Rotman’s David Beatty discusses the measures boards should take to ensure survival and seize long-term opportunities
The implications of the crisis and the looming economic downturn for companies’ value, reputation, or very existence, go beyond the operational level. Consequently, board members in publicly quoted, as well as venture capital or private equity backed companies and family firms, are being drawn into an active role to support their management teams—a role that in many cases will be unfamiliar to them.
Considering the role of board members during a crisis, David Beatty, Academic Director of the Centre for Corporate Governance Innovation at the Rotman School of Management, distinguishes between the policing or oversight role of the board and the board’s potential role in adding value. “Boards are generally good at policing, and they're generally terrible at value adding,” Beatty says. While many boards will now be focused on measures to ensure short-term survival, it will too often be this weakness in the ‘value add’ role that exposes a failure to provide the long-term resilience needed to weather the storm.
“Looking at the longer term—we live in a cyclical world,” says Beatty. “Last time it was the financial crisis, and the one before that was 9/11, and the one before that was the dot com bust, and so on.” Those companies that have taken a long-term view and have built up their resilience financially, when times were good, are now in a position to seize opportunities during the downturn. But the opposite is frequently the case.
Beatty quotes a mining company which has been “very busy buying back its shares, because it had a lazy balance sheet, and increasing dividends to shareholders. So, it probably gave out 80 or 90% of the upswing in the metals’ markets, and now that good assets might be available at reasonable prices, it's spending its days at the bank asking for extended credit lines. It cannot take advantage of the cyclical downturn.”
“Looking forward the plea would be to be much more conservative with your balance sheet, much less driven by the shareholder returns necklace, and much more aware of the cyclicality of various industries so you can take advantage now.” Boards need to ask themselves, “How much have we been driven by short-termism, and hammered by activists, and how much opportunity are we missing now because we have no resiliency on our balance sheet?"
Beatty’s core message is that the creation of long-term growth and sustainability can only be derived from having a strategic time horizon of five years and more. He recommends that emerging from the COVID-19 crisis, directors spend a day, as a board, re-setting their time horizon. “That way you can, as a director, influence long-term outcomes profoundly and perhaps gain significant long-term strategic advantage for your company out of this global tragedy.”
This crisis can be used to dramatically shift the strategic horizons of your company to the longer term
As a rule, family firms tend to take a longer view, thinking ahead in terms of the next five to ten years and the next generation. VC-backed companies—often start-ups part of a large portfolio—are relatively immune to short term pressure. Whereas private equity owned companies and especially publicly quoted companies, under incessant pressure to report to shareholders and fight off activist investors, can have strategic time horizons of no more than the next three months. These companies, Beatty notes, are “pinned to a Wall Street time horizon, and now, in a time of crisis, are forced to cut staff, close factories, exit entire businesses and try to preserve what precious net cash flow they have—and beg to their lenders for relief.”
The other aspect that Beatty highlights is that “Boards of public companies have never worked very well. Think about the 2008/9 financial crisis, $2 trillion worth of shareholder value written off in 15 banks. Now each of those banks had a board of 15 people. Each of those 15 would have had a stellar resumé. But collectively they failed.” There is fundamental weakness caused by the gaping chasm that often exists between the management team—100% engaged in the business—and board members who perhaps spend 8% of their time focused on the company, are typically not industry experts, and may be responsible to the boards of several companies.
“So, you have an in-built triple problem,” says Beatty. “Board members only give 8% of their time, they are amateurs rather than experts, and they are busy doing other stuff—versus a management team that's working 3500 hours a year, completely focused on the company. How do you bridge that chasm so there's true value add? It's mission impossible.”
Beatty offers this advice to boards wanting to improve their strategic potential and create enduring, differentiated competitive advantage:
“Do these three things and do them ASAP,” he says:
“This crisis can be used to dramatically shift the strategic horizons of your company to the longer term,” Beatty concludes, “and in doing so, help to shift free enterprise and publicly traded companies back to a sense of long termism.”
David R. Beatty, C.M., O.B.E. is the Academic Director of the David and Sharon Johnston Centre for Corporate Governance Innovation at the Rotman School of Management, University of Toronto.
Rotman School of Management is Canada’s leading business school and has Canada’s largest group of management faculty. It is home to some of the most innovative research institutes in the world