The Board’s Role in Corporate Crises

Printer version  PDF

By Mark B. Nadler

If you were to search through the existing library of standard “bibles” on crisis management, you’d be hard pressed to find any serious discussion of the board’s role. At best, there’s some obligatory reference to the board on the list of stakeholders that the CEO should touch base with during a lull in the real action.

Indeed, conventional thinking on crisis management closely mirrors the traditional views of the CEO and the board. There’s an implicit assumption that crisis management is all about the CEO donning a Superman cape and single-handedly defending the corporation. That view was always simplistic; in today’s world, it’s irrelevant. Fortunately, empowered boards and smart CEOs are coming to realize that boards have an important role to play, not just when a crisis erupts but during the preparation and recovery stages as well (see exhibit 1).

Exhibit 1

To begin with, the board can add real value in the emerging area of enterprise risk management, the essential first steps toward identifying the potential sources of crises and taking action to either prevent them or mitigate their consequences. “The upsurge in compliance reminded us of our risk management responsibilities – that is, how are we doing managing risk from all sources,” explained a member of the NACD Blue Ribbon Commission on Board Leadership.^*

Part of the board’s fiduciary role is to ensure that management has developed and implemented processes for identifying potential risks, flagging and addressing problems before they reach crisis proportions, and managing unavoidable crises once they occur. The board also bears responsibility for developing its own crisis management procedures. And together, the CEO and the board share responsibility for fostering a constructive working relationship.

First, it’s crucial for the board and management to develop a shared understanding of the appropriate scope and intensity of the board’s involvement.

The CEO has primary responsibility for enterprise risk management, a comprehensive process for identifying and addressing the full range of seriously disruptive events that could threaten the institution. But the board has an important oversight role – making sure the process is fully developed and regularly updated.

Boards can contribute real value by prodding management to stretch its thinking about the potential sources of corporate crisis. “Risk management today has gone way beyond ‘the CEO may have a heart attack,’” said one commission member. “It requires that we look on an ongoing basis at our exposure on a number of fronts, such as human resources, products, operating parameters, reputational risk, environmental risk, and so on.”

Risk management, much like CEO evaluation, succession planning, and strategy development, is an area where “appropriate engagement” by the board translates into “real work” rather than perfunctory approval.

Some crises are preventable, some aren’t. Many are of a company’s own making, resulting from sins of commission or omission. In those cases, the board certainly has a role to play in crisis prevention and has clear accountability for failing to faithfully execute its fiduciary duties. A good many crises are “slow boils,” developing gradually, over time, with plenty of opportunities for an alert board to step in and take corrective action.

“Apart from something like the Tylenol scandal,” said a commission member, “most crises don’t start as crises, they start as problems. A problem that isn’t dealt with immediately can become a crisis. It’s like that saying, ‘Problems are like ice cream cones – if you don’t lick them, they can become a real mess.’” But sometimes the ice cream doesn’t melt; it just falls out of the cone without any warning.

We tend to view crises in four categories (see exhibit 2):

• Gradual emergence, external origin: These might involve economic downturns, the emergence of competitive threats such as breakthrough technologies, new go-to-market strategies, alliances of major competitors, or regulatory changes that limit business practices or expand competition.
  
  
• Gradual emergence, internal origin: Examples range from strategic mistakes (such as a poorly conceived merger) to failed product launches, the loss of key talent to competitors, and employee discrimination suits. We also put many CEO succession crises into this category, since the absence of strong internal candidates usually results from years of inattention.
  
  
• Abrupt emergence, external origin: Some of the most obvious examples are natural disasters, terrorist attacks,
  
  
and product tampering.
• Abrupt emergence, internal origin: This can include the sudden death or resignation of one or more key executives, failure of critical technology, production, or delivery systems, or workplace violence.
  
  

These categories provide CEOs and boards with a simple framework for understanding and preparing for vastly different categories of crises. For instance, in the case of a gradually emerging crisis, a robust risk management process would send up red flags in plenty of time for the company either to avoid the problem entirely or to take corrective action before it develops into a full-blown crisis. The abrupt crises are more problematic; no one can predict a terrorist attack, or for that matter, an earthquake, plane crash, shooting spree by a disgruntled employee, or a CEO’s sudden decision to quit and go to work for a competitor. But sound planning can help the company mitigate the consequences and speed the recovery. The board has an obligation to ensure that management regularly reviews, updates, and practices all aspects of crisis planning, everything from risk assessment to departmental calling trees.

One of the board’s unique responsibilities is putting together its own crisis management plan, which begins with an understanding of the different roles the board might be called on to play depending on management’s role in the crisis. The board faces a particularly complex situation – and has an especially critical role to play – when the CEO is the source of the crisis. That requires detailed planning about the specific role of board leaders and individual directors, and frequently updated lists of outside resources the board can call on for independent guidance on legal, financial, or public relations issues. It requires a clear understanding of who is authorized to speak publicly on the board’s behalf, and under what circumstances.

The board needs to be absolutely clear about how it will be organized during a crisis, which members have particular expertise that might be of use, and who will take the lead in dealing with management.

The final aspect of crisis preparation has less to do with creating plans and more to do with building relationships. Unless the CEO and board have built a solid working relationship based on trust and open communications, they’ll quickly find that it’s impossible to suddenly create that relationship in a crisis atmosphere.

During most crises, the board has an important but clearly secondary role to play; the CEO is the chief crisis manager and communicator, and the board operates in the background to provide oversight, advice, and support.

But when the CEO is the cause of the crisis, the board assumes the full burden of safeguarding the interests of the institution and its shareholders. More than at any other time, said one commission member, “that’s when you need an independent board member to take a leadership role in addressing the situation.”

That situation can arise for a host of reasons. The most obvious is the CEO’s death or sudden departure for health reasons; in 2004, McDonald’s had the misfortune to experience both. The CEO might resign without any warning or be forced out.

But things aren’t always so clear cut, and sometimes the board’s first duty is to determine whether the crisis creates a real or potential conflict between management’s interests and the company’s. For example, a hostile takeover bid could cost top executives their jobs but still be in the best interests of shareholders. In such situations, only the board can exercise the leadership so essential to maintaining the stability of the company and retaining the confidence of employees, customers, and the financial markets. It’s hard to imagine any other situation in which the board plays such an essential role.

Every board should have a detailed plan for dealing with the sudden and unexpected loss of the CEO. Once emergency succession plans for the CEO and other top officers have been developed and agreed on by the board and the CEO, they should be reviewed and updated at least once a year.

Most corporate crises are not about the CEO, allowing the chief executive to shoulder the primary responsibility for leading the institution, marshaling the company’s internal resources, maintaining continuity and morale, and communicating both inside and outside the company. The board, however, still has an obligation to stay involved in a number of ways: approving key decisions; providing the CEO with a confidential sounding board; giving informed advice based on directors’ previous crisis experience or special expertise; and demonstrating confidence in the CEO and support for management’s efforts to navigate the crisis.

Of course, once a crisis hits, nothing is neat and clean. The path to successful crisis management inevitably involves trade-offs. It requires a good-faith effort on the part of both management and the board, balancing sometimes conflicting needs for speed and decisiveness as well as collaboration and consensus. Additionally, the need for communication between the CEO and the board is most intense just when the time available is most limited. It generally makes sense for the board to designate a small number of directors to be the primary touch point with the CEO. Or there might be a mechanism in place for leaders to quickly create a special crisis group within the board. These aren’t issues the board should be thinking about for the first time in the chaotic hours after a crisis has erupted.

Constant communication between the CEO and the board serves several purposes. At the most basic level, the CEO has to keep the board informed as events unfold. Beyond that, the CEO should be discussing with the board the alternative courses of action. Effective communication also gives the CEO the benefit of the board’s collective experience with crises at other companies.

One of the timeworn clichés of crisis management is that the Chinese word for “crisis” incorporates two characters – one meaning “threats,” the other “opportunities.” However, while a window of opportunity for learning and change does open briefly in the wake of a crisis, it usually slams shut before the important lessons have been learned and the most essential changes have been made. So, before the crisis fades into the hazy mists of corporate memory, the board has one final role to play: working with the CEO to ensure that the lessons have been learned, and most importantly, translated into action.

The opportunity for collective introspection and improvement is surprisingly brief because there is an inevitable organizational imperative to regain normalcy, calm, and control. It takes a powerful countervailing force – like the board – to withstand the organization’s powerful drive to regain equilibrium at any cost. This is a time when the board can demonstrate its independence, leadership, and value to the organization by insisting that management stop and learn the most important lessons from its brush with disaster.

In the final analysis, thorough risk assessment and a wellthought- out crisis management plan are essential but not enough to ensure the board will play its proper role. The final ingredient is board composition and leadership – the right mix of skills, experience, and availability. In its periodic self-assessments, the board should always be looking at its composition through the prism of crisis planning and asking whether it has the right people in the right roles. Two primary considerations are:

• Availability: When a board becomes embroiled in a major crisis, at least some directors will have to drop everything to wade knee-deep into crisis management. That might mean limiting the number of active CEOs who will find it difficult to ignore their “day jobs” or placing restrictions on the number of board memberships a director can have.
  
  
• Leadership: Ideally, the people who lead the board during a crisis should collectively possess a range of leadership styles and skills. They also need to have experience dealing with crises, and exhibit psychological independence, which will allow them to form an independent view of a situation and not just rely on management. Finally, they need to have experience in senior corporate management.
  
  

From one perspective, nearly all of the board’s “normal” duties involving the oversight of the company’s financial performance and the CEO’s personal performance have the underlying intent of helping the organization avoid a wide range of preventable crises. So many of the corporate scandals of recent years came to pass because boards were “asleep at the switch.” In some cases, they simply failed to make the time or effort to understand the financials, business models, and strategies that should have raised red flags and caused them to ask management some serious questions.

Nevertheless, the board has a number of very specific roles to play in the areas of risk assessment, crisis planning, and organizational recovery. When it comes to crises, the quality of the board’s involvement can literally make the difference between the organization’s ultimate failure or success.

^* In 2004, Mercer Delta was an active participant in the 2004 National Association of Corporate Directors Blue Ribbon Commission on Board Leadership. For the project, about 50 directors, CEOs, chairmen, academics, and corporate governance experts were interviewed; their comments are used throughout this article.

Mark Nadler is the executive editor of Mercer Delta Consulting. Mark Nadler, David Nadler and Beverly Behan are the editors of Building Better Boards: A Blueprint for Effective Governance (Jossey-Bass, 2006). This article is adapted from the book.