Critical Questions Boards Should Ask Now

The aftermath of the collapse of major financial institutions and the worldwide economic recession have left boards feeling uneasy about risk and liquidity. Moreover, many are wondering about the capabilities of their executive teams to rise to the current challenges.

To gather insight about what boards of directors should be doing now, I spoke to Lowell Robinson, a former senior financial executive at Citigroup (C), Kraft (KFT), and Advo who currently chairs the audit committees of Jones Apparel Group (JNY) and International Wire Group. For the past two and a half years, Lowell has served as the chief financial officer and chief operating officer of MIVA, a public online direct marketing company. (He recently sold off 70% of MIVA to a private company.) He also serves on the board of the University of Wisconsin Business School, where he spearheads their highly acclaimed Directors Summit. Edited excerpts of our conversation follow:

Lowell, how can board members get their arms around the issue of how effectively the company is being managed amid the challenges of this economic downturn? Boards have a fiduciary responsibility to shareholders to be on top of the current issues the company and their respective industry is facing. In this environment, boards can't be sitting back and waiting for information to come to them, assuming that four to six meetings a year are sufficient to get the updates they need to govern effectively. They must be proactive and probe deeper than they might have done before, so that they understand the challenges the company faces and the risk profiles under different scenarios.

This may require board members to do more homework on their own about what is going on in the industry, how competitors are faring, etc. If board members believe that they need more or different information than what they typically receive from the company to keep abreast of what's going on in this rapidly changing environment, they should tell the CEO what they'd like to receive. At a minimum, the CEO should be providing monthly updates to the board, which can be done in writing, in person, or on a teleconference, to keep the board current regarding the state of the business, the financials (which includes P&L and balance sheet/liquidity), and the outlook for the foreseeable future.

What are the questions boards should be asking of management and of themselves now? The first is, "What is our cash flow and liquidity profile under current and a more severe economic downturn?"

No. 2: "What is our strategy and action plan should things get significantly worse? What is our risk profile, and are we taking on risks outside of our primary business?"

And last: "Do we have the appropriate executive leadership team (and board) to manage under a severe recessionary environment, and directly related to that, is their compensation linked to performance?"

How can board members satisfy themselves that the cash flow and liquidity concerns are understood and addressed? The key is stress testing the assumptions by evaluating different scenarios and determining what the cash and liquidity positions will be under them. To the extent this type of analysis reveals that you are somewhat on the edge, you may need to encourage management to take more costs out now [instead of] waiting. Waiting to renegotiate loans and covenants until the point that you actually need them can be a costly error. Terms will be more stringent and financing more costly.

What do you mean by the "appropriate" leadership team and board for these challenging times? Very frankly, it's easy to be a winner when times are good. But when things change as radically as they have since last September, boards and management must be able to adapt quickly.

The current economic environment is very severe and will get worse before it gets better. Companies in virtually every sector are being compelled to downsize and restructure in order to survive. Selling divisions and terminating people are tough decisions, but in some cases, they're necessary realities. Many of the people affected have worked with the CEO and become close friends. The key issue is will the CEO be able to bite the bullet and do what is necessary for the company to survive and prosper? Some may, and some may not.

Boards face similar challenges. All board members must step up to the plate and work with management to steer the company through uncharted waters. But in some cases, board members may not have had to deal with complex issues like these. Turning on a dime and making tough decisions may be alien and uncomfortable for some of them, too. The board may find it useful to bring on new board members who have restructuring and turnaround experience who can assist in navigating through the storm.

It may be difficult to consider adding new directors if it means asking a current director to resign. But in this economy, you truly need the best team on the field both in the boardroom and in the executive suite—and the best boards will step up to these tough issues. Shareholders deserve nothing less.

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