Corporate Governance During Times of Crisis
Companies must be willing to stay ahead of the curve on coronavirus
Welcome to the Nongaap Newsletter! I’m Mike, an ex-activist investor, who writes about tech, corporate governance, the power & friction of incentives, strategy, board dynamics, and the occasional activist fight.
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Companies are moving in the right direction regarding coronavirus mitigation, but we’re about to find out who’s making “linear” incremental adjustments and who’s properly prepared for an “exponential” crisis.
Buckle up. The next few weeks should be interesting.
Coronavirus is Escalating Quickly…Daresay Exponentially
In late February, I commented that the market sell-off (up to that point) didn’t seem to properly reflect the exponential nature of coronavirus’ global spread:
“The sell-off last week was significant but still felt “linear”. I don’t think it captures the nonlinear changes on the ground and the market hasn’t “broken” toward reality yet.”
Fast forward to today and coronavirus continues to disrupt at an exponential pace and the markets continue to sell-off at historic levels.
While things are incredibly volatile right now, I’m still not convinced the market is pricing in the reaction consumers will have once coronavirus is meaningfully in the community, puts cities on lockdown, and starts infecting close friends and family.
As Vanguard’s Amy Lash points out to Yahoo Finance:
“During the last week of February and the first week of March, the majority of households trading moved money into equities rather than into fixed income (bonds and cash),” Vanguard’s Amy Lash told Yahoo Finance. “More than 7 in 10 households trading moved into equities.”
While there has been an overall increase in trading from Vanguard clients, only 1% are making moves, compared to a typical day’s 0.4%. People with only retirement plan accounts — as opposed to taxed brokerage ones — have barely touched things. Less than 0.3% of Vanguard’s 30 million customers have made any trades over the past month, according to Vanguard.
This narrative shows that while there may be significant selling driving the markets lower — the S&P 500 index is at last May’s levels as of Monday’s close — average retail investors are looking ahead – to when the coronavirus will be under control and the fears calmed.
I’m not sure “looking ahead” is the right way to frame the current situation. The Washington Post (in my opinion) describes the coronavirus situation pretty well:
When a danger is growing exponentially, everything looks fine until it doesn’t.
It’s easy to “look ahead” and feel things manageable when coronavirus is “unseen”, but 2 weeks of exponential growth can turn an “unseen” coronavirus situation into a full blown crisis that puts an entire country on lockdown.
If investors are having a hard time getting a handle of the coronavirus situation, imagine the challenges Boards and executives are facing.
Everything looks fine until it doesn’t.
Boards Must Proactively Prepare for “Nonlinear” Changes
To date, companies are doing a very good job making incremental changes (i.e. cancel non-essential travel, work from home, etc.) to limit business disruption in the face of coronavirus.
The question is are companies prepared to handle rapid “nonlinear” changes?
It’s possible to make linear incremental changes during “normal” markets, but we’re in a market where consumer demand can and will collapse in weeks. Boards need to acknowledge this reality and proactively prepare.
Leadership and Governance During Times of Crisis
Leadership and governance during times of crisis is a much different animal from what most Directors and executives are accustomed to. It requires quick and decisive action often in the face of great uncertainty.
I’ve seen and worked on quite a few “governance during crisis” situations while at Relational Investors and wanted to share some personal thoughts and takeaways:
1. Every Crisis Is Unique
Every crisis is unique with their own set of challenges. All companies are dealing with the coronavirus, but the “solution” to this crisis will be unique to each company.
It’s tempting to apply “solutions” from previous dislocations (i.e. global financial crisis) or copy what others are doing, but it’s really important to look at each crisis with a fresh set of eyes and try to understand how the crisis will impact key business drivers specific to the company.
2. It’s A Thankless Job
Personal opinion but being a Board Director during times of crisis is a thankless job.
I understand most won’t sympathize with Board Directors, but many under appreciate just how much time and effort it really takes to stabilize a company during crisis.
Don’t underestimate the stress Directors go through as they evaluate hard decisions. It’s not fun discussing headcount reductions, placating angry stakeholders, contemplating leadership changes, etc.
Directors across Corporate America are about to earn their annual Board fee this year.
3. Survive First
The primary goal should be “survive first”. Companies must focus and be willing to tighten up the cost base (if necessary) and make hard decisions.
There will be plenty of time to pursue discretionary growth initiatives in the future when the environment stabilizes, but the goal right now is to “get to the future”.
Survive first.
It’s counterintuitive but sometimes the best way to drive future innovation is to go back-to-basics and focus. One of my favorite talks on this topic is Steve Jobs’ “Think Different” presentation.
Most remember the “Think Different” marketing campaign, but few recall the hard decisions Steve Jobs had to initially make to stabilize Apple.
To Recap:
Trying to get back to the basics of great products, great marketing, and great distribution.
Apple has pockets of greatness but has drifted away from doing the basics really well.
Looked at the product roadmap and decided there’s way too much stuff.
Got rid of 70% of the stuff on the product roadmap and simplified.
Focus on the 30% that are gems.
Folks were excited to get their projects cancelled because there was now a sense of direction with the new focused strategy.
Cleaned up distribution and manufacturing.
4. Narrow the Decision-Making “Duration Mismatch”
During times of crisis, Boards and management experience a decision-making “duration mismatch” where decisions that typically take weeks, if not months, will often need to be made in days and under great uncertainty.
Similar to Ben Horowitz’ Peacetime CEO/Wartime CEO, Boards must convert into a “Wartime Board” during times of crisis when a company is fending off an imminent existential threat.
In order to be a highly functional as a Wartime Board, it is essential to close the gap between a normal decision-making timeline and a crisis decision-making timeline.
One way to close this gap (in my opinion) is to temporarily set up a special committee on the Board that acts as an interface between management and the rest of the Board. This committee will play a key role in maintaining nimbleness and acting quickly.
I believe a dedicated committee is essential to deal with coronavirus where the situation is changing within days versus the quarterly cadence most Boards are structured for.
5. Kill Cookie Cutter Concepts
Cookie cutter concepts and fixes won’t fly during times of crisis. A blind share buyback isn’t going to make the crisis away.
Markets are looking for targeted solutions that specifically address the dynamics unique to the business. All stakeholders want and need to know you have a thoughtful plan in place.
6. Have a Clear “North Star”
Companies can’t have a thoughtful plan or make hard decisions without knowing what their guiding “North Star” is.
Boards needs to critically examine “who they are” and know what the company “is” and what the company “isn’t”.
Once a “North Star” is in place, the Board can begin to debate and examine the appropriate strategy, cost structure, and go-to market.
7. Proactively Communicate
It’s important to proactively communicate, acknowledge issues, how they’re being addressed, and keep stakeholders up-to-date on progress.
Communication must be specific to the business and underlying dynamics. Having a “North Star” should make messaging easier and understandable to all stakeholders.
Do not underestimate how powerful clear communication is. Establishing public benchmarks and executing towards those benchmarks is a powerful way to build confidence and stabilize the company.
That said, markets and stakeholders can sniff out PR platitudes (see #5 “Kill Cookie Cutter Concepts”).
8. The Board and Management Must Be Aligned
The relationship between the Board and management must be a true partnership. Everyone must be “all in” on the plan.
9. Be Decisive With Hard Decisions
No one wants to be the bearer of bad news, but Boards must be decisive with hard decisions.
I really like Sequoia Capital’s post Coronavirus: The Black Swan of 2020 regarding fast and decisive adjustments:
Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”
During times of crisis and uncertainty, markets reward steady and decisive leadership.
10. There’s No Silver Bullet
At the end of the day, there’s no silver bullet to make a crisis go away. Decisive action and execution can mitigate its impact, but often times there’s no substitute for “riding things out”.
Emphasis on “riding things out” and not “getting smashed into the rocks”.
Conclusion: Slay the Dragon
The next few weeks are going to be era defining. Boards will need to step-up and help “slay the dragon”.
P.S.
I highly recommend you study Dropbox and the “decisive actions” they made last quarter. The current market sell-off has erased their post-earnings gains, but their shift to margin/cash flow/capital allocation makes them well prepared to navigate the current environment (in my opinion).
If you’re a premium subscriber, I recommend reading my note on Dropbox.