After the storm

Business continuity is vital in the wake of any disaster such as the floods and havoc wreaked this week by Cyclone Gabrielle.

We have put together the following recovery toolkit for boards to steer their organisations through the crisis and ongoing disruptions to operations.

As a starting point, the Four Pillars of Best Practice Governance provides useful guidance in relation to the board’s role in a crisis.

The board’s role in a crisis

All boards and their organisations should be prepared for crises. The focus of the material below is what boards can do during a crisis and directly afterwards.

The early response

Coach and guide your team. Don’t try to play the game for them.

The board can support management by providing guide-rails for the response. It is critical for management and the board to be clear on roles and expectations from the start. Be clear about delegations and boundaries so that management understand when they can proceed at pace and when further consultation with the board is required.

The board needs to be kept informed so they are ready and able to provide management with direction or guidance on key matters. With management initially focused on the response, the board can provide perspective and work on framing the post-response strategy and long-term recovery.

If the board sees inappropriate responses or gaps in the response, these can be raised with management. However, the board needs to be careful to avoid taking over, undermining management confidence, or adding unnecessary burden.

Trust and relationships are critically important

Maintaining relationships and building trust and confidence with key stakeholders will have a big influence on the recovery outcomes for the organisation. Words and actions should align with the organisation’s core values and long-term reputation. Communication should also be proactive, open and frequent, covering staff, customers, suppliers, and critical stakeholders. Crises can dramatically alter the stakeholder landscape with unanticipated levels of interest, influence and agendas. The board needs to ensure that the organisation is adequately anticipating and responding to these changes.

Listen and seek a variety of perspectives
Directors should not rely solely on updates from management to inform their thinking. They can enhance their understanding and corroborate information with other sources – by talking with people and observing what is happening, both within the organisation and externally. Finding ways to be visible and present for staff is a good way of demonstrating collective commitment and support. In doing this, directors need to take care not to undermine management or get in the way of the response: the purpose is to inform themselves, understand all perspectives and express support, not to instruct staff, take over the response, or add to the staff’s burden.

Be agile in decision-making

A crisis requires rapid decision-making in an environment of heightened uncertainty and risk. Decision-making processes need to reflect these changed circumstances. This includes agreeing on principles to guide board and management decisions, greater delegations, increased reliance on qualitative information, and deliberately seeking and exploring alternative views to test thinking and harness the collective wisdom of the board.

Implement more agile decision-making and communication processes
In a crisis, normal board meetings are too slow and place a potentially heavy administrative burden on management. Frequently during a crisis, the chair or a committee of the board will act as a conduit for communication between management and the full board. With regular informal briefings, the chair or committee then take responsibility for communication with the rest of the board. The chair has a critical role in this: he or she must decide when their guidance to management is sufficient, versus requiring wider socialisation with the board or calling the board together for a formal decision.

Prepare for the long haul

Crises invariably last longer than initially anticipated and ripple out to have unforeseen ramifications on the business, either directly or through staff, customers or suppliers. The board has an important role in navigating the organisation through recovery by helping senior management to look up and over the horizon, and monitoring organisational health to ensure forward progress is sustainable.

Amplify health and safety

Health and safety risks are usually heightened during a crisis. While people may want to take heroic actions or trade-off health and safety to achieve quick results, directors’ duties and liabilities are not suspended in a crisis. Rather than unwittingly accepting additional risk, extra care needs to be taken in health and safety awareness and decision-making to reduce the risk of harm to the staff and public.

The special role of the chair
Everyone’s workload will increase in a crisis, but the board chair has a special role in leading the board and as a conduit between management, the board and other critical stakeholders. There needs to be capacity to take on this amplified role in a crisis. If the chair’s work schedule is full prior to the crisis or spread thinly across multiple organisations, it may be difficult to accommodate the increased responsibilities in a large-scale crisis.
The Four Pillars also highlight the potential for financial distress. This can happen in the context of recovering from a crisis, including a natural disaster.

Serious financial distress

There are times when companies face the real likelihood of failure. For directors, a company in serious financial distress is a dangerous time in which the risk of personal liability is heightened.

A true crisis often calls for external advice or intervention. The decision to seek external advice as a crisis unfolds can be difficult. Directors are sometimes reluctant to engage professionals, such as lawyers and accountants.

Their concerns include:

• The issues involved concern the private and confidential business affairs of the company
• Relevant information may be market-sensitive
• The time frame within which decisions must be made or action taken is too short.

Independent expert advice

In times of potential financial crisis, independent advice can be critical. Sometimes an objective assessment of the situation is called for, as it becomes difficult to see the wood for the trees. It is prudent to commission a suitable expert to carry out an immediate investigation of risks to the company, including its current financial position and solvency. The board will need a flow of accurate up-to-date information if it is to make sound decisions.

The report should cover all crucial items, including:

• The immediate and overall position
• Current, medium and long-term liabilities
• Present and future cash-flow
• Any liabilities that can be restructured or rescheduled
• Any assets that can be sold quickly to meet liabilities
• Whether any further equity capital can be attracted
• The degree of support from bankers and other financiers
• The likelihood of contingent liabilities crystallising.

The report should also cover:

• Key issues and risks
• Key employees, products and markets
• The company’s ability to improve its position, e.g. by reducing its operating costs
• Options for the board to consider.

The decision to commission the report should be taken as early in the process as possible. The benefits of an independent objective analysis cannot be underestimated. Too often, subsequent actions are too late.

If the report discloses that the company is unlikely to be able to trade its way out of financial difficulties, or a buyer of the business cannot be found reasonably quickly, then receivership, a compromise with creditors and/or liquidation are probable outcomes.

Professional advice on all legal implications is essential. Obviously, if company failure can be avoided it will save considerable stress, time and expense for directors as well as for others involved with the company. By remaining highly active and alert, and by recognising warning signs of potential problems early on, directors will be in the best position to see that serious trouble is avoided.

Take legal advice

Take legal advice on the position of the company and the individual directors and consider the expert’s report in light of that advice. There is a risk that legal action could be taken against the directors, under the reckless trading provisions of the Companies Act 1993, if the company continues to trade during times of financial crisis.

Other helpful guidance about board leadership of recoveries

Resilient Organisations, a New Zealand‑based public good research programme has also produced some useful guides including: