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Crisis management in the boardroom
Throughout history, businesses have had to weather crises in many forms. Some are firm specific, such as the 2019 Johnson & Johnson baby powder recall, after the US Food and Drug Administration discovered traces of asbestos in the product. Others are more industry specific, such as the Libor scandal in 2012 that involved several major banks – including Deutsche Bank, Barclays and UBS – which colluded to illegally manipulate interest rates for profit.
Yet some crises have more far-reaching effects, such as the 9/11 terrorist attacks in 2001 that crippled many industries, changed the global aviation industry and boosted national security budgets around the world. Now, the Covid-19 pandemic is wrecking economies, societies and businesses across the globe.
Covid-19 has reinforced the importance of having a crisis management framework to help firms navigate through a crisis. Corporate boards have an essential role to play in the three phases of preparing for crises, responding to crises, and conducting post-crises reviews.
Although no organisation can fully anticipate every single crisis, a firm can reasonably anticipate and develop crisis-specific response modules. For instance, firms in the oil and gas industry should have detailed crisis management plans dealing with environmental risks from their operations.
At the very least, crisis preparedness should cover the key risks identified in a firm’s risk-management framework. For crisis preparedness to receive adequate board attention, a board risk committee can provide oversight over the crisis management framework. This committee should largely comprise non-executive directors with the expertise to advise management, who remains responsible for developing these frameworks.
Nonetheless, crisis preparedness has to be robust to cover crises not identified in a risk management framework. Boards should work towards a framework that incorporates at least three essential activities applicable across any crises: command, calibrate and communicate.
“Command” refers to establishing a clear chain of command and decision-making rights. While the composition of the crisis-response teams varies depending on the crisis, a crisis management framework can aim for more clarity closer to the top, especially at the C-suite and board level. For instance, a crisis involving a major accounting scandal should involve the board audit committee and the CEO, unless implicated in the scandal.
“Calibrate” involves a preliminary assessment with regular updates on a crisis. This includes identifying affected internal and external stakeholders, plus collecting information to assess the scale, scope and duration of the crisis. Useful tools in this activity include scenario planning to map out uncertainties for constructing response modules to various crisis scenarios.
“Communicate” requires establishing communication protocols to affected stakeholders, and possibly regulators, to present a coherent discourse to restore confidence. SGX-listed firms, such as CapitaLand, Hai Leck Holdings, Amara Holdings and many others, have done well to provide Covid-19 updates to the investing community via SGXNet.
Regular simulations to test crisis-response modules can strengthen crisis preparedness. Oftentimes, managing a crisis requires close coordination across multiple teams. Boards can play a role by requiring management to plan for simulations and report learning outcomes.
A recent McKinsey article on “Boards of directors in the tunnel of the coronavirus crisis” cautions that boards must be careful not to burden management with additional meetings or reports that create little value during the crisis. With this in mind, boards can still play a meaningful role.
Crises, by their very nature, often require quick responses in uncertain conditions. Management, including executive directors, are likely preoccupied with short-term actions. Non-executive directors can alert management to consider longer-term issues and augment their capacity to assess the strategic implications of a crisis.
Firms should adopt offensive postures to seize opportunities in the post-crisis landscape, whenever possible, instead of staying in defensive postures during the crisis. Some crises, such as Covid-19, are likely to challenge norms, accelerate digital transformation, and change the business landscape.
For instance, fashion retailer FJ Benjamin was forced to temporarily shut its nearly 300 stores in Singapore, Malaysia and Indonesia, due to lockdown measures. The group is now scaling up its online store network with more global brands and building omnichannel digital capabilities not only in response to the crisis but also to prepare for more online opportunities post-Covid.
After a crisis, boards can contribute by engaging management to review responses during the crisis, covering areas that worked well and those that did not. A key objective is to update the firm’s crisis management framework, substantively improving future preparedness and responses to any crises.
A robust crisis management framework does not guarantee a safe passage through all crises. After all, a crisis may highlight existing gaps in leadership, resources and human capital. Having a framework in place does however increase the likelihood of survival. Firms that are prepared for a crisis like Covid-19 can better adapt to the changing landscape and emerge stronger post-crisis, while weaker firms falter and exit the industry.
As the saying goes, during a bear encounter on a group hike, it is not whether you can outrun the bear to survive this encounter but whether you can outrun others who are with you.
The writer is a member of the Advocacy and Research Committee of the Singapore Institute of Directors.