Magazine article New Zealand Management

When Boards Go Bad: Chapter Two-Keeping Your Head in a Crisis: Despite the Talent and Experience You Would Expect in Members of Any Board, Their Reactions to a Crisis Are Too Often as Stupid or Heroic as Those of Any Other Person or Group of People. This Second Article in the Series Takes a Look at What Typically Happens When Boards Face a Crisis, as a Lesson in How to Act Differently

Magazine article New Zealand Management

When Boards Go Bad: Chapter Two-Keeping Your Head in a Crisis: Despite the Talent and Experience You Would Expect in Members of Any Board, Their Reactions to a Crisis Are Too Often as Stupid or Heroic as Those of Any Other Person or Group of People. This Second Article in the Series Takes a Look at What Typically Happens When Boards Face a Crisis, as a Lesson in How to Act Differently

Article excerpt

When a crisis faces an organisation, the board s role is to protect shareholder interests by ensuring management actions are consistent with the organisation's long-term value and purpose, and by holding management to account. When a crisis is specific to a board (such as shareholder disputes or hostile takeovers), the board needs to take the action itself.

The central premise of this series is that a board can survive both types of crisis if there is excellent communication between members, management, and staff. The linchpin of communication is clarity of thought and the ability to articulate those thoughts. No board can communicate its way into and safely out of a crisis unless it is thinking clearly. In this article we examine the barriers to clear thought.

The two threats to clarity of thought for board members are: insularity, which causes denial of the crisis or its seriousness; and panic, which drives selfish or short-term decision making.

In the last article (NZ Management, October 2007) we discussed how denial had allowed a crisis to swamp companies. The denial came from a tendency in boards to be blinkered and to focus on minutiae. To help prevent this I suggested board members should be hired not for knowledge specialities but for their ability to analyse and/or to act quickly, and that there should be a wider mix of ages and experience.

Three decades of research into human reactions to physical crises has for all but the most immediate emergencies, such as an earthquake, shown the first human reaction is to seriously underestimate the magnitude of the threat (see Emergency Management: The Human Factor, Thomas E Drabek).

The more time it takes for a physical crisis to emerge, the more likely it is that people will not react in time. In fires, for example, people do not react until they feel the heat of the fire. Studies have found that even though people may have had many minutes in which to escape from a building fire, they die not far from where they were when the fire started.

The reason boards get overcome by 'the fire' of a crisis is that they find all sorts of complexities and excuses to prevent them from taking responsibility and then either demand more of management or act themselves. A regular excuse includes concern over exposure of confidential affairs or market sensitive information of the company.

One example is New Zealand meat company Fortex, which went into receivership in 1994, although its board would have known about massive financial losses for at least three years.

The board needed to suspect the worst much sooner and demand more information. This illustrates the importance of good communication lines between the board and all of management, and other important staff.

In contrast, Johnson & Johnson demonstrated the benefits of a quick reaction when packages of Tylenol, its headache remedy, were sabotaged with cyanide on store shelves. It pulled the product immediately. Public confidence in the company rebounded quickly. Shortly after, the company was able to bring Tylenol back under a new label.

In this case, the board needed to ensure management had weighed the risks to the company of withdrawal, and then unequivocally back the recommendation. …

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