What your board should do in a downturn

“During the bursting of the tech bubble, our management developed a set of principles, or objectives, which would guide it through the downturn, however long and deep that might be. The principles are probably somewhat generic, but perhaps could be tuned for each situation. Our principles were: “We will attempt to remain cash flow neutral while protecting our key assets — which are our people, our client relationships, and our intellectual property.”

That simple set of objectives, communicated to all constituents — employees, investors, and the board, as well as clients — seemed to have a positive effect, even if it wasn’t a certain answer about how, when, or if the business would recover. It gave everyone a consistent set of rules within which management could develop and then explain its quarter-to-quarter tactical moves as the business descended to wherever it was going.”

Mel Bergstein, Directors & Boards (Issue 1, 2009)

Understanding what boards should do in boom times is relatively simple: just support management as they drive ever-increasing numbers; cheer-lead; applaud; counsel. But what about the times, like the current one, when it all goes wrong? When demand melts away, when buyers aren’t buying, when no one knows where the bottom is? An important question, and one which Mel Bergstein, a chairman and former CEO himself, tried to answer in Directors & Boards recently using his experience of the last great meltdown, the internet bubble.

The first thing is to develop a clear statement of policy, as shown in the excerpt. Costs must be cut during a downturn, and cash must be protected. But what is sacred, and what can be subjected to the scissors? Which assets must sustained, and which ones can shrink? Boards must craft a clear policy that leaves no room for ambiguity, and serves as a quarter-by-quarter guide for managers.

What else? One of the most important points Bergstein makes in his article is that directors, even independents, must view themselves as part of the fabric of the company. It is very easy during periods of difficulty for directors to think of themselves as pure watchdogs or detached auditors, put there to monitor and mitigate the mistakes of management. That is just not helpful when times are tough. Directors must offer support and provide leadership – not become mere observers.

Equally, directors must be very sensitive to the stress that accompanies downturns. The CEO and senior team are invariably undergoing sleepless nights and worrying about the possible meltdown of their careers. Their judgement may be impaired, which is what makes it even more important for directors to develop a deep understanding of the situation and be proactive in managing relationships with key managers. No good comes from unnecessary distance at times of trouble. Greater understanding is needed, not less.

A final observation: when the numbers are bad, managers can often spend too much time with investors, government officials, and managing layoffs of staff. It is a time that many leaders take their eye off the main point of the business: customers. And so challenging times are exactly when boards should be urging managers to spend time in the market, taking its pulse regularly and understanding where demand is still strong – and where it might revive quickly when the inevitable upturn happens.

As a downturn looms for many Kenyan companies, these are excellent points for boards to remember. Set a clear policy of priorities and no-go zones; stay involved and intimate, not detached and destructive; be sensitive to stress levels, and appreciate the emotional dimension of coping with shrinking sales. Most importantly, make sure that the company’s eye stays trained on the ball that really matters – the customer.

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