Boardroom dilemmas

In the current economic downturn, where revenue growth remains weak and profitability continues to be under pressure, consolidation and managing costs remains a major challenge for most companies.

Many companies had a predictable initial response to the financial crisis, and employed similar strategies that carried them through previous recessions — downsizing staff, reducing operations, and postponing investments until economic conditions returned to normal.

Waiting until conditions return to “normal” is not an option — after more than three years of uncertain economic and market conditions that show little sign of abating globally, this is the new normal.

We believe that companies that continue to wait to reinvest in their businesses may be risking their longer-term competitive ability.

Volatile times

A second big challenge is the ability to successfully manage the volatility in capital markets, exchange rates, and balance this with investor expectations.

Heightened volatility creates unprecedented challenges for companies in executing their longer-term strategies.

In reviewing strategic plans, boards must challenge the economic and business assumptions that provide the foundation of those plans to ensure they are both reasonable and take into account different scenarios, including the risks created by changes that uncertainty generates.

When assessing the impact of deteriorating economic conditions, they should ensure that management's analysis looks beyond the company's own walls to assess, for example, the ability of suppliers to continue meeting their contractual arrangements and customers maintaining their order levels and ability to pay invoices.

Boards also need to take an appropriately balanced view of risk and opportunity.

With the continuing uncertainty in the global economy, companies may suffer risk paralysis — boards may now adopt a risk-averse strategy and may be hesitant to act on opportunities that would create value.

Cash management

Today, despite the continuing slow growth of many markets, companies have built up sizeable cash reserves due to prudent spending and deferral of new investments.

The challenge for profitable companies is really to decide on the best use for the cash they have. If it is to protect that cash, boards should assess the consequences of holding idle cash.

On the other hand, boards may evaluate putting the cash to better, more active use.

Given that the global economy is unlikely to return to pre-2008 conditions, companies may be at risk if they continue to wait until better times before reinvesting in their infrastructure, people, research, acquisitions, and other areas that are essential to their future viability and growth.

M&A activity

Global merger and acquisition activity has been increasing steadily since mid-2010, which clearly demonstrates that companies are looking to acquisitions to offset slower growth rates.

In reviewing the M&A strategy, boards should first consider the strategy's overall objectives: Is it to reach a specific growth objective or is it purely defensive?

The M&A strategy should be aligned with the company's overall business strategy and must be in the best interests of key stakeholders.

Ensuring that both the acquirer and target have similar cultures and values and determining the appropriate deal structure and identifying financing at the outset may help avoid any fall through in the deal later.

Importantly, the board should also have oversight over the strategy for communicating the details of a proposed transaction to stakeholders.

Investor confidence

As the global economy continues to falter, regulators and investors are paying closer attention to corporate governance.

In India, the Ministry of Corporate Affairs has been working towards strengthening of the corporate governance framework and has issued the “Corporate Governance — Voluntary Guidelines 2009” which indicate some of the core elements that businesses need to focus on while conducting their affairs.

There is no doubt that robust disclosures in the financial statements, especially those that require exercise of management judgment, will go a long way in instilling investor confidence.

As circumstances change, boards should determine if they have the right mix of knowledge and experience to be able to address all of the board's responsibilities effectively.

New regulations

If not, boards may need to recruit directors who can bring a different set of expertise and experience to the board.

Finally, boards will have to find ways to cope with the onerous new regulations that are being introduced by governments and regulators across the globe.

Boards should take a portfolio approach wherein, instead of finding an isolated solution to each individual regulation, an overall best response is identified.

Building better working relationships with regulators may also ease the transition to new regulations as regulators may be able to provide directors with a better understanding of the intent of the new rules.

(The author is Partner, Deloitte Haskins & Sells.)

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