Topics: Risk Management
Topics: Risk Management
October 14, 2021
October 14, 2021
The organizations that tend to thrive amid disruption are those that prepare before disruption arrives and actively manage it when it does.
Effective boards can stack the deck in their favor by tasking executives with fortifying the company before a crisis. And yet, for too many businesses, crises are the last thing board members think about until a disruption occurs.
Before any season of turmoil, directors should advise their executives to concentrate on three key action items in preparation: preserve or improve liquidity; develop realistic scenarios for the range of potential outcomes and identify actions to take based on changing circumstances; and plan for effective stakeholder communication.
Boards should direct their executives to be bold and decisive in pivoting their focus to cash. In a crisis, an organization’s life depends on liquidity.
Most often, the board’s understanding of liquidity comes from the company’s financial documents. But cash reflected on these statements may be dated, distributed around the world without being readily available, or restricted as a result of debt covenants that require reserves in exchange for favorable terms or ratings. So, even when cash on hand looks good on paper, it may not be a true measure of available liquidity.
Complicating matters, interdependencies can make freeing up cash more complex. For example, a company may have a $500 million line of credit, but if drawing on it threatens other covenants, the organization may find itself with fewer options to increase cash.
Directors can oversee this delicate interplay of cash and credit by stressing to executives the importance of understanding true cash available, as well as the restrictions to freeing up additional cash. A critical tool to manage liquidity is a 13-week cash forecast. Organizations that do not use a weekly cash forecast should develop one immediately before they find themselves in a crisis.
Once a baseline understanding of liquidity is established, directors should ask leadership to develop a series of escalation strategies to extend the “runway” of liquidity to maximize flexibility. An escalation framework may incorporate the following levels of action:
Companies can recover from the escalation phase, but it can be difficult to reverse survival actions once they commence. The more prepared an organization is for a crisis and the more quickly it can implement actions to extend the liquidity runway, the more time it typically has before having to consider survival options.
Once leadership understands how long the company’s cash runway is and identifies actions to extend that runway, boards must press executives to do the hard-but-necessary work of developing business plan scenarios that contemplate the paths out of a potential crisis.
While scenarios should cover a longer time period (three to five years), boards should place special focus on the immediate term (such as a four- to six-month period). Boards should request that their organizations provide plans that define key initiatives, milestones, and resource allocation. Detailed assumptions should be understood by the board and pressure-tested. Boards should also press management on what events or situations would trigger further business changes and potentially cause the need to change course to a less desired path out of a crisis.
Once scenario planning takes place, the board should ensure the organization has the right leadership to execute on the plan, adequate capital to get through implementation, and a process in place to monitor performance in real time (e.g., weekly) so that issues can be quickly identified and addressed.
Management often has difficulty truly accepting how bad a situation is or can become, which in turn can delay important actions to slow or stop negative scenarios until it is too late. In these situations, it is critical that directors are realists who help management face hard truths and take action before a “do-or-die” situation emerges. It is often helpful in these situations for the board to hear from outside advisors to ensure key business and legal considerations have been identified and are being taken into account.
The final component of preparing to manage disruption is ensuring effective crisis communication. A good plan will overcome misinformation, use several channels of communication for maximum flexibility, and contain consistent, clear messaging.
The first move is to make sure there is a dedicated leader responsible for delivering relevant crisis messages to constituents and a clear chain of command and decision-making process. Additionally, the board should ensure the approach includes the following elements:
Finally, messaging should balance optimism and realism, and any plan should include a feedback loop to identify issues at an early stage.
Boards should not wait to face the potential occurrence of a crisis or be surprised by the next one. They should prepare in advance for the unforeseen and ensure executives begin building their market disruption tool kit now.
Charles Moore is a managing director with Alvarez & Marsal’s North American restructuring group. Moore regularly serves as chief restructuring officer for organizations undergoing significant challenges and has served in fiduciary roles such as liquidating trustee and special fiduciary. He provides expert testimony in bankruptcy and commercial litigation matters and regularly advises companies on matters such as liquidity management, operational analysis, cost reductions, mergers and acquisitions, capital raise, negotiation of commercial issues, negotiations with unions, and strategic planning.
NACD: Tools and resources to help guide you in unpredictable times.