The Blind Spot in the Board Room
By Bill Lawrence
With the surprisingly resilient economy avoiding recession and businesses looking ahead to the prospect of some form of interest rate relief in 2024, most CEOs and boards are focusing on strategies to improve business this year. Those initiatives typically include growing revenue, improving productivity, improving employee morale, or increasing bottom line profitability, along with a host of other measures focused on improving enterprise value.
In other words, it’s all about growth. Having the discipline to plan for a potential crisis takes a back seat and that’s when management enters the danger zone. Establishing a plan to deal with a crisis — before it happens — is a critical part of management’s responsibility, equally important as their responsibility to plan for improvement.
The Numbers Don’t Lie. A recent PricewaterhouseCoopers (PwC) global crisis survey reinforces this concept, finding 69% of survey participants experienced at least one crisis situation in the past five years. In addition, the Federal Emergency Management Agency (FEMA) estimated that 75% of businesses do not have a disaster plan in place; furthermore, between 40–60% of small businesses close permanently after a disaster.
Directors and management should understand they need to be prepared for a sudden change of events, as it’s only a matter of time before a threatening situation will occur. How they prepare for a storm whose clouds may not have formed today has a huge operational and financial impact on how well they weather it tomorrow.
Not All Crises Are Created Equal. Contingency planning is easier said than done, largely because of the many types of potential threats. Such threats can range from major disruptions like natural disasters to those which occur in the normal course of business. The most frequent crises include operational breakdowns, competitive disruptions, supply chain issues, cybercrime, or instances of ethical misconduct.
While it’s difficult (if not impossible) to anticipate and plan for every possible threatening scenario, it’s important nonetheless to develop a framework for making rapid decisions once a problem unfolds. In addition, it’s important to identify the most likely one or two significant disruptions that would negatively impact the business.
For example, for any company involved in e-commerce, a cyberattack could have an immediate impact on the company’s ability to generate revenue. If it disrupts operations for an extended period of time, the outcome could be fatal. Supply chain disruptions could also pose a significant threat to most companies that are dependent on receiving raw materials and/or shipping finished products to their customers.
Building Your “Red Team.” One of the most crucial elements of a proactive plan is to determine who is in charge when things go wrong. There should be a clear line of authority regarding who is making the decisions and at what level decisions will be made. Senior executives are most likely involved in every stage of crisis response, but there must be a clear definition of who is responsible for executing those decisions and their level of authority to make changes to the plan along the way.
Management should also identify outside resources such as attorneys, accountants, insurance experts, and advisors with operational experience in crisis management who could rapidly deploy to assist the company should such a crisis arise. Attorneys can be extremely valuable to help proactively navigate the legal, financial, and insurance issues which a company could face during a crisis. It’s important to have a law firm involved which has expertise in multiple disciplines, to ensure the company has advice from legal specialists who understand risks in their respective areas of law.
In addition, it may be important to identify resources which could rapidly bring in additional manpower to help survive a disaster. Management should also review the company’s insurance coverage to make sure they have adequate coverage for property damage, liability, cyberattacks, business interruption and loss of profit. Having insurance in place to finance the operational recovery is critical in mitigating negative impact.
While most companies don’t spend much time thinking about these hidden land mines, it’s important to understand a good offense is the best defense when it comes to mitigating the impact of a disaster. Many of today’s most damaging crises originate inside a company, and a core function of management and directors is working with the management team to identify the most urgent emerging threats, think through potential risks and weaknesses in existing strategy, and put preventative, proactive measures in place before any lurking risks escalate into a full-blown crisis.
Bill Lawrence is a Principal at Seattle-based restructuring and corporate advisory firm Revitalization Partners, which has served as a receiver in more than 30 cases in the Pacific Northwest. He and his partners write regularly about the operational and financial challenges in successfully restructuring companies. Learn more in the firm’s blog as well as its e-book, “Insights to Grow, Build or Save Your Business!”
