post-title How Boards Can Plan for the Disasters That No One Wants to Think About

How Boards Can Plan for the Disasters That No One Wants to Think About

How Boards Can Plan for the Disasters That No One Wants to Think About
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Executive Summary

While some have described the Covid-19 pandemic as a black swan event, in reality it should be treated as a “black elephant” — a cross between a black swan event and the elephant in the room. From climate change to cybersecurity, there are plenty of other visible, looming black elephant events that companies should be preparing for. Successful companies need to build in resilience to prepare for these events around three areas — governance, leadership development, and compensation — where boards should play a special role in preparation for future threats.

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It’s tempting to call the Covid-19 pandemic a black swan — an event so unexpected and devastating that companies could not have prepared for it. But experts have been predicting global pandemics for years, and in January 2020, the World Economic Forum’s Global Risks Report cited infectious diseases as a potential threat. Yet very few companies included a global pandemic in their highest risk categories.

We argue the pandemic is better seen as a “black elephant” — a term derived from a cross between a black swan and the “elephant in the room.” Coined by the investor and environmentalist Adam Sweidan, it describes a looming disaster that’s clearly visible, yet no one wants to address it.

The 2008 financial crisis may have been the first such black elephant, but we’re likely to suffer more, such as cyberattacks, breakdowns in algorithmic-driven security trading, and weather disasters due to climate change. In the past, companies could dismiss these threats as local or regional problems. But markets and businesses are now so deeply interconnected across the globe that disruptions in one place can spread rapidly and deeply.

Further Reading

Boards have a special responsibility for building the necessary resilience in this environment. They have a fiduciary responsibility to ensure the business is sustainable. But in the past, the short-term focus of capital markets often pushed directors away from resilience. Any airline that tried to build up a substantial cash reserve in the 2010s, for example, would have been pummeled by investors demanding dividends or stock buybacks. Many airlines did eventually invest in long-term customer and supplier connections, but we now know they needed a bigger frame for resilience.

As former Gen. Stanley McChrystal has pointed out, the economy in recent decades aggressively pursued the efficient use of assets. Through debt leveraging, extreme outsourcing, and attenuated supply chains, companies became vulnerable to disruption in far-flung places. Yet investors sought returns ever more strongly, discouraging executives who might have wanted to play it safe.

A new strategy is needed. The companies that thrive in the future will have built resilience into their systems, and they’ll have a ready playbook for getting through black elephants. This article offers board-level guidance for getting there, through governance, leadership development, and compensation programs.

Resilience through Governance

Boards have a variety of means for promoting resilience and monitoring potential black elephant events. They can encourage stress tests in comprehensive risk reviews. They can press management on the worst-case scenarios for each black elephant, including when the threat becomes existential for the company. They can then suggest “war games” to develop principles for effective responses — with lessons brought back to the board for assessment and discussion.

Operationally, they can encourage management to fortify the company’s defenses, both physical (for example, against flooding and hurricanes) and digital. The pandemic has served as an unfortunate trial by fire for many kinds of defenses. Boards can encourage resilience in supply chains with reshoring or repositioning, simplification, and redundancies. They can also promote technological solutions to minimize disruption, from automation and 3D printers to flexible IT systems. They can expand the options for remote work, supported by robust, secure videoconferencing and other technologies. As business needs change, they can also encourage apprenticeship or retraining programs for employees.

Resilience Through Leadership Development

Conversations and exercises around black elephant events can happen only when the right leadership is in place. Developing leaders with the organizational and business acumen to think creatively and proactively about the future should be among the board’s highest priorities. As management brings talent planning discussions to the board, directors should whether there are agile leaders in the pipeline who will respond to threats promptly and decisively.  They should look for leaders who:

  1. Operate from a set of clear values, making tradeoffs that build commitment and goodwill for the long term. These are inclusive leaders who act and communicate transparently — sharing the principles by which decisions are made, never seeking to blame, and telling bad news as well as the good.
  2. Have a holistic view of the company that extends well beyond their functional silos.
  3. Pull the organization together around a North Star purpose, promoting collaboration across the organization, and empowering local decision-making to respond to unique local customers, suppliers, and circumstances.
  4. Act decisively when speed counts, while learning from suboptimal decisions and pivoting as necessary.
  5. Are intellectually curious, noticing the small things that make a difference and seeing new possibilities when the old ways no longer work. They don’t rest on their laurels, as they know the world will keep changing.

Boards can use the succession planning process to get clear on who these leaders are and ensure they hone their skills. For example, they could deploy them on multidisciplinary initiatives to explore growth possibilities.

Resilience Through Compensation

Boards can also contribute by redesigning compensation programs to make them responsive to disruption. The challenge is two-fold. First, boards must explain to investors that the firm’s sustainability depends on investments for resilience. Without support from investors, boards will get nowhere.

As they build this support, boards can design incentives to boost resilience while maintaining accountability.  Companies still need executives focused on maximizing value, and resilience should not be an excuse for losing sight of profitable growth over the long term.

Some of that resilience will come from better balancing the needs of all stakeholders. Companies will still want executive incentives to align with shareholders, but also capture the needs of other stakeholders. This balancing will help ensure, as was the case with the current pandemic, that corporate leaders consider their local communities (through providing needed goods and services), ensure that suppliers starved for cash do not go out of business, and share the pain with front line employees.

This expanded focus on stakeholders translates into measures that can be hard to quantify. It likely means increased weighting on long-term incentives, perhaps extending beyond the standard three-year programs. Boards could add a scorecard that evaluates contributions to stakeholders and modifies incentives based on strategic and financial outcomes. A food and beverage company, for example, might measure progress on sustainable sourcing, responsible packaging, and diversity and inclusion initiatives. Larger ownership requirements for executive stock ownership could overlay these solutions.

If a black elephant event overwhelms these compensation plans, companies will need to use after-the-fact judgment and discretion. Directors can work now to devise rules to govern those adjustments. These rules can follow from the war gaming, but here are some principles to ensure fairness:

  • Make adjustments symmetrical — if boards adjust awards upwards for unexpected factors that hurt results, then they should also adjust downwards for factors that boost results.
  • Maintain pay/performance relationships to the extent possible.
  • Ensure full transparency, both internally and externally, through clear communication with stakeholders, especially investors and executives.
  • Consider how the actions taken will provide precedents or affect the company long after the black elephant event.

Resilience takes years to build up, so boards should prepare for a long-term program rather than a big quick initiative.  For now, directors are busy dealing with the current crisis. But in time, they can use the pandemic as a springboard to making their company ready for the next black elephant.

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About Juan Rodulfo

Defined by Nature: Planet Earth Habitant, Human, Son of Eladio Rodulfo & Briceida Moya, Brother of Gabriela, Gustavo & Katiuska, Father of Gabriel & Sofia; Defined by the Society: Venezuelan Citizen (Human Rights Limited by default), Friend of many, Enemy of few, Neighbor, Student/Teacher/Student, Worker/Supervisor/Manager/Leader/Worker, Husband of Katty/ Ex-Husband of K/Husband of Yohana; Defined by the US Immigration System: Legal Alien; Defined by the Gig Economy: Independent Contractor Form 1099; Studies in classroom: Master Degree in Human Resources Management, English, Chinese Mandarin; Studies at the real world: Human Behavior; Studies at home: Webmaster SEO, Graphic Web Apps Design, Internet & Social Media Marketing, Video Production, You Tube Branding, Trading, Import-Exports, Affiliate Marketing, Cooking, Laundry, Home Cleaning; Work experience: Public-Private-Entrepreneur Sectors; Other Definitions: Bitcoin Evangelist, Human Rights Peace and Love Advocate. Author of: Why Maslow: How to use his theory to stay in Power Forever (EN/SP); Asylum Seekers (EN/SP); Manual for Gorillas: 9 Rules to be the “Fer-pect” Dictator (EN/SP); Why you must Play the Lottery (EN/SP); Para Español Oprima #2: Speaking Spanish in Times of Xenophobia (EN/SP). Social Media profiles: Twitter/FB/Instagram/VK/Linkedin/Sina Weibo: @rodulfox
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