Crisis Management and the Board of Directors

Crisis management is a critical component of business continuity that should be prioritized by the Board. Inevitably, unforeseen circumstances could arise, which if not managed properly can shake the very foundation of the Board and by extension that of the Company. Planning for and emplacing an effective crisis management plan will betterposition the Board to effectively handle crises as they occur. The cause of a crisis may be internal or external, accordingly, the relevant organizational stakeholders must be carefully profiled, engaged and carried along during the period of crisis.

In today’s social media connected world, it becomes more crucial for organizations to get in front of crisis situations and own the narrative. Any sudden occurrence that could negatively impact corporate performance or the credibility of the organization and the perception of key stakeholders has the potential to become a crisis. For instance, the CEO of a quoted company will most certainly make the news-rounds where he/ she is picked up by law enforcement agents at a public event for fraudulent activities from a previous employment. Other crisis incidents that may include the leak of a company’s toxic culture, cyber breaches and decisions gone wrong.

A major cause of internal crisis could be unresolved disputes on the Board or with shareholders/investors. According to Prof. Mervyn King, it is part of the duty of care of the Board to ensure that disputes are resolved quickly in order to maintain relationships that business people, particularly Management spend their lives building. An effective Board must assess disputes and conflicts that arise amongst its members in order to determine the effect on boardroom dynamics, effective communication and general decisionmaking process.

In the New York Times article – New Challenges to Times Board: Dissidents With Large Stake – two major dissident shareholders (Harbinger Capital Partners and Firebrand Partners) challenged the New York Times’ investment decisions. They didn’t want to eliminate the two-tier share structure allowing the Chairman/publisher and his family to control the company, but they wanted to elect board members who were not hand-picked by and beholden to the current management led by the CEO. The Board’s Nomination Committee met with the four nominee directors of the shareholder, therefore raising the possibility of a negotiated deal as opposed to a proxy fight. The agreement to meet allowed the Company and its dissident shareholders resolve their dispute as the Board agreed to the nomination of two of the four directors proposed by the dissident shareholders.

It is recommended good practice for the Board to have periodic interaction with major shareholders/investors to forestall potential disputes and resolve disagreement before it escalates.

According to a report on Resolving Corporate Governance Disputes issued by the World Bank, the strong, well-articulated viewpoint of a single powerful leader – such as the CEO or Chairman – can so affect those around and under him/her that any dissent is suppressed, creating a “march to folly.” Even though the leader may have only offered an early opinion, expecting to hear dissenting views, it is not unusual for others to simply agree with the leader’s initial, stated position. This phenomenon is known as “groupthink.” The Chair builds the bridge between the Board and the CEO and this partnership between the Chair and the CEO comes very handy during a crisis.

In the ‘Crisis at Tyco – A Director’s Perspective’ case study, the Fortune 50 Company – Tyco - acquired CIT Financial Services for $10 billion, the company’s first venture into commercial financing. The Lead Director had helped to facilitate the acquisition as a result of which the Chairman/ CEO approved compensation of $20m for him. When the Board raised the issue of whether or not the payment had required board approval, and proceeded to demand the return of the money, both the Chairman/ceo and the Lead Director stood their ground, refusing to return the money. The Chairman/ceo then issued a press release saying that the Board had ratified the payment which was untrue. The Board immediately constituted an Executive Committee to deal with the issue following which issues were discovered including investments and sale transactions between some members of the Board and Management. These all culminated in the resignation of the Chairman/ceo, following which he was arrested and charged with tax evasion.

Many organizations today are currently working through the COVID-19 pandemic as this was unprecedented and caught many unawares. Board members all over the world have had to make use of their best crisis management strategies in order to stay afloat and even prosper during this pandemic. Ana Botin, Executive Chairman of Santander stated: “One of the critical things in this crisis we’ve been trying to get across is that we have to throw away the rule book. We’ve never seen this kind of crisis in our lives”. Leadership teams can sometimes be unprepared or underprepared for the effects of a crisis like the COVID-19, which may cause uncertainty, discomfort, and other negative emotions. In such situations, the Board should show empathy, particularly towards the CEO and the leadership team.

On his/her part, the CEO should not be overly emotional in his/her response to a crisis, as clear and logical thinking is required. Therefore, the CEO’S communication should involve a balance of emotion and reason. As the crisis begins to wind down, the CEO should ensure that the leadership team pauses and learns the most critical lessons from the crisis. It is also an appropriate time to study, analyze, and upgrade the skills and competencies across the organization to build resilience that will hold up in the event of another crisis.

Whilst the Board would rather avoid crisis, the effective Board is the one that anticipates and establishes a crisis management policy, emplaces the required training across the organization to activate the plan, communicates effectively with and provides the required support to Management during and post the crisis period.