Topics:   Leadership,Risk Management

Topics:   Leadership,Risk Management

November 12, 2019

Is Your Board’s Relationship with Management Built to Withstand a Crisis?

November 12, 2019

Corporate crises that have a serious impact on an organization’s share price, reputation, and leadership are increasingly frequent events. Yet few companies are truly prepared to cope with such crises, and, in particular, with the challenge of deteriorating personal dynamics between a company’s executive management and its overseers—and within the boardroom itself. This cultural dimension is often a fundamental weakness which, in the most severe crises, can threaten a company’s very survival.

This is the premise of a new joint report from McKinsey & Co. and NACD, titled “Building Board-Management Dynamics to Withstand a Crisis: Addressing the Fault Lines.”

“Crises are emotional events that severely stress the relationships between the CEO, the senior-management team, and the board of directors,” the report argues. “Such stresses can make the response to the crisis less effective and severely impair an organization’s ability to emerge strengthened from it and return to a path of profitable growth.”

The paper, based on in-depth interviews with seasoned board directors and executives who have experience at more than 80 US and UK institutions, notes that most companies have comprehensive crisis contingency plans, and undertake regular crisis exercises.

But it also cites 2018–2019 NACD Public Company Governance Survey data showing that only in a small minority of cases—8 percent—did boards participate in crisis-simulation exercises with management. Furthermore, fewer than 25 percent of directors had recently discussed the board’s crisis roles and responsibilities. Too often, the report suggests, crisis preparations are “check-the-box” exercises that fail to capture the personal and emotional dynamics that crises bring into play at the top of an organization.

“Crises fundamentally change the terms of engagement between boards and senior management,” the report says. “Just as a major storm or earthquake can expose long-standing structural flaws in a building, so a crisis can reveal and inflame existing weaknesses and dysfunctions at the top of a company. All the more reason, then, to recognize and resolve such issues in calm times.”

The report identifies four typical flaws—it calls them “fault lines”—in relations between boards and management teams that can become inflamed in times of crisis:

  • Over-reliance by the board on senior management, to the extent that board members are reluctant to check or challenge executives. Failure to hold candid conversations, the report says, “leaves directors complicit in poor judgment calls by management and less able to take an independent stance when a crisis comes.”
  • A tendency by the board to micromanage and become hyperactive in crisis situations. As one interviewee tells the report’s authors, “If directors are overly intrusive on good management teams, it creates a muddle in terms of crisis management—a recipe for disaster.”
  • Problematic dynamics or weak leadership within the board itself.
  • Poor information flows between management and the board, which in a crisis can cause a damaging loss of trust. “A lack of transparency and trust too often hampers the effectiveness of board–management dialogue even in normal times. In a crisis, poor relationship dynamics can prove fatal.”

All this makes a powerful case for rethinking board–management relations, the report concludes, and in particular for “a clear-eyed assessment of existing relationship dynamics to prepare organizations to face highly disruptive circumstances more effectively.” It suggests four potential remedies to address the fault lines identified above, before a crisis hits.

  1. Boards and management teams should hold candid conversations with the aim of establishing shared expectations of their roles and responsibilities in a crisis, reinforced by regular board involvement in crisis simulation exercises.
  2. The board needs to establish strong, effective leadership from a nonexecutive chair or lead director and the leaders of board committees. Board responsibilities should be clearly defined and the board leader tasked with maintaining an open, collaborative environment during a crisis.
  3. Appropriate protocols should be developed regarding the information that directors are expected to receive once a crisis hits, ensuring they receive relevant and timely updates and do not over-rely on information provided by the CEO. 
  4. Finally, boards should conduct regular, rigorous self-assessments, reflecting on operating processes and the health of the board’s culture—including, where possible, input from senior management. This is especially important after a crisis to evaluate how the board and management performed and could have done better. The report notes that although such postmortems are universally acknowledged as helpful, only 9 percent of boards, based on the latest NACD Public Company Governance Survey data, currently conduct them.

These recommendations are intended to help companies prepare for any crisis, but the report also emphasizes that all the measures proposed present best practices for healthy and well-run organizations. They “will not only make companies more resilient when something goes seriously wrong but also help them function more effectively in meeting the challenges of business as usual.”

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