What Are The Key Topics Chairmen And NEDs Should Be Discussing Now?

fdu’s guest blogger, David Tilston is a Chartered Accountant, a Fellow of The Association of Corporate Treasurers and a member of The Institute for Turnaround. He has held CFO roles in both listed PLC and PE-backed companies and has significant experience of managing turnaround situations.

Executive teams are under pressure to deal with short term trading challenges and preserving liquidity. Chairmen and NEDs have more time available to take longer term views. There has been a wealth of useful advice posted recently into the public domain. I attempt to summarise below some of the key topics Chairmen and NEDs may want to consider.

Economic Forecasts may not be helpful

There are a wide range of economic forecasts available (for example from Deloitte and EY). They are all quite reasonably qualified as to the extreme scale of the short-term economic decline (worse than the Global Financial Crisis) and the timing and speed of recovery. A severe recession is anticipated along with increased unemployment. Significant industrial restructuring is anticipated and many businesses will not survive.

These forecasts will undoubtedly change as the effectiveness of Government responses unfolds as the trajectory of COVID-19 infection across many countries develops. Management teams will have no choice but to be very agile and reactive to events for the foreseeable future.

Where are you on the resilience/recovery path?

Different advisors have been articulating their own recommendations on how to respond and recover when economic conditions moderate. KPMG talk about Reaction, Resilience, Recovery and New Reality whereas EY talk about Restart and Adapt, Resilient Recovery. Others articulate different responses. They all however include themes of short term crisis management, stabilisation during a period of uncertain outlook, and preparing for next steps and an eventual recovery. This is complicated by trying to understand how their market landscape may have changed when their company eventually emerges from the economic downturn (assuming their company is capable of doing so). Boards need to understand where they are on their recovery path, and whether they have at least managed to stabilise their position.

What scenarios should you be considering?

There are two types of scenario that companies might wish to consider.

The first is based around the expected scale and timing of any general economic recovery (ie is it going to be V-shaped, U-shaped or some gradual rebound). As noted above economists are hedging their bets.

The second relates to relevant scenarios based around the company’s main activities and business drivers. Will customer interactions return to their previous state or has business materially migrated to digital channels? Is there a fundamental change in the market, for example a substantial reduction in employees based in offices, which will drive a completely new business model requirement? Do you think that Brexit/international trade restrictions will create hurdles which alter the economics of competing with existing or emerging competitors? Each business will face its own potentially existential challenges and it is worthwhile establishing now the scenarios to be modelled and tracked.

“Is there a fundamental change in the market…..?”

A sliding scale of options

The Quoted Companies Alliance recently produced research into NEDs recently and the area of long term vision and planning was highlighted as an area where they could contribute most value.

I summarise below a possible sliding scale of situational assessments and some implications that might be considered by directors (and there are many more situations and options that I have omitted):

“The area of long-term vision and planning was … where [NEDs] could contribute most value.”

  1. The company has been irreparably damaged and has no realistic prospect of trading solvently – probably best to close asap and not risk unlawful trading liabilities.
  2. The company has some prospects, but insufficient to lure in additional equity – maybe look for professional turnaround help to restructure the business, to merge with a complementary business or raise further debt (providing there is confidence it can be paid back in the future).
  3. The business has prospects and is trading on a cash neutral basis so it should survive – assess how its “business as usual” success can be enhanced in the future (with investment in digital skills, further restructuring of cost base, additional investment to support organic growth, developing new business models, M&A) and consider whether further equity funding is necessary and can be raised to support future value creation.
  4. The business is prospering and is already leveraging new opportunities that have presented themselves – assess how progress can be rapidly accelerated to open the gap with existing and potentially new competitors (again with investment in digital skills, M&A etc).

Understanding where the business is along this sliding scale, and the sorts of options that might be considered, is important. It will help the executive management team in establishing a more forward looking perspective at a point in time when they may still be overwhelmed with short term operating priorities.

“Assess how progress can be rapidly accelerated to open the gap with existing and potentially new competitors.”

Clearly having significant cash resources to ensure survival, protect value and increase strategic options is a major factor at present and is one reason why we have seen many public equity issues in recent times as companies bolster their financial position.

The next pandemic – Climate Change and Biodiversity Loss?

The World Economic Forum published “The Global Risks Report 2020” earlier this year. Their Global Risks Landscape 2020 chart contained therein listed “Infectious Diseases” as a major risk.

Climate Action Failure, Biodiversity Loss and Extreme Weather Events were all listed as having both significantly greater impact and significantly higher likelihood of occurring.

As someone said to me recently “Climate Change does not have a vaccine”.

Separately there has been ongoing coverage suggesting that the Earth is on the verge of its sixth mass extinction which highlights the importance of preserving biodiversity.

There is huge pressure for climate change and biodiversity loss matters to be raised up the Board agenda. At a recent webinar the law firm CMS noted that there has been a significant increase in litigation and that as at January 2020 some 1,444 climate change cases had been filed in 33 countries. The Task Force on Climate Related Disclosures has issued guidelines which will shortly be mandatory for listed PLCs. Chapter Zero provides a good knowledge hub for Chairmen and NEDs wishing to know more about climate change issues.

“Climate change does not have a vaccine.”

Many commentators (including over 200 top UK firms and investors) have already called for the recovery from the current recession to be managed in a way which is consistent with protecting against climate change and biodiversity loss. Whilst this may represent a major risk, for many companies it may also represent an opportunity to develop their products and services to meet emerging environment-friendly demand. Consequently, this may add a further scenario to those noted above, the strategic implications of which will continue to emerge.

In conclusion

Chairmen and NEDs need to ensure that the longer-term potential of their companies does not get overlooked in the focus to manage shorter term priorities. This will require Board’s to have an assessment as to

  1. the status of their current strategy and
  2. the potential scenarios they should consider.

From this they can assess the options available and decide, given current economic uncertainties, on whether they

  1. pragmatically follow their existing strategy, or
  2. amend their strategy given changed circumstances, and
  3. need any further flexibility on implementation to keep other options open.