Tuesday, 29 June 2010

Crisis Management 101

We all have to face crises in our careers as managers and entrepreneurs, and it's often said that your ability to handle a crisis is what defines you as opposed to how you manage "business as usual".

I'm sure that anyone reading this can come up with examples of "good" and "bad" responses to crises to show what I mean. Such examples will often form the basis of business school studies, but from my limited experience, you need to cover off a number of areas when handling a crisis.

Firstly, what's the situation now? What needs to be done to stop it getting worse? What equipment/manpower, money, official/government support, etc is needed? How long to get it?

Secondly, who are the "stakeholders" involved: buyers, suppliers, staff + families, management, shareholders, community, government? What's the impact on them, and what action is needed? Do you need to calm nerves, soothe feelings, explain what's going on? What's the best way of doing so? Look at BP and how they've handled things - stakeholder management could have been better.

Legal: any possible litigation problems (against you?). Do you need to start litigation against someone else? Do you need to talk to a legal adviser?

PR - who needs to be briefed? How will you do it?

HR: what staff issues will you have? Do you need extra time worked to clear things? Will you have a potential court action on your hands or a strike? Will you need to make special arrangements for staff/families? Will you need extra people to help out? Can you get them? If the crisis was caused by a member (or members of staff) being negligent, what discip[linary action is required? How do you keep up staff morale during the crisis?

Systems: What is the impact on your systems? Do they still work? Do you need new computers/servers? Can y ou get them? How long to set up/restore data? Is your data intact and not compromised?

Processes: did staff follow laid-down procedures, or was the problem due to faulty or out of date processes? What needs to change?

Lessons learned: what can you learn from this for the future?


Tuesday, 22 June 2010

What Can We Learn From Deepwater Horizon?

The Deepwater Horizon disaster has sparked considerable comment - from the environmental and economic havoc resulting to President Obama's efforts to show he's in charge, to BP's risk management to CEO Tony Hayward's public comments and behaviour.

There are several dimensions to this event: environmental, economic, political, commercial and perceptive. The environmental part will take massive efforts to resolve and recover from. Similarly, the economic hardship caused to those who make their living from the sea and shoreline (in a time of global economic crisis) will reverberate for years to come (assuming that the economy can be restored to even a shadow of its former self).

Politically, President Obama has to show leadership despite having allowed this kind of drilling to take place. The grilling of BP CEO Tony Hayward by the US Congress shown on TV to millions has really been political grandstanding in the run-up to congressional elections this year.

Commercially, the US consumes almost 20% of the world's oil output, whilst having only 2% of global oil reserves. With such an imbalance, the oil to feed US demand has to come from somewhere, and BP responded to this. Would the fuss in the US have been as great if the pollution had hit the coast of another country far away? One can only speculate.

On the perception side, this is where real damage limitation could have been done had BP taken advice on managing the situation. Whatever the truths of the matter, BP have adopted a crisis management strategy of a CEO as the front man and the Chairman and the most senior US employee out of sight. Soundbites have consisted of gaffes (perhaps unfairly in one case, given that the Chairman's native language is not English). Information has been sketchy and perception is that senior management are distant and too keen to await the results of the enquiry into the disaster. Facts reported look more selective than part of a coherent chain.

BP's CEO is now spending all his time managing one disaster. This should be managed by the most senior BP US employee who understands the culture and priorities in the US and has the contacts. Tony Hayward should be keeping a close eye on things and flying to the US once a week for updates and meetings, but he still has the rest of the world to manage. We have little idea of how BP is managing the rest of its global operations, and this is getting the market antsy. The one calming factor has been their setting aside a USD20billion compensation fund.

In the end, this episode will result in stricter regulation of the global oil extraction industry, a review of our dependence on hydrocarbons and a change in BP. These will take place relatively quickly. Longer to repair will be the environmental and economic damage to the US and BP's reputation.


Wednesday, 16 June 2010

Walking For Jack's Place

A couple of weeks ago, my nine-year old daughter and I completed 12 miles of the Clarendon Walk from Broughton in Hampshire to Salisbury Cathedral in Wiltshire in aid of Jack's Place at Naomi House. This was our first big fundraiser together and I'm glad to say that we managed the whole course!

What impressed me most was my daughter's willingness to put in the effort for this. She needed to have the right equipment (a good pair of boots and socks, as well as a daddy with a rucksack full of extra rations, drinks, first-aid kit, spare socks), training and - most importantly - attitude. By the time we started, she had the equipment and the training and knew that she could do it. Half the battle was won!

As in many cases, the journey is part of reaching your goal. A group of friends and parents were also on the walk, and we all encouraged and supported each other along the way. The weather was fantastic with scattered clouds, a good breeze, and firm, dry going on the way. Preparation paid off as blisters came up, drinks were needed, and other minor distractions arose where "Daddy" was needed. We kept going, guided by others on the route and by a wonderful group of marshalls who encouraged us as we passed with updates of how far we had to go. We all had each other for company, so could share conversation and not notice the miles as they passed.

The time I really knew that we were going to do it was when, cresting a rise, we saw the spire of Salisbury Cathedral about two miles away. It was all "downhill" from there. As we finally crossed the line, we were applauded and told where to go to get our medals. For my daughter, she had certainly achieved a physical goal over which she had doubts at the beginning (as did I over my own physical abilities!).

Lessons? Preparation, attitude, and a willingness to support others help you not only reach your goal, but actually enjoy getting there. We sometimes forget to enjoy the journey, so focused are we on getting to its end. It's the journey that teaches us more about ourselves and others, the end is the icing on the cake.

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What Happens When A Bank Fails?

This is the final article in my series on the current global financial crisis. The root cause of much of the panic stemmed from a number of financial institutions which were let down by poor decision-making by senior management who were subject to a number of external pressures and expectations in the modern financial markets. Added to this was that markets had become much more inter-connected and more “stakeholders” are now impacted than anyone previously realised.

I’m not trying to exonerate the management teams, but I am pointing out that we all contributed to the current global crisis and that we all need to learn from it. We need to be prepared for when banks fail again (as they will). We need to learn from the mistakes of the past.

We've heard enough theory on “living wills”; breaking up banks deemed “too big to fail” (no real definition of this yet); increased regulation; separating investment from retail banking activities. My personal favourite is taxing the banks (including those who managed to survive and spare their customers and governments the effort of bailing them out). Here the politicians are now going to tax the very institutions that are expected to add grease to the wheels of the global economy to help it recover. Sensible? You decide…

Another way to look at what to do is to consider the “stakeholders” in banks: customers, creditors, debtors, staff, shareholders, pension funds, insurance companies, asset managers, the local community, auditors, ratings agencies, regulators, governments, the local and international economy, international trade, recruitment agencies. The impact of a failure of a large bank can be massive now.

To start with, regulators need to have more “teeth” and that means having qualified inspectors who have been in the market and understand it, the risks taken and their structure.

Secondly, we need to stop expecting exponential revenue growth every year – this was what caused a lot of the pressure to perform “whatever the cost” and turned cautious men into cowboys.

Third, we need to lower our expectations of what the banks are for. They aren’t charities and should not be viewed as “loan on demand” providers.

The above would go a long way to removing the systemic problems that caused the crisis in the first place. Banks will fail in the future for reasons yet unknown. The first thing to do is define what "failure" is. Next, identify which stakeholders are impacted. Next, minimise fallout with prompt action: get regulator, auditor and government on side (and inside); ring-fence the business that has caused the problem; call creditors into an emergency session; develop a media response to prevent panic amongst markets and customers. This may seem like overkill, but if done quickly enough, will save taxpayers a bundle!

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Friday, 4 June 2010

Are Our Markets Really "Efficient"?

The price of an asset (say a share in a company) is meant to reflect a number of things: past performance (earnings), future earnings potential, financial strength of the company, quality of management and the idiosyncrasies of the industry/market within which that company operates.

So, according to the above, my answer to this question is a big “NO”. Prices are governed these days by a few speculators betting billions one way or the other. Not surprising when you consider that of the trillions of dollars traded on the foreign exchange market, 95% or more is speculation. Why should other markets be any different?

So who are the people who manipulate our markets (if “manipulate” is the right word)? Simply put, they’re what we call the “institutional investors”: life insurance companies, pension funds, asset managers, hedge funds, sovereign wealth funds. These organisations have huge amounts of money to dispose of and need somewhere to put it. They’re also judged on their performance, so they’re dead scared of loosing money.

As a result, if anything looks risky, they bail out (assuming they’re “in”). This can create a self-fulfilling prophecy as others see the price of an investment fall and, lemming-like, “follow the herd”. A prime example is Europe at the moment. The Euro is under pressure, and as a result, anything European is being treated cautiously (if not cavalierly). Another is BP – a company capable of earning more than enough to cover the costs of cleaning up the shoreline of America, yet whose shares have plummeted (mind you, the “political fallout” will have a bigger impact than the environmental). Never mind sound underlying fundamentals, Europe is bad, let's sell!

Just to add to the fun, some investors deliberately target the shares or bonds of those who look like they may be in trouble and deliberately “short” (i.e. sell those shares/bonds) in the hope of buying them back later (hedge funds are allowed to do this). Although there are market manipulation rules supposed to prevent this, deliberate intent is difficult to prove.

I spoke to a fund manager at the beginning of 2009 who was watching the value of their portfolio drop despite the fact that the underlying fundamentals of the company shares that made it up were strong. This was the result of panic and our question was; what if governments worldwide ordered a cessation for two weeks of all exchange activity? Of course, such action would be unthinkable and would bring unimaginable chaos as those needing to raise cash from asset sales could not do so, but the point was, if people had time to sit back and think, what would be the result?

Perfectly sound companies are seeing billions wiped off their market capitalisation for no good reason other than the panic of a few individuals out to make a buck for a small group of investors. We have all being willing to castigate the bankers for the current crisis, but what about the fund managers? When will people look at what they do?