Boards Must Anticipate Crises

The rapid financial downturn of the last month has surely tested the mettle of all market participants, from executive officers on down to shareholders, but the corporate director has learned that financial meltdowns can be anticipated even if they cannot be prevented, and that there are means of preparing for a downturn that must be taken into account in the modern economic climate.

Most competent boardrooms are staffed with knowledgeable, capable, and experienced directors, but talent isn’t necessarily enough to stay afloat when the market floods. “Few corporate boards are well-equipped to deal with the issues some financial companies faced recently,” says Joann Lublin of The Wall Street Journal, “…but the governance experts say those boards, and others, could have taken steps months ago to spot danger signs.”

The most important anticipatory move a company can make is ensuring that its board seats are filled with individuals with relevant experience in both the industry and the potential problems that can arise. Lehman Brothers, a hundred-year old firm that recently tumbled to bankruptcy in a matter of weeks, had ten outside directors, only three of which had direct experience in the financial-services industry. Clearly, if a company hopes to respond to a volatile market environment, their board must be staffed with the kind of people that know how to react to crisis.

Also vital is that boards engage in comprehensive risk assessment, and discuss risk matters often at meetings. At Lehman, again, the board’s risk committee met only twice annually, evidently not often enough to take stock of the potential pitfalls that could lie in wait for an overzealous culture of credit swaps.

It’s also important for boardrooms to know just what their procedure is in the event of an emergency. It should be part of any board’s agenda to determine exactly how a board will operate in the event of an unforeseen emergency. This includes planning for a variety of hazardous scenarios, and communicating between board members as to just what potential dangers lie ahead. “You imagine the worst things that could happen,” and craft a playbook, explains Fred Crawford, chief executive of AlixPartners LLP.

Though there is no surefire way to deal with a board-level crisis, proper planning goes a long way to ensuring that a board can respond to disaster with both a calm demeanor and a well-informed outlook.