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In the latest installment of the Salzburg Questions for Corporate Governance, Jeffrey D. Grant provides several suggestions for how Boards should respond to existential threats and the importance of making a rapid response
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Global Corporate Governance Forum
The senior management of a company and their Boards routinely face threats to their company. These threats include changes in the regulatory environment, competition - domestic and international, supply chain stability, and technology-driven obsolescence. These types of threats are part of a company's routine risk assessment.
Usually, Boards can counter threats with responses consistent with a company's planning and investment timeline, typically annually. Existential threats, such as we have experienced with government responses to COVID-19, including extended lockdowns, closing non-essential industries, are low probability. Nevertheless, they still threaten the existence of many companies.
When companies face an existential threat, significant changes are almost always required to address the threat - a company cannot just continue to do what has worked for it in the past. As Alvin Toffler, author of Future Shock, wrote, "The first rule of survival is clear: Nothing is more dangerous than yesterday's success."
First and foremost, the Board needs to ensure that management is putting the employees' and customers' safety and well-being first. This approach will typically require the Board to meet with and review management's proposed actions to address the threat on a timeline driven by the danger - not by previously scheduled Board meetings. These steps might require restructuring the managements' goals and incentives. The management team should not be conflicted with a previously approved strategy, compensation structure, and dated business priorities while dealing with the existential threat.
I have found aligning financial incentives to desired management behavior is an essential element of Board responsibilities. In times that require transformational change, the typical annual review and refresh of both short-term (one year) and long-term (three years) management incentives are ineffective.
The Board needs to rapidly review the necessary changes to address the existential threat and update the financial incentives to unambiguously align the management team's incentives and the desired changes.
Again, citing Toffler, "It is always easier to talk about change than to make it." It is essential the Board meet often enough to ensure the agreed-to changes are implemented on a schedule to be effective.
The Board also needs to review its own membership backgrounds, skills, demographics, and committee structure and assignments to ensure the Board can effectively deal with the transformational changes required. This action may require significant updates to the Board structure and membership. We have seen recent cases where age, being tone-deaf on emerging issues, and lack of technical expertise can limit the effectiveness of the Board's abilities in driving and understanding the necessary transformation.
The Board should assess the current management team and organizational structure to ensure the management team can bring about the desired changes. After such a review, the Board may choose to direct key personnel hires (or dismissals), promotions (or demotions), and seek organizational restructuring. In addition, when the threat has been dealt with, the Board needs to review the management's performance and evaluate how the team did in dealing with the threat. This review should include measures of speed and effectiveness.
While timely Board responses to existential threats are essential, it is also critical to maintain and update a comprehensive risk assessment that assesses the likelihood of occurrence and consequences to the company. The comprehensive risk assessment needs to be reviewed by the entire Board at least once a year, and the Board needs to ensure resources are focused on those risks that present threats to the company.
Accurately predicting which risk will present itself to a company requires soothsaying skills that we shouldn't expect anyone to have. However, the process of evaluating risks and taking prudent steps to deal with them will be of great value when any existential threat to the company is realized, and rapid responses are required.
Jeffrey D. Grant was sector vice president and general manager of Space Systems at Northrop Grumman Aerospace Systems, from 2011-2018, a provider of manned and unmanned aircraft, space systems, and advanced technologies. In this role, Grant led the division, which provided space solutions for civil, military, and restricted customers. Jeffrey joined Northrop Grumman via the acquisition of TRW in December 2002. Prior to his joining TRW in February 2002, he held a variety of government and private sector positions. Most recently, he was vice president and chief technical officer for Astrolink International, LLC. Before joining the private sector, Grant served for 21 years at the United States Central Intelligence Agency (CIA) in positions at the CIA/National Reconnaissance Office, Directorate of Science and Technology, and Directorate of Intelligence, Office of Scientific Intelligence. He is the recipient of numerous awards, including the Distinguished Intelligence Medal, the Intelligence Medal of Merit, the CIA’s Engineer of the Year, the Intelligence Certificate of Distinction, and the CIA Certificate of Distinction. Grant currently serves on the board of directors for the Space Foundation. Jeffrey received a bachelor of science in ocean engineering from the Florida Institute of Technology. Jeffrey is a Fellow of Salzburg Global Seminar.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org. To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter