Crisis Preparedness: A Quest for Excellence in the Boardroom

The current pandemic, which has challenged businesses like never before, has also got them thinking about the quality of their board of directors. Although the process of examining value add by independent directors had started some time earlier, it is only now, since the pandemic, that it is being accelerated.

It is understood that in some cases, with valuable suggestions not always forthcoming from board members, CEOs have been all at sea in these unprecedented times. They also believe that information flow is the biggest impediment to crisis management. The speed at which things move is often incredible; it’s challenging. The board wants to make sure they know what’s going on. They need to make sure advice is not only being sought, but heard.

The pandemic has taken board members of several companies by surprise, leading to lack of appropriate guidance from the board to the CEO. Some do not see much value add from board members in this turbulent time; others are considering positioning internal talent as directors on the board, rather than looking for external members to fill in the vacancies.

Companies are increasingly looking to bring on board members who can be advisers to the CEO, as few board members have experience dealing with a COVID-like pandemic. Today, organizations are increasingly looking for independent directors who have dealt with crises, change management, turnaround scenarios or unprecedented situations and who also can challenge conventional thinking.

A Fortune 500 CEO has said an independent director must be willing to challenge managerial proposals and ask the critical questions that nobody else is asking. The independent board’s role of playing devil’s advocate can be challenging. In the words of Peter Drucker, “if everyone agrees with a decision without challenge, it probably is the wrong decision.”

What’s Ahead

As a result, within next three to six months, we can expect boards to begin including far more professionals who can help the organization grow in these turbulent times. Previously, organizations would only look for independent directors who would not ask any uncomfortable questions. Today, conversations with CEOs reveal that they are looking for those who can help the business grow. There has been a strong focus toward inducting independent directors, as companies are seeing the value of independent directors being more objective, and there is a serious capability matching.

There is also an increasing realization that investors are looking at companies with better corporate governance, and independent directors are expected to be the watchdogs to ensure good practices by the board. This is driving companies to bring in people with impeccable records. There is also a corporate governance premium emerging – in other words, companies with better corporate governance enjoy better prices in the stock market.

For many, it’s about not knowing how to anticipate and take advantage of any disruptions to the status quo. In most cases, companies lack the internal talent to make what feels like seismic shifts in focus, because they’ve hired executives to meet the needs of their current reality. Those who can’t answer the question “what’s next?” often find themselves stalling, hoping that clarity will miraculously show up like a sign from heaven. To quote former New York City mayor Rudy Giuliani, “…hope is not a strategy.”

One frequently overlooked means of preparing for the future is through a high-performing, strategically focused board. Most companies don’t utilize a true-functioning board team beyond the minimum statutory requirements, and those that do have a functioning board team often lack directors whose competencies and experiences are well-aligned to anticipate and execute on potential future opportunities. In both instances, the business lacks the right people in the right place to see beyond the day to day and craft a winning vision of the future.

However, there are boards that effectively demonstrate their depth of knowledge and experience. In these companies, the level of engagement between directors, the chairman, CEO and other CXOs increased dramatically during last four months. They are engaging themselves in multiple one-on-one, small group and several committee conversations in addition to board meetings. Any new ideas or proposals are discussed openly among the board members. Several such members are of the opinion that “what determines such active engagement levels is the DNA of the board, which is not built overnight.”

The Value of Preparing for a Crisis

Ideally, boards should dedicate a block time each year to better understand and prepare for major threats to the business. This should be considered integral to their fiduciary duty to represent the shareholders who inevitably will pay for the consequences of a poorly handled disruption. But given that most board agendas are already packed more tightly than a subway car at rush hour, attention to crisis preparedness tends not to get much attention. Often, it is only after the fact, when a board is consumed with repercussions it could have ameliorated, that preparing for a crisis suddenly seems important.

A recently published report, “Adaptive Governance: Board Oversight of Disruptive Risks” by the National Association of Corporate Directors (NACD), suggested that whether driven by unforeseen circumstances or problems hiding in plain sight, disruptive risks won’t wait for boards and management teams to catch up. Put simply, these forces have the ability to make or break an organization’s success. Here, “disruptive risks” are those risks that have a significant, severe and often sudden effect on a company’s revenue, profitability, competitive position and/or reputation.

In an NACD poll of public- and private-company directors, more than six in 10 respondents said they view disruptive risks as “much more important” to the business environment today when compared with five years ago. Yet nearly half of directors said their board’s tendency to focus on oversight of known risks presents a significant obstacle to the board’s ability to understand and oversee disruptive, atypical risks, and less than 20 percent said they were extremely or very confident in management’s ability to address these types of risks. The report made the following recommendations to help boards strengthen their oversight of disruptive risks:

• Improve the visibility of disruptive risks in the boardroom, including enhancing the content and format of reports from management and information from outside sources.
• Stay informed about company and industry developments between board meetings.
• Conduct deep dives with management on disruptive risks and their implications for the organization’s strategy.

Further, PwC’s “Global Crisis Survey 2019” suggested that in the future, external stakeholders will demand hyper-transparency from the board of directors. They will expect a much swifter reaction to crisis triggers, and they won’t hesitate to punish companies and brands whom they perceive to be slow-footed or ineffective in their response. Ultimately, perfect handling of a crisis will be expected from day one — even though crises are messier and potentially more destructive than ever before. The future of crisis and of crisis management has already arrived.

Becoming Crisis Resilient

Any crisis event can be divided into two phases: the event itself, and the response to it. Most stakeholders – customers, investors, employees – are sympathetic when a company is hit by a hard-to-avoid disaster. They are less forgiving if the response is poor or panicked, if measures that could have been taken beforehand to mitigate effects were ignored or if leadership downplays the impact of the situation. There is little patience or sympathy for an avoidable disaster within a disaster.

Crises don’t discriminate, and they can threaten the existence of the organization if not contained in time. They come in all shapes and sizes, and no one is immune. Crises that have occurred in the past and affect us today may not necessarily exist in the future, and those that are expected to hit in the future don’t seem to be triggers in the present. Traditionally, Leaders seem to be looking at the “known unknowns.” While their prediction of future crises is based on their current and past experiences, the real threat to their existence could come from anywhere – that is, the “unknown unknowns.”

Only those organizations that regularly test their crisis response plan and train themselves on it will become crisis resilient in the future. History suggests that smart business leaders invest in crisis management capabilities. They know that these capabilities can help their organizations avoid costly and sometimes irreparable damage to finances, employee morale, brand and reputation. Truly effective crisis management goes beyond being reactive and simply protecting existing business value; it also enables resilience and powers future business performance, thereby enabling an organization to emerge stronger, fitter and better.

Today, many business leaders are of the opinion that crises are becoming more intense as the world becomes more dynamic. Any event can turn a simple situation into a massive one. And crises aren’t always “big bangs” or immediately visible. For example, many cases of financial fraud and other forms of corruption may simmer under the radar for some time before boiling over. Today, there’s hardly any room for error, and the cost of reacting too slowly, or ineffectively, grows by the minute. In the near future:

• Crises will be more complex and harder than ever to contain.
• Every organization will need a crisis leader.
• Crisis management will require a broad, tested response plan, ready to deploy from day one.
• Cultural expectations will converge.
• Crisis preparedness will be more than an opportunity; it will be a competitive advantage.
• Many of the future crises will be human events.

Organizations that are adept at crisis management take a systematic approach to mitigating potential crises and managing those that do arise with a focus on both preserving and enhancing business value. The process is facilitated in a sensing capability that continually assesses internal and external data for signals of change in the company’s environment. When such signals appear, these organizations know how to address the situation so as to prevent the incident from escalating into a crisis. In today’s society and economy, this know-how can be crucial to seizing a competitive advantage.

Successful leaders are of the opinion that leadership and direction are the two most important capabilities for managing companies through a crisis. Leadership, so that leaders inspire others and shape their actions, and direction, so that it’s clear where companies are going and that people are aligned on how to get there. Further, the two most critical kinds of individual leadership behavior for managing through the crisis are presenting an inspiring vision, defining expectations and rewarding achievement.

Other important leadership behaviors for the future: challenging assumptions and encouraging risk-taking and creativity. Though monitoring financial performance is crucial in a crisis, successful leaders suggest that they should place a higher priority on motivating employees during crisis. A focus on the big picture can be insufficient for motivating middle managers and others when they are grappling with new responsibilities and downsizing programs in an atmosphere of great uncertainty. They also believe that undergoing crises enables organizations to prioritize the detection and prevention of crises, in addition to managing them. Moreover, leaders who exhibit a high level of empathy and who display their full capabilities under the pressure of a crisis can support effective decision-making and communication when they are most needed.

After a crisis ends, board members should examine its causes and take action to ensure it does not recur. Sometimes, the board has to push management to do a root cause analysis, versus just identifying the immediate cause. Sometimes the board gets an assessment of what happened, but not why it happened. If we have a crisis, then it’s helpful to think about whether the dynamics exist for the crisis to happen again.

With number of crises on the rise, it is crucial for organizations to be ready to respond with agility to multiple scenarios that have been tested multiple times at the field level. Equally vital is understanding that many crises can be avoided in the first place, allowing organizations to focus on core business performance and growth. Perhaps most important of all: The dramatic difference in outcomes when senior management and board members are involved demonstrates the urgent need for organizational leaders to proactively plan and prepare for crises, to contribute to risk management plans and to take part in crisis simulations and exercises — all of which can substantially improve an organization’s ability not only to manage the crisis, but also to take advantage of the power of the potential storm.

There is a famous saying: “pressure makes diamonds. It can also make a puddle of mush. The difference is how well we adapt to crisis leadership versus leadership in good times.”