By The Athena Alliance
Is your board prepared for a crisis?
Adverse events from cyber breaches to product recalls or industrial accidents can place immediate pressure on both management teams and boards to take quick and decisive action to restore confidence. But to do so, companies must be prepared to respond. Increasingly, a key to long-term success lies in the ability of management teams and boards to build a reservoir of goodwill with key stakeholders, including investors, which can be drawn upon when a crisis hits.
PJT Camberview, the corporate governance and shareholder engagement practices group of PJT Partners, is a leading provider of investor-led advice to public companies on engagement and shareholder relations, special situations including reputational crises, activism and contested situations, sustainability, and complex corporate governance matters. PJT Camberview helps its clients succeed by providing unique insight into investors’ perspectives on long-term value creation, interpreting the evolving governance landscape and creating proactive strategies to stay ahead of investor challenges. Here, they share their insights into the evolving role of boards in the high-stakes world of crisis management.
At a Glance
Every company must be prepared for a crisis situation.
Expectations have never been higher for management teams and boards to act quickly in order to restore confidence when a crisis hits.
Companies that are most successful in navigating an adverse event are those that have made an effort to build trust with all of their key stakeholders, including their investors, through engagement and responsiveness to feedback over time.
Why Preparation Matters
In the always-on news cycle, information that once would have taken days or weeks to reach the public can now be disseminated widely in mere seconds. With an immediate time-frame, companies are under more pressure than ever to respond to a crisis situation even while facts are still emerging.
According to Harvard Law School, 65%of CEOs experienced a crisis in the last three years and 73% expect a crisis within the next three years.
When an adverse event occurs, management teams and boards have traditionally played relatively defined roles. Management has been expected to have a coordinated response, inclusive of appropriate and timely updates to the board, and a strategy for communication with media, shareholders, employees, and other stakeholders. Boards have been responsible for providing oversight of the company’s response and identifying underlying issues while providing guidance to management.
However, in some recent corporate crises, directors have been called upon to take a more active and public role in companies’ responses. One key area where director participation is particularly valued in a time of crisis is shareholder engagement. Investors view directors as their representatives and often want to hear directly from the board when an adverse event occurs.
An important preparation tool that can yield dividends in a time of crisis is proactively building relationships with investors through regular engagement meetings, said Rob Zivnuska, Managing Director at PJT Camberview.
“In evaluating a company’s response to a challenging situation, shareholders will be focused on the role of independent directors both before and after a crisis. Having strong investor relationships at the board level has become an important building block of a successful corporate crisis response strategy,” said Zivnuska.
Companies should consider:
- What is the plan for engaging with investors before a crisis occurs?
- How should engagement with key stakeholders be prioritized if a crisis hits?
- What role will the board play in engagement?
- How will investor feedback be tracked and implemented into go-forward practices to demonstrate responsiveness?
Speaking in one voice when a crisis hits
In a crisis event, companies must speak in one voice to ensure that a unified message is delivered to all stakeholders. Management teams will be expected to take the lead in communicating to the public at the outset about what happened, what steps have been taken, and expectations for actions ahead. Investors will be immediately focused on a company’s risk oversight mechanisms, management accountability, and board response to the adverse event.
“Boards that have taken steps to prepare in advance and have a process in place to make sure they’re getting the right quantity, complexity, and cadence of information are in a better position to ask the right questions of management and deliver the right message to shareholders,” Allie Rutherford, Managing Director at PJT Camberview, pointed out.
Questions that investors may ask in a crisis context include whether effective mechanisms for reporting and processes were in place to mitigate risk and whether a situation could have been avoided if different risk management protocols had been operational. The board in this situation can also expect scrutiny of how oversight was being provided and whether the current directors have the appropriate skills and experience to effectively oversee such risks.
“There’s a growing expectation on the investor side, and within the broader business community, that director oversight requires looking very deeply into the organization,” said Zivnuska. “In a crisis, investors will want to understand what the board knew and what actions it took.”
Boards should consider:
- Which leaders are responsible for communication and to which stakeholders?
- What is the internal source of information and which third party sources are necessary?
- Were directors proactive in their oversight of risk identification and mitigation?
Companies are increasingly taking steps to ensure they are prepared for Day One of a crisis event.
“Boards that are best situated to respond to a crisis situation are those that have outlined what their company’s material risks are and what their response plan should be. If a crisis management situation turns out to be different than what was outlined, they’ve already run through similar response plans and have a starting point,” said Rutherford.
Many management teams and boards go through tabletop exercises with third party consultants where they play out an entire crisis response, from initial discovery to stakeholder outreach through a post-event review, so they can understand the situation from every angle and assess the strengths and weaknesses of their strategy.
“Companies face criticism when their response is not timely or when flaws in their response create more challenges or risk than the crisis itself originally presented,” said Zivnuska. “Taking time to understand who is playing what role and what pitfalls exist can help streamline decision-making for boards and management teams when a situation presents itself.”
Boards should consider:
- What are the most likely risks that a company could face and what are the playbook responses for those scenarios?
- Have the board and senior management teams practiced their roles in a mock crisis?
- How prepared is the company today to respond to the kinds of crisis identified in the company’s Annual Report as material risks?
Understanding the ‘long tail’
Companies that emerge from a crisis situation are faced with a series of shorter and longer-term risks. Annual meetings provide a natural assessment point for investors to evaluate how effective the management team and board’s response has been. These votes are the ‘long tail’ of crisis response and, depending on the perceived level of responsiveness, can take the form of ‘vote no’ campaigns against individual directors, votes against executive compensation, or shareholder proposals that target topics related (sometimes tangentially) to the crisis.
It is in this context that having investor relationships to draw upon is particularly valuable. As an annual meeting approaches, investors will be evaluating the immediate response to a crisis in the context of the company’s prior history of engagement and past actions. In addition, the concept of responsiveness to investor concerns will include not just specific changes requested by investors but also other actions taken proactively in response to the management team and board’s evaluation of its processes to enhance governance or risk oversight.
Directors who have built relationships with investors can provide perspective on how these oversight mechanisms are operating in practice while providing valuable context that can help meet shifting shareholder expectations.
“Investors are trying to assess whether a crisis situation was an isolated incident or something that’s more systemic, as well as how the board reacted once an event occurred,” said Rutherford. “Having a track record of engagement provides a reference point that can help companies achieve success at their annual meeting and beyond.”
‘Every crisis that emerges is an opportunity’
Today’s increasingly interconnected world has only enhanced the need for companies to engage with all of their stakeholders on known and emerging risks. More than ever, engagement discussions with investors encompass a range of environmental and social topics such as corporate culture, gender pay gaps, employee development, and retention and climate change.
“Investor expectations for dialogue continue to shift,” said Rutherford. “Engagement topics are expanding as investors seek to understand how companies are managing environmental and social risks and opportunities, how frequently these topics are being discussed at the board level, and the lens that directors are using as they oversee these and other issues.”
The learning should never stop.
“When major crises hit, it can cause an entire industry to re-focus on that particular risk,” said Zivnuska. “Investors will ask questions. Boards will ask questions. Every crisis that emerges is an opportunity to take stock and think through ways to prepare.”