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The Resolution

The six most important steps for a board to take in a crisis

Over my career I’ve seen a number of short and long-term crises. Regardless of what started the crisis, how the board responds in the first 48 hours is crucial.

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As a CEO, I’ve run companies that have been in distress. Over my career I’ve seen a number of short and long-term crises. Regardless of what started the crisis, how the board responds in the first 48 hours is crucial.

In my experience there are six things that a board needs to do immediately to manage the situation and mitigate risks:

1. Understand accountability and actions

Long before a crisis occurs the board should ensure that the business has a crisis continuity plan in place. This plan should document what issues may potentially arise. For example, if you’re in the food industry the business needs to contemplate what happens if a customer experiences severe food poisoning.

The business continuity plan also steps out your modus operandi and outlines roles, accountability, and who needs to be contacted in the event of a crisis. It should also include a template of potential media statements that are ready to go as soon as something happens.

Once a crisis actually occurs, the board would access this plan and immediately start acting on it.

2. Assess if you have a continuous disclosure issue

One of the first things any board needs to do in a crisis is assess what the company needs to communicate to market. Continuous disclosure is absolutely critical - boards must assess whether the crisis may potentially affect their shareholders and the value of the organisation. This is not an easy decision to make, but it’s one that the board needs to debate immediately. If the board is not sure, then they need to obtain good legal advice on whether the matter needs to be disclosed.

Regardless of whether the board decides to disclose or not this decision should be well documented. Down the track this will allow you to demonstrate to stakeholders that you went through a robust process to determine the right level of disclosure, based on the information that you knew at that time.

3. Determine if you need to enter a trading halt

Depending on what the crisis involves you may need to enter a trading halt. A trading halt is particularly important if you don't know the real extent of what you are dealing with. In the initial hours, most boards are still trying to come to terms with an issue and only starting to develop a real understanding of what it may mean for the company.

If you are grappling with what the crisis means for your company and shareholders, it may be best to contact the ASX and request that the company halts trading temporarily.

4. Communicate factually and quickly

Communication is absolutely key when a company is facing a serious issue. This is where a lot of companies fall down - you hear radio silence from a business in crisis - but that is the worst thing you could possibly do. The company needs to communicate quickly, both internally and externally.

Communication doesn’t need to be lengthy but it should be factual. Even if you don’t have all the facts at hand, explain that you don't know some things at this point in time and provide information about what you do know. Companies can explain that the situation is fluid and that they will keep the market and their stakeholders briefed - this is much better than saying nothing at all.

5. Bring in external crisis management

Your business should already have a company that you can call on for crisis management. Even if you don’t have them on retainer, it is best to have already gone through the process of meeting people and knowing who you will call. They should already be familiar with your crisis continuity plan and be aware of the potential issues that your organisation could face. This means you won’t be scrambling to find someone to help you manage a crisis, during an actual crisis.

As soon as you identify an issue your external crisis management firm needs to come on board. While many companies question whether they need an external crisis management company, there are two reasons it’s best to bring in external help straight away:

First, they are not involved in the company so they can offer an objective perspective. Having an impartial opinion is important as the rest of your business will be stuck in the detail at the time the crisis is happening. An external crisis management business can stand back and give you another perspective.

Secondly, they already have relationships with reporters from all the newspapers, and will be able to give you a fast and unbiased sense of how things are unfolding in the market.

6. Make sure you have the right CFO in the chair

Last, but certainly not least, is to ensure you have the right CFO, depending on the crisis and especially if it is going to substantially affect the organisation financially. Alongside the CEO, the CFO shoulders much of the burden during any crisis.

When a crisis hits, it's sometimes due to poor forecasting - perhaps the CFO has not been giving you a realistic picture of what has been happening in the company. If the board had good forecasting and accurate cash flows they may have anticipated the crisis earlier and been able to put in place contingency plans. That is why it is so critical to have absolute confidence that you have got the best CFO on board.

Even if the crisis is not a financial one, your business will need to understand the financial implications of the crisis and what caused it. If the board doesn't have 100% confidence in the CFO or the forecasts, then they will be unable to make any long-term decisions or manage the crisis effectively. This often means it might be the time to consider a change of CFO, particularly if the crisis is a financial one.

To help determine if the CFO is the right person for the job, the board should look back over the past three years of financial figures and see if the forecasts and original budgets were actually achieved. If you’ve constantly missed or changed forecasts and budgets then it’s a good indication that your CFO doesn’t have a good understanding of what will happen in the future.

A cash flow problem is the biggest indicator that an organisation might be facing some financial challenges. Ask your CFO for a rolling cashflow statement for the next 12 months. It may surprise you to find out just how few CFOs can actually produce a rolling cashflow. In a crisis this is critical. If you don't know what your cash situation is going to be you actually can't trade.

Many boards may be reluctant or nervous to change CFOs in the middle of a crisis, but nothing is more important during a crisis then to have a CFO who has a firm grip on your financials, cash flow and can deal with the banks.

Dealing with the banks is important during a crisis because you will need to be upfront and help them understand the situation. Banks want to work with your company - it's not in their interest to see a company go into insolvency. But, at the same time, they need to make sure that they are dealing with someone they trust and who is giving them realistic expectations and forecasts. That’s why financial know-how from within the organisation is key, particularly in a crisis.

The best CFOs I’ve seen are hardened and battle-worn. This makes them slightly cynical, which is exactly what the business needs during a crisis. You need someone who has been there and done that so they can keep calm in the challenging times.

How you respond in the first 48 hours after a crisis hits is critical. If you do those six things you will be in the better position to enable your company to weather the storm.

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