Why do corporate crises happen? How can they be prevented or combatted?
Addressing these questions has always been central in the research and practice about firm survival and evolution.
In the past, I tried to offer a conceptual contribution to the topic. My perspective takes a middle ground between those scholars arguing that corporate crises are primarily the result of internal mistakes carried out at governance and/or management level, and those scholars advancing that crises almost totally driven by external, environmental variables are also possible.
A key component of my perspective is understanding how the internal and external variables co-evolve; to do this, focusing on the Top Management Team misperceptions could help. In principle, misperceptions can be considered as wrong assessments about the status (or dynamics) regarding either the internal or external variables. In other words, misperceptions also serve as a linking pin between the two.
Finally, the perspective also attributes importance to the so-called triggering event, i.e. an extraordinary event of internal or external nature which transforms a corporate situation of decline into that of a formal crisis needing urgent interventions to avoid failure.
The above explained, there can be various ways in which a company can take into account the co-evolutionary dynamics that lead to crises and thus develop the strategies to counter the environment.
1. Forecasting is key
Companies need a focused group able to detect the warning signals happening in the environment, so they can deploy strategies to counter this. In large companies, this is often time a separate planning and forecasting department that constantly prepares data for the top management.
Among the actions of this group should be in-depth, comprehensive scenario planning. This involves making assumptions on what the future business environment is going to be and how the organization should respond to it. It should consider the neutral (external variables remaining status quo), best-case (external variables evolving in a positive way) and worst-case (external variables evolving in a negative way).
It is important to keep in mind that all three scenarios can occur. Based on data from these scenarios, the group should make predictions, keeping in mind that such prognostications can always be flawed.
2. Be wise
Another important approach to combatting crises with a co-evolutionary perspective seems to have a long-term view. The pressures to deliver quarterly earnings can lead to strategic decisions that don’t take into account the expectations of the external environment over the long-term. Enron and WorldCom are just two of many companies that have learned this lesson the hard way. Relatedly, we could mention many other examples of this in the United States, Europe and even in Japan.
On the contrary, a long-term perspective, in which the top management team responds to the data of different scenarios with its wisdom, can set up an organization to survive and potentially even thrive when a crisis emerges.
3. Board variables count
Finally, board characteristics can also reveal to be important to increase the survival chances of distressed firms. For example, in a parallel research conducted with colleagues Vincenzo Farina, Tor Vergata University of Rome, and Niccolò Gordini, Intesa Sanpaolo, we found that board independence apparently matters, because it enhances objectivity, critical thinking, and rational problem solving.
Conversely, from this research emerged that replacing the CEO during crisis situations, which is an action that most of the distressed companies do first, is a myth not necessarily per se positive to achieve successful corporate turnarounds. The empirical evidence shows that it works in some cases, while it does not in others. Other factors might determine whether this choice is appropriate or not.
What do you think about the 3 highlights introduced above? For example, do they need rethinking in the light of our COVID-driven “new normal”? In what situations can COVID be considered as an external factor for corporate crises, or a triggering event itself?
I would love to hear your thoughts.
Thank you!
Gianpaolo
Relatedly, if interested, you can also read the full research article Interpreting Corporate Crises: Towards a Co-evolutionary Approach, published in Futures.
Comments