments the organisation may face. Scenario planning works by describing small number of scenarios, by creating stories of how the future may unfold, and by considering now the best strategy the organisation can adopt for each scenario, should it emerge.
Boards that give management the only option for survival as downsizing are failing. At the other extreme when the board visualises and brings about different organisation and new future then management will have the potential to revitalise the organisation and lead it to even higher performance in the new environment. The best boards recognise they have high ability to influence and as consequence accept their leadership role and act accordingly. The board is there to lead not score keep.
Consequences of the recession will continue to dramatically change the environment for all organisations. Providing the essential leadership to address the long-term impact of the recession on their organisation must become the top governance priority for every board. The initial reactions of having management downsize through redundancies and closing down activities inevitably puts the organisation at greater risk for the future. The magnitudes of the impacts of the recession are largely beyond operational adjustments. The issues clearly are strategic.
Unfortunately many directors still assume radical change is unnecessary and things will be back to “normal” soon; many directors view the problems as management matter; many boards function in way that reinforces rather than challenges their entrenched thinking. These boards will find themselves struggling and badly positioned in the very different environment that will result from the recession.
Without leadership from the board most organisations will wander through 2009 focused more on survival than revitalisation, hoping that their past view of the world will be restored. The way the directors react to the recession will be critical to whether the organisation survives through the recession and into the changed future. It’s not something that’s going to pass quickly – it’s new paradigm and every board must learn how to work in it and achieve the highest levels of performance in it.
The chairperson has the most important role in leading the board’s reaction and response to the new environment imposed by the recession. They must lead the board and management in the development of new strategies and strategic goals, aimed at the achievement of the highest levels of short- and long-term performance in the new environment. Management must then be responsible and accountable for translating the strategies and strategic goals into optimal performance in the new environment. Ongoing board oversight of management must ensure management is leading and managing the organisation appropriately and effectively in the new environment.
To meet the challenges of the recession many boards must change the way they work. Mobilising the board to tackle the crisis requires fundamental overhaul of how its directors interact and what they focus on.
The chairperson needs to challenge the board to think things through afresh. The only solution may be to force the board to change. The chairperson can emphasise the gravity and urgency of the situation and focus directors on it by leading extraordinary “profit crisis” meetings; “survival” meetings; “will our strategy and plan save us?” meetings; “how can we revitalise the organisation?” meetings; or “how can we turn this recession into an opportunity?” meetings.
Directors must develop good understanding of the external environment through reading, brie