Recessionary tide went out - Boardroom360

By: Boardroom  05-Apr-2012

Recessionary tide went out - Boardroom360

In good economic times Boards spend time considering current and potential
performance and enjoy seeing the organisation's repeatedly healthy economic rewards. However when the tide changes the real test of a Board's ability is revealed. How well would the Boards you service rate?

Accountability

If we are truthful to ourselves the seeds of the fi nancial meltdown that struck us in 2008 were sown much earlier but we may have had our sun glasses on and had not reached out for our wetsuit. Therefore we had no insulation from the cold storm that blew some organisations out to sea.

Business and environment jolts came in all shapes and sizes: in many parts of the world, across many industries and came in different forms. The impact was felt in large and small organisations – not just in the corporate world. The carnage of the past year will remain with many shareholders for years to come.

One of the primary reasons of a Board is to carry out fi duciary duty. As such, Board members are there to act in the best interests of their shareholders, by acting as their agent. If, as we are reading in newspapers, shareholders are suffering and one or two have taken their own lives due to the substantial losses occurred, then the question that is yet to be asked is 'who is accountable?'

Were the recessionary conditions predictable?

Raise this notion among senior management and Board directors and I am sure that someone in the room will tell you that the recession couldn't have been predicted. As Philip Kotler and John Caslione in their book Chaotics remind us the signs were there but many chose to ignore them or disregard them. These writers illustrate this point by referring to Detroit's big three automakers GM, Ford and Chrysler – both the companies and the shareholders were badly hit.

It can be argued that it is easy in hindsight to spot weaknesses. But undeniably it is a Board's role to test management assumptions, to bring an external and independent view to the board table, and in doing so ensure that semantic disturbances are at least being monitored. Looking at the US car market, should Boards in this industry now be asking:

  • If we knew the US was relinquishing its world market share to Asian manufacturers of televisions, audio and video players, PCs and other consumer electronics, could the same pattern impact on the car industry?
  • Were we measuring the perception of own products – did we truly believe that world buyers would stay loyal even when our products did not meet consumer needs or could not compete on quality.
  • Why did we not see that Japanese, Korean and European automobile and truck manufacturers were becoming skilled and able to react quickly to environmental change?
  • Why did we not consider what the mavericks and outliers such as environmentalists were saying? The call for alternative energy was growing and the power of the green movement rising, so what did our impact study show?
  • Why did we not wonder what would happen if oil prices were to move upward. In hindsight we now know higher price petrol has seen buyers opt for smaller cars.
  • Why did we not ask what emerging technologies could change the game? Did we really appreciate that an electric hybrid was possible even though Honda had introduced one in the US in 2000?

Hindsight is not the test

What happened was not really unthinkable – oil went up to over $150 a barrel prompting a gallon of gas to top at $5.00 and the US went into a deep depression prompting buyers to stop purchasing autos and trucks – but the production went on.

Of course it is easy in hindsight to see the early warning signals. Nevertheless if Boards and Management in these organisations read the signs and signals coming out of the marketplace and the economy overall, and the Board had tested likely impacts, would the companies have fared much better? And would they have found themselves facing the issues of insolvency at a time when all their foreign competitors faced only a temporary
downturn in business? Honda and Toyota were not so buffeted by the plight.

Like the US financial institutions banks in many countries did not see the recession coming – they were actively promoting 100% mortgage lending and so when house prices fell both the banks and the buyers were hit hard – you could say they swam straight into a rip-tide at the cost of the shareholders.

So what do Boards have to do?

So that Boards are not caught swimming naked they need to consistently and regularly ensure that they are keeping watch on the tides, rips, currents and the weather. As well as looking at the outside activity, Boards need to ensure the organisation will be able to swim through unknown and often turbulent waters. Shareholders are expecting Boards to be their lifeguards, by recognising dangers and responding appropriately as soon as they see the signs of danger.

1 February 2010

The information in this article was current at 27 Mar 2012


Other news and updates from Boardroom

05-Apr-2012

Directors are accountable to ensure the numbers are correct - Boardroom360

It can.In recent times we've had Directors in court (in particular Feltex and Lombard Finance come to mind) trying to explain why they haven't looked at the financial statements close enough. If your organisation has stock, then you need to check whether that stock is valued correctly and whether provision has been made for any obsolescence or possible very slow-moving stock.


05-Apr-2012

Articles - Boardroom360 - Shaping the world of governance

We all know that a strong and knowledgeable board can make a significant difference to the performance of any organisation, but how many boards can truly say that they work hard to ensure that the board comprises of individuals with not only the right abilities but who are passionate about developing the right organisational culture and ethics.


05-Apr-2012

360 Assessment - Boardroom360

We assess a Board's governance capability - from processes to behaviour, enabling board members to govern more effectively. The board is prioritising and assessing the effectiveness of its risk management and corporate governance procedures. The board can keep up with and manage the changing risks facing the business. The organisation is engaging with its shareholders and stakeholders.


05-Apr-2012

CEO and Board Remunerations - Boardroom360

In spite of the accountability that goes with a director's role you could just imagine the uproar if directors fees were similarly increased in line with the extra accountabilities they hold which suggests the ultimate accountability that directors take on when they accept a directorship is now fully understood.