Corporate crises are common. In fact, about 59% of companies have been hit by a crisis at some point. Interestingly, only 54% of them have a management or response plan in place. While there’s a massive relationship between crisis management and corporate governance, many companies haven’t been able to bring the two worlds together.
A corporate crisis threatens a company’s survival or stability. So, it must be addressed with the urgency it deserves. Corporate crises emanate from different sources, from governance policy changes to corporate leadership gaps. Companies that effectively manage crises usually identify and address these sources before the crisis strikes or shows signs of doing so.
Overall, there’s an urgency to understand the impact of corporate governance on crisis management. Good governance leads to better crisis management, while poor governance is often blamed for reputation-defacing scandals and company failures.
The board drives the company’s corporate governance and is crucial in managing crises. It sets the company’s strategy and oversees senior management as it enforces its approved crisis management policies.
However, the board of directors is not the only player in the corporate governance ecosystem tasked with crisis management. The senior management, which includes the managing director, CEO, executive directors, and other senior-level management officials, also has an integral role, as do the audit and risk committees.
This guide will explain corporate governance’s impact on corporate crisis management and the roles of the key players, including the board and senior management. We’ll also examine the best crisis management strategies and other important information. Here we go!
Key Takeaway:
- A company goes into crisis when a situation threatens its ability to run efficiently or threatens its survival or reputation.
- Corporate crises emanate from various sources, including changes in governance policies, a corporate leadership gap, mass key stakeholder resignations, reputation-damaging scandals, economic/political instability, pandemics, and natural disasters.
- Crisis management involves identifying, evaluating, and responding to risks threatening the company’s survival or stability.
- Poor crisis management, often related to corporate governance failure, leads to a negative reputation, supply chain disruption, vulnerability exposures, and reduced consumer demands.
- Corporate governance contributes to effective crisis management by establishing frameworks, improving preparedness, observing ethical standards, promoting effective communication, enhancing decision-making, and coordinating response efforts.
- The board’s role in crisis management includes overseeing policy implementation, strategic planning, adopting adaptive governance models, stakeholder engagement, and succession planning.
- The management enforces board-approved crisis management efforts and offers technical assistance to the directors when a crisis hits.
- Two of the best crisis management strategies are the 3A’s (Alert-Act-Access) and the 4R’s (Recognize-Respond-Regret-Remediate).
What’s a Corporate Crisis?
A corporate crisis is a situation or risk that threatens the ability of a corporate entity to run efficiently or could cause massive losses or reputation damage. Corporate crises are unplanned and could result from various reasons, which we shall discuss next.
Companies always experience crises; the only difference between those severely hit and those not is how they handle them. Overall, good corporate crisis management depends on good frameworks, and that’s where corporate governance comes in. The two are almost inseparable.
What Causes a Corporate Crisis?
A corporate crisis is never an easy experience. It could hit at any time from different sources, and thus, there is a need to prepare for it adequately. Here are the common causes or triggers:
1. Change in governance policies
So many companies experience a crisis when an unexpected change in governance policies occurs. The staff, in particular, is often reluctant to accept new changes in how the company is run. If the corporate leadership is not careful, forceful implementation could plunge the company into a crisis.
2. Corporate leadership gap
The unexpected resignation or death of a key corporate leader, perhaps a key shareholder, company owner, or president, could toss a company into a crisis. This could happen if there’s no clear succession plan. If so, it’s a product of governance failure.
3. Mass key stakeholder resignation
Mass resignation is never good for a company’s image. It’s even worse when key stakeholders such as board members and top managers are involved. It’s equally bad when multiple investors withdraw or dissociate from the company, or suppliers cut off their partnerships. That throws the company into a crisis.
4. Reputation-damaging scandal
Giant corporate entities like Enron, Xerox, Tyco, and WorldCom are perfect examples of what a scandal can do to a company’s reputation. Again, a reputation-damaging scandal is more often than not a product of poor corporate governance.
5. Economic/political instability
Economic instability, which could result from a stock market price fluctuation, a drop in home prices, or unexpected disasters, could plunge a company into a crisis. The same goes for political instability, which scares investors, disrupts fiscal policy implementation, and creates economic uncertainties.
6. Pandemic
A pandemic creates stress, anxiety, and panic. The uncertainty level is higher, affecting activity in and outside the boardroom. That’s what happened during the 2019 COVID-19 pandemic. So many companies were bowled into a crisis around the globe.
7. Natural disasters
Natural disasters like earthquakes, floods, storms, and landslides may chunk a company into a crisis once it hits a major infrastructure or production unit. The same goes for a hurricane, Tsunami, forest fire, or volcanic eruption.
What’s Crisis Management?
Crisis management is a structured approach to identifying, assessing (or measuring), and responding to risks. These risks can drive a company into a crisis, causing it to worry about its survival.
As shared earlier, a corporate crisis may take different forms, including leadership gaps, mass stakeholder resignations, pandemics, and natural disasters. Since crises are often unavoidable, the best that a company can do is prepare to manage them when they hit.
How Does Poor Crisis Management Impact the Company?
Poor crisis management, a classic example of corporate governance failure, negatively impacts the company. Here’s how it does that:
- Negative Reputation: A crisis can damage a company’s good reputation—even worse when its handling is wrong. Investors withdraw, and potential partners want to stay away.
- Supply chain disruption: A crisis can affect different elements of the supply chain, including procurement, logistics, transportation, and distribution. Once that happens, it’s harder for the company to produce and effectively distribute its product or deliver its service to the final customer.
- Vulnerability exposure: A crisis exposes a company’s vulnerability to everyone, including fierce competitors. Some of the most vulnerable elements are the company’s privacy and data protection, communication system, and marketing strategy, to name a few. A competitor can exploit your vulnerability to hit you where it hurts the most.
- Reduced consumer demands: Consumers tend to shy away from affected companies during a corporate crisis. Some don’t even want to associate with the company, reducing their demand for the product or service. Demand will drop if the consumers’ confidence in the company is shaken.
What’s Corporate Governance?
Corporate governance refers to the guidelines and structures that dictate how a company is run. That includes the rules, procedures, policies, and practices that a company observes that make it accountable to its stakeholders. Ideally, the board of directors enforces a corporate governance culture through various management levels.
What’s The Role of Corporate Governance in Crisis Management?
Corporate governance plays an integral role in managing crises. It offers a structured framework for running the company, which includes identifying and addressing risks. Here’s how corporate governance helps with crisis management.
1. Establishing Framework
Corporate governance enables a company to create a comprehensive framework for managing crises. Such frameworks outline procedures and protocols for identifying crises, assessing their severity or potential severity, and launching a response.
The framework outlines clear responsibilities and roles of the board and management, as well as communication structures and emergency response protocols.
2. Improving Preparedness
Governance emphasizes the need to prepare adequately for potential emergencies by regularly assessing and updating exciting crisis management programs. That includes the following:
- Risk assessments
- Scenario planning
- Crisis simulation
Doing the above prepares the company for unexpected events. More importantly, it reduces potential adverse effects if the crisis strikes while improving the company’s resilience.
3. Coordinating Response Efforts
It’s not enough to lay out a framework for an emerging crisis. Coordinating various departments involved in facilitating a crisis response is equally important. This is part of corporate governance. Good governance ensures a unified approach to responding to a crisis when it hits. Everyone gets on the same page to ensure efficient resource utilization and cohesive action.
4. Observing Ethical Standards
Good governance fashions ethical leadership, starting with the board and senior leadership. They all set the standard for upholding integrity and ethics. They can do that at all times, including during the corporate crisis. Ultimately, ethical conduct and integrity improve stakeholders’ trust in the leadership in managing the crisis.
5. Promoting Effective Communication
Clear communication during a crisis is essential. Everyone should know who to report to and consult, and more importantly, the information should be timely and accurate. That’s usually the case when appropriate corporate governance structures are in place, and you want that. Governance ensures that information is well shared across all stakeholders, including investors, employees, regulators, and customers.
6. Enhancing Decision Making
During a crisis, a company should swiftly make decisions that broadly fall on the board and senior-level management. Effective governance allows companies to make informed decisions fast and timely when a crisis hits or shows signs of doing so. Governance streamlines the decision-making process so the company can swiftly respond to crises and reduce their impact.
What’s The Role of the Board in Crisis Management?
The board of directors, especially the executive board, has a fundamental role in managing corporate crises. That includes the following:
- Policy implementation oversight: The board oversees the management as it implements its approved (board-approved) crisis management policies. It ensures that all concerned individuals are aware of the risk management policies. If they aren’t, the directors facilitate the training.
- Strategic planning: The board defines the company’s risk management goals and outlines a plan to realize them. The directors set the company’s corporate strategy and work with the management to facilitate deployment during a crisis.
- Adopting adaptive governance models: The board must evolve, and when it does, it can develop adaptive governance models that can help respond to emerging risks and crises. Such adaptations include embracing newer technology and following market trends.
- Stakeholder engagements: During a corporate crisis, the board engages all stakeholders to ensure they are all in the loop. This helps minimize the spread of fake reports, which could damage the company’s image.
- Succession Planning: The board identifies leadership gaps and prepares for them to ensure smooth transitions whenever there is urgency for someone to step in. They ensure the company doesn’t slump into a crisis when a key corporate leader vacates their position for whatever reason.
What’s The Role of Other Key Players in Crisis Management?
The board is not the only entity integral to managing a corporate crisis. The management risk committee, audit committee, and the board chair also have roles to play.
The Management
The management, which involves the managing director, MD), executive directors, CEO, and other senior management officials, play these roles in corporate crisis management:
- Enforcing board-approved crisis management policies
- Offering technical aid to the board for maneuvering around the crisis
- Periodically reports to the board
Management helps the board proactively develop the right strategies to navigate a crisis. Although they don’t make the final decisions, as the policies have to be approved by the board, they are integral in providing the board with accurate, reliable, and timely dates.
Risk Committee
The risk committee (which doesn’t exist in all companies) improves the board’s risk oversight capacity. The committee identifies, maps out, and regulates a company’s risks. Moreover, it oversees the effectiveness of management’s risk management policies.
Audit Risk Committee
The audit committee assesses the financial impact of a crisis and oversees the company’s financial and audit functions, liquidity position, and financial reporting obligations. Sometimes, however, the audit and risk committees are combined to play both roles.
Board Chair
The board chair establishes the right collaborative environment for managing risks at the board level. They provide the necessary leadership to steer their team to a practical solution that will help address the crisis at hand.
What’s The Best Corporate Governance Crisis Management Strategy?
While there are different crisis management strategies, here are our top recommendations:
1. The Three A’s Crisis Management Strategy
The ‘Three A’s Strategy’ is a structured crisis management approval that involves these three steps:
Alert
As a company, you must be informed about potential risks, and all stakeholders should stay in the loop. Everyone has to be alert, which means identifying the risks and communicating them with the right personnel as they wait for further communication about the next course of action.
Act
At this stage, the crisis has hit or is likely to hit anytime soon, as the signs are already there. Depending on the framework already in place, the board and senior management must spearhead a response. All protocols should be followed, and all information disseminated to stakeholders should be concise and clear.
Assess
After successfully responding to and possibly managing the crisis, it’s time to learn. In this phase, the company reviews how it handled the situation, identifies what worked and what didn’t, and pinpoints areas for improvement. It also prepares the company for future risks.
Also Read: The Role of Company Secretary in Corporate Governance
2. The Four R’s Crisis Management Strategy
The ‘Four R’s’ is another structured approach for managing corporate crisis which involves these four stages:
Recognize
Everything starts with recognizing potential signs of a crisis before it hits. Here are some of the questions that can help you do it:
- Are the share prices or revenues shrinking?
- Is the media calling or making inquiries?
- Are normal corporate operations disrupted?
- Are there signs of reputation harm?
If you answered YES to any of the above questions, a crisis is looming, and it’s about time you recognized that and then acted.
Respond
Upon recognizing a potential crisis, you have to respond to it. This is where your crisis management plan comes into play. The plan should clearly outline what to do. It may mean calling a crisis management expert or risk committee, which can then outline the next course of action.
Regret
This stage involves taking ownership. As a company, you have to acknowledge the fault, which means regretting that it happened and taking full responsibility. The public, the media, and all stakeholders expect you to express concern to victims after a crisis, even as you try to protect the company’s image.
Remediate
Information is powerful, and negative publicity can damage the company, especially after a crisis. Therefore, the company should try to control what goes out of its walls as much as possible. That includes what the staff says. It means halting advertisements momentarily, offering exclusive interviews, communicating with key stakeholders, and doing everything to contain the issue.
Improve Your Crisis Management Efforts with Corporate Governance Training
As the Center for Corporate Governance, we understand the impact of good corporate governance on crisis management. While crises are often unavoidable, suitable structures and frameworks can help manage them. That’s why we run a monthly corporate governance training course.
This 5-day training can benefit everyone, including the board of directors, top-management leaders, board council members, business owners, entrepreneurs, and compliance officers. It deepens your knowledge of corporate governance and equips you with the right toolkit to recognize and manage corporate risks.
