Fortune Work
Apr 21, 2009
What boards must do in the crisis - (January 29th, 2009)
(Fortune)—With major companies battered by recession, the spotlight is on boards of directors to take more active roles in response to the crisis. But what should their priorities be? Fortune senior editor at large Geoff Colvin talked to two top consultants: management expert Ram Charan, whose latest book is Leadership in the Era of Economic Uncertainty, and Tom Neff, chairman of Spencer Stuart U.S., the executive-search firm. Key excerpts:
Q.: What should be the top items on a board’s agenda in 2009?
Ram Charan: The financial storm is not over. A number of companies I’m looking at are forecasting 10% to 20% declines in revenues. So the first and most important item for the board is to invest time to understand the cash issues, balance sheet issues, leverage issues, and liquidity issues. One- or two-hour presentations are not enough.
Second is rethinking targets for management. You want to motivate management, but you can’t just use the old targets with minor modifications; in this era, survival may be an issue.
Third is reevaluating the peer group against which you compare your company. Some of the old peers may be insolvent or may not be relevant because conditions have changed dramatically.
Fourth is rethinking compensation. Most compensation committee chairmen I’ve met never understood the Black-Scholes model for valuing stock options. If you don’t understand it, think of something else.
Tom Neff: Boards have to spend more time thinking about the unthinkable—scenarios that would have seemed irrational, maybe unimaginable, just a year ago. What if our lead bank disappears? What if we have a liquidity crisis? What if the Dow goes to 6,000? What if our stock keeps dropping and attracts raiders?
The other subject that boards need to focus more on is enterprise risk management. It’s not just risk in the sense that banks need to focus on it, but what are the risks in our business model, what are the global risks that could affect our business? It’s a holistic approach to the subject, and stress testing what we’re doing.
One other thought. Every seat in the boardroom is critically important, and boards need to think about that more strategically. In light of the new challenges and uncertainties, what kind of talent and expertise is needed that isn’t sitting around the table today? More directors will be resigning from boards, particularly active executives who just don’t have the time or the stomach for this anymore. So boards need to be thinking ahead and have a pipeline of people they’re talking to who could be directors.
