Insights

Boards Can Guide Businesses Through A Crisis

Featured In MIT Sloan Management Review

By: Rutger von Post and Robert Pozen
This article was first published on May 7, 2020 in MIT Sloan Management Review.

Editor's note: Oliver Wyman is monitoring the COVID events in real-time and we have compiled resources to help our clients and the industries they serve. Please continue to monitor the Oliver Wyman Coronavirus hub for updates.
 

The coronavirus pandemic is a crucible moment for management teams and their boards of directors. Companies that can respond in real time to rapidly shifting challenges while accelerating longer-term strategies will most likely stand as beacons on the battered landscape of the postcrisis economy.

Boards of directors are in a unique position to help management teams achieve this balancing act — by focusing on immediate fundamentals while keeping their eyes on the horizon. Being removed from day-to-day operations, independent directors can help management teams battling in the fog of war to pinpoint the critical factors for survival while uncovering opportunities that will allow the company to emerge stronger in a radically reshaped world.

Below are three effective practices that boards should adopt. The first and second — understanding the situation and approving an action plan — must take place quickly in order to survive. The third — thinking through strategic changes — is a longer-term process that must start as soon as survival is assured.

Verify Business Fundamentals in Areas of High Flux
During a crisis of this magnitude, the board must understand how the company can weather the storm. Directors should begin by asking management for an in-depth analysis of the pandemic’s impact on the company’s liquidity. The board needs to become quickly educated about access to credit lines and thresholds of debt covenants, as well as the financial implications of planned expenditures, share repurchases, and shareholder dividends.

The board should also prod management to consider potential showstoppers. For instance, what would happen if there were a major breach of data security? How would the company continue to operate if its supply lines were cut by government restrictions? What would happen if the virus spread rapidly among portions of the company’s workforce?

A useful way to snap a management team to attention on the areas at the greatest risk of becoming destabilized is to systemically review the pandemic’s impact on the company’s relationships with key stakeholder groups — shareholders, customers, employees, suppliers, and governments. The directors should ask management to talk with representatives of all five stakeholder groups to get reactions to the crisis. Then, when the board approves an action plan, management should communicate the main points promptly to all of them.

Approve an Action Plan, With Several Different Scenarios
As this educational process is taking place, the board should ask management to prepare an action plan right away, rather than waiting until they have collected all the data and completed every analysis. That deliberate pace will be impossible, given the unprecedented scope, speed, and depth of the current crisis. Following existing management routines and processes would be like driving while looking through a rearview mirror.

The initial action plan should concentrate on survival, plain and simple. It should address the liquidity challenges the company faces. For example, the company may decide to stop share repurchases and reduce dividends. It may also refinance certain bonds, draw down on credit lines, and ask for covenant relief. In the action plan, the board should also decide whether to continue with planned transactions, cut or expand internal projects, and participate in applicable governmental programs.

Boards of directors are uniquely positioned to help management teams plot a path through and beyond the current crisis.

However, the distinguishing characteristic of this pandemic is its uncertain duration. No one knows how long it will last or how quickly the world will return to normal — whatever that means. The effects of the pandemic could linger for a year or two, until there is an effective vaccine that is widely distributed. If so, some real estate and retail companies may fail as online platforms grow even more dominant.

Thus, given the high level of uncertainty about the pandemic’s duration, boards must push management teams to develop supplemental action plans for longer scenarios. These might cover six months, one year, and even two years.

Pulling this off requires deep trust between management and the board as well as a shared vision, which may be rapidly evolving. So the directors should ask for frequent updates, perhaps even weekly, until survival is assured. And the board should be open to adopting modified operating rules during the crisis. For example, between formal meetings, each board committee might work informally with management on relevant subjects, such as revision of stock awards in the compensation committee and development of new risk disclosures in the audit committee.

Share Your Crow’s Nest Perspective on Strategy
Soon after the directors approve the action plan along with alternative scenarios, they should focus on dealing with new threats and creating new opportunities. It’s exceptionally difficult for management teams to engage in longer-term strategic thinking without hard data in the heat of a global pandemic. By tapping into their specific areas of expertise, or connecting management teams with people in their networks, directors can help management think strategically about the future. Although the pandemic will cause myriad problems, it will generate a wide array of new opportunities as well.

Directors should begin by trying to project what the company’s situation will be, relative to its competitive universe, after the coronavirus has subsided. Is the company likely to emerge as a strong player because it increased its customer base and revenues? Or is the company likely to be substantially weakened by the pandemic, especially if the crisis lasts for a year or more?

Based on these projections, the board should raise broad-based questions about the company’s future strategy. Here are a few areas where the board should press hard.

1. Restructuring the business. If the company is likely to be in a relatively strong position after this pandemic, should it acquire competitors that have been substantially undermined by it? Or expand into new lines of businesses or new locations? On the other hand, if the company is likely to be in a relatively weak position after the pandemic, should it adopt a poison pill to deter bargain hunters, divest low-margin divisions, or seek a merger with a stronger partner?

2. Optimizing human capital. The pandemic is likely to have a significant impact on the ways employees work in the future. How should the company support employees who may want to work from home, at least part of the week, while maintaining high levels of productivity? As the pandemic accelerates the trend toward a digital economy, what skill sets and learning models will be needed as the company operates in a new way? How will recruitment practices and training programs change?

3. Reorganizing company operations. Given the expected decline in globalization, does the company need greater diversification in its supply chain? And should it develop stockpiles of critical inputs of operations so it won’t be caught shorthanded in the next crisis? How can the company test and implement alternative warehousing, delivery, and transportation options for physical goods? And how can it increase the use of robotics and other new technologies to improve productivity?

4. Adapting to new customer behaviors. As many of us have been forced to shelter at home, both what we consume and how we consume it have changed. To what extent will these changes in consumption habits become permanent and outlast the pandemic? In certain industries, like entertainment and retail, online channels may replace in-person venues to a significant degree. Although online platforms may become more dominant, customers may demand stricter regulation.

While we cannot predict exactly what changes will result from the coronavirus crisis, we can predict that there will be major upheavals on both the supply and demand sides of companies. In that context, boards of directors will become even more important — to guide companies through this period of great uncertainty and to help them develop strategies to cope with the brave new world ahead.


About the authors

Rutger von Post is a Partner at Oliver Wyman focused on organizational strategy and effectiveness. He is an experienced practitioner working with clients to drive strategy development, activation and execution. Prior to joining Oliver Wyman, Rutger was a Partner at Strategy& (formerly Booz & Company), the strategy consulting arm of PwC. Rutger has authored several articles on organizational effectiveness and corporate culture, and how to improve business performance. He is a board member of the American Scandinavian Foundation.

Robert Pozen is currently a Senior Lecturer at MIT Sloan and a non-resident Senior Fellow at the Brookings Institution. He was formerly President of Fidelity Investments and Executive Chairman of MFS Investment Management. He serves on several company boards, and is also on the Senior Advisory Board of Oliver Wyman.