Expectations for public company management teams are changing. External constituents are demanding more than just quarterly financial results that meet or slightly beat analysts’ expectations. They are starting to ask more strategic questions that get at the organization’s long term future and even viability.
This new reality is not a passing fad that can be waited out. Visionary leaders realize this new environment. In response, they are now focusing on how to get ahead of this trend and set expectations rather than play catch-up.
For those leaders following the old football adage that the best defense is a good offense, attention needs to be on:
Liquidity Plan: As recent events proved yet again (Lehman, Bear Stearns, AIG), nothing will put you out of business faster than a liquidity crisis, regardless of your leverage ratio. If immediate cash needs are met, even partially, through short-term borrowing (under one month) and that source disappears and cannot be replaced, bankruptcy is inevitable.
For example, if you are borrowing $1 overnight, have $99 of equity to fund a building worth $100, and you cannot re-borrow that $1, you will be forced to declare bankruptcy. It is that simple.
Prudent leaders understand this lesson and have a plan for how to respond if their short term source(s) of borrowing disappear for 1 day, 30 days, 60 days, 90 days, etc. These managers understand that, like a sprinkler system, every element of their plan may not work perfectly and cannot be tested under a real life situation; but it is better to be prepared than not to be.
Having formulated a contingency plan that identifies alternative funding sources, assets sales, staff reductions, etc, leaders are much better prepared if their source(s) of short-term borrowing suddenly evaporate.
Succession Plan: Just as the Scouts teach children to “Be Prepared,” strategic leaders and their boards annually assess how, if needed, key management team members can be replaced. These leaders want to assess the strengths and weaknesses of their team and provide them with developmental opportunities. Leadership and business-specific knowledge are gained through real life experiences.
As with the liquidity plan, leaders acknowledge that their plan may not work perfectly out of the box. However, they also know that having done the initial thinking and analysis of each position’s requirements, requisite skill set and experience, they are further ahead than had they not done this plan.
Compensation Plan: The SEC is already requiring that US public companies analyze the relationship between their compensation plans and risk. A clearly articulated set of goals and objectives, defining expectations in order to continue employment and for additional compensation (e.g., merit increases, bonuses, stock options) will ensure that employees’ individual goals are closely aligned with those of the organization. Including comparative pay plans across an industry or function will ensure that employees are fairly compensated and motivated to put forth their best effort.
Business Risk Assessment: In order to assure external audiences that a compensation plan is not promoting undue risk taking, an organization needs to be able to describe, and quantify, if feasible, the risks that it is exposed to.
In large corporations, these risk assessments need to be done at the business level to determine if offsetting risks exist within the organization.
Board Assessment: The SEC is also asking companies to identify the specific skills and attributes that qualify each director for a board position. Clearly, this new requirement is in response to concerns that boards are not sufficiently independent or capable of providing effective oversight.
Leaders need to carefully consider the requisite board members’ skills, hard and soft, to provide the management team with a good exchange of ideas. All board members should contribute to the “team.”
Conclusion: The expectation bar is clearly being raised for leaders. It is not, however, a passing storm that leaders can just wait out until clearing skies re-appear. Instead, visionary leaders need to embrace this change. They need to harness the management value in these new demands and articulate these benefits, internally and externally; internally, so employees will take these initiatives seriously and externally so that investors, creditors, and others have confidence in the organization.
Note: See earlier posts, Risk Management: Invest or Wither - 1/14/2010, and New SEC Disclosure Rules: Small Changes, Potential Big Impact - 2/26/2010.
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Charlotte Nad consults with leaders and senior managers on business and organizational effectiveness. Bonnie Roe is a securities partner in the New York office of Davies Ward Philips & Vineberg, LLP.
