Alberto lavín presentation: Boards Under Crisis

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Book presentation

Alberto Lavín

Rotary Spain

Hotel Fénix

Madrid, November 6th 2014

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Why this book?

n  Boards are formally the key decision making bodies within organizations; therefore, increasing our learning on how (focus and processes) they decide during crisis is crucial

n  The objective is not only to understand this issue (Boardroom decision making in crisis) for Spanish (or European) firms, but to extract some further conclusions potentially useful in other settings or circumstances (e.g. other countries or expansion periods)

n  If we are able to better understand how decision making under crisis works, then some practical applications could be outlined (i.e. potential courses of action to increase quality of decision making processes during crisis)

Alberto Lavin & Carmelo Mazza

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Summary of findings


Parochial or individual interests put quality and timeliness of decision at increased risk during

crisis

More intense short-termism at the Board during crisis

Crisis is fact, but also perception and social construction

There is more centralization and control at the Board during crisis

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Summary of findings



crisis




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Crisis is fact, but it is also social enactment (perception) at the

Boardroom; this may have made decision less precise or

timely

Easier before: smoother debate, less politics, less conflicts of interest, etc.

More difficult to agree on diagnosis during crisis and then to act upon this

understanding

Nature of crisis perceived now as not being easily reversible to

“normality” (previous expansive period): Crisis or a new normality with

increased uncertainty and/or a different attitude towards risk?

Summary of findings (I): Crisis is fact but also “social construction”…


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Summary of findings



crisis




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Summary of findings (II): There is more centralization and control at the Board during crisis

n  More centralized information processing from the Board

ü  CEOs or Chairmen drilling down in issues they would not during expansion

ü  More internal information demanded (e.g. management information)

ü  More external ad hoc information (e.g. external analysts, consultants, auditors, banks, lawyers)

n  Boards “invading” or “overlapping” with executive labor à More constriction in control and centralized decision making

ü  Formalization of decision process is increased (i.e. reduced leeway for decision makers): formalized voting and recording of decisions, formalizing role of Secretaries, etc.

ü  Ad hoc centralization (e.g. via changing or adapting the organizational structure)

ü  CEO sources of power (dominance) become more important under crisis


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Summary of findings (II): The root cause for increased centralization is an augmented risk aversion (at the individual and group levels)

n  Risk aversion at the top increases at the individual and group levels

ü  Logical reaction to deep crisis

ü  Other reasons to increased risk aversion

ü  Reputational risks due to increased perceived risk of legal liabilities for Directors)

ü  Lack of trust in people (e.g. Board in the executive team) promotes intervention/control loops

n  Other sources of institutional pressure (e.g. increased influence of CG standards and codes) may also reduce discretion for Directors and increase risk of “deviance”


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Summary of findings (II): This centralizing behavior of the BoD has potentially negative implications

n  Legitimating effect of external help may create extra-cost: More (than usual) use of consultants, external advisors or auditing services, etc.

n  Other direct costs may not be explicit, but significant (e.g. Board and/or senior management time and organizational motivation, particularly in the executive team)

n  Other probable (and negative) outcomes of this behavior, e.g. bottle-neck in decision, exit rate or burnout for executives


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Summary of findings



crisis




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n  Self interest and parochialism seem higher during crisis; so balancing acts are more complex

ü  Every actor moves to pursue their interests (compensation, role, investment protection, etc.) and this self interest is probably stronger than during expansion times (due to increased uncertainty and risk)

ü  Implications of other external factors (e.g. regulation) may be bigger (or closer) during crisis for Directors (e.g. legal penalties)

n  Directors avoid confrontation if they can (e.g. except if decision may seriously harm their prestige) so not all valuable perspectives may be (timely) elicited

ü  Rationales for action are the effect of locally enacted social constraints (logic of appropriateness)

ü  To allow effective problem solving, this logic of appropriateness should be context specific (e.g. aligned to crisis)

Summary of findings (III): Balance of parochial or individual interests and Board goals (e.g. company interest and group cohesion) at risk (e.g. tension)


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Summary of findings (III): Parochial interests, more complex and tense debate turn the process of decision longer and drive less or untimely action

Analysis (e.g. identification of cost

and value levers)

Action: typically short term action

followed by diversification (e.g. in

activity, in geo or both)

Analysis (e.g. identification of cost and value levers)

Action: typically short term action and diversification (e.g. in

activity, in geo or both) is postponed

During this crisis

In other crises

1 2

1 2


Illustration

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Summary of findings (III): Decisions are slower or mistakes more probable (e.g. when executives press hard not to postpone decisions)

n  When the decision making process is not postponed, there is a higher risk of mistakes (more decision work to do in less or the same time, so less thinking -or overload- and larger risk of mistakes)

n  These factors are also creating more tension or checkout (and indirectly impacting decision making cost or quality): More pressure, more difficult decisions and more workload (in the same or less time)

n  There are other outcomes of this process: there are more “no” answers (e.g. a higher proportion of executive proposals are rejected) and less unanimity à Implementation ability?


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Summary of findings



crisis




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n  Many external pressures towards short-term are similar to those pre-crisis

ü  The stock market and stockholders are significant pressures for listed companies (month, quarter, year)

ü  Rating agencies and analysts

ü  Proxy advisors, growingly important

ü  Media

n  Internal forces towards short-term were also important before crisis

ü  Executive compensation, for example, is often short term centered and this may condition behavior (e.g. influencing CEO focus)

ü  The attitude of block-holders or majority owners towards risk

Summary of findings (IV): There were already reasons for short-termism before crisis


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Summary of findings (IV): This short-termism at the Board (e.g. larger accent on tactical decisions) is strengthened during crisis

n  Main focus at the Board level during crisis is on the short term, even more than pre-crisis (e.g. volume of corporate activity plummeted)

ü  Cost cutting (SGA, headcount, etc.) is the preferred tactical lever to face crisis

ü  Protection of cash position (e.g. reducing working capital requirements and cash investment) is also frequent

ü  Selective divestiture is one the vehicles used to reduce capital needs (i.e. access to funds is tougher)

n  At times, it is not only about selective divestiture, but about selling the “family jewels”: short-term oriented action with significant long term implications


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n  Sometimes it is about organizational survival and then options are limited, but time and energy restrictions (bounded rationality) and causal ambiguity play a key role in this short-term focus

ü  Deciding (and implementing) tactical issues is often faster and more predictable: cost cutting, protecting cash, etc.

ü  Available energy (e.g. time constraints) is, by definition, limited (particularly now, because under crisis a larger amount of decision workload is expectable)

Summary of findings (IV): The main reason for this short-termism is bounded rationality


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Summary of findings (IV): This short-termism results in crucial opportunity costs like adjourning growth or M&A decisions

n  Strategic dec is ions are of ten postponed due to funding or organizational issues, even if this should be considered on an industry or company basis

ü  Corporate and M&A activity falls down

ü  New markets are not looked for or geo expansion is slowed down

ü  Diversification (products or markets) often appears as a second move after cost control -even if this move is delayed under very intense crisis conditions-

n  Increased strategic risks

ü  Loss of long term results or reduced competitive advantage through bad timeliness

ü  Increased Boardroom conflict? (e.g. some Board members awareness that focusing on the short-term is not enough and may be risky)


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So what could we do now?



crisis




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There are things we learnt for future crises (blue) and things that could still be implemented (red)

Early assessment of crisis and timely reaction

Other measures to increase Board effectiveness during crisis

(institutional)

Develop internal Board routines and procedures (also during crisis)


Balancing composition of teams with crisis challenges

Helping change the role of the Chairman/CEO during crisis

Maintaining (or improving) strategy process during crisis

Economy & Finance

Alberto lavín presentation: Boards Under Crisis