In Case of Emergency, BREAK GLASS!

Increasingly, when CEOs find themselves in a tough spot, they have come to rely on members of their board to roll up their sleeves and pitch in.

November 23 2009 by C.J. Prince


In the early morning hours of February 7, 2008, John Sheptor, newly installed CEO of Imperial Sugar, was touring the company’s refinery in Port Wentworth, GA, with two other members of management and the site’s plant manager. The group was startled by the sound of an explosion. “We looked at each other with an expression of, ‘That doesn’t sound right,’” recalls Sheptor. But before they had time to process it, another, stronger blast followed, knocking all four men to the floor. “At that point, we knew something very serious had occurred.”

They soon learned that a sugar dust explosion in one of the silos had ripped through the building, killing 14 workers and wounding another 40. Sheptor, who had been at the helm only eight days, and at Imperial less than a year, was facing a full-on crisis. He had not only the personal tragedy to cope with, but also a public relations nightmare and a bleak near term as the now-incapacitated refinery represented 60 percent of the company’s earnings capacity.

Within hours of the explosion, Sheptor was on the phone to board chairman, James Gaffney, giving him a complete update.  The two agreed to set up a call with the entire board the following morning. By then, the story was on every media news channel and both Sheptor and the board were knee-deep in crisis management. “I was very fortunate that at least two of our directors had relevant experience,” says Sheptor. One director had been through a significant product recall that required sophisticated crisis management, and another had been at a company that experienced a grain silo explosion.

Over the next months, Imperial’s board worked closely with Sheptor, advising him on communications and public relations strategy and giving him critical moral support, letting the embattled CEO know he would, ultimately, get through it. “You have a tendency to lose that perspective when you’re in the beginning of a crisis, so that encouragement coming from my peers at that time was important,” he says. The board also helped focus Sheptor’s attention on the local crisis. “Your mind drifts to, ‘What about my other sites? What about the larger implications of what happened here?’” he adds. “Their encouragement that [you’re] doing a great job at the inception of the crisis ultimately helps [deal with] the secondary influences of that crisis. My board’s input helped me stay the course and focus my attention—and were just good words of wisdom.”

Today, the company still faces challenges; in September, an investigation by the U.S. Chemical Safety Board found the explosion “preventable” and the company could face more litigation. But the damaged plant has been rebuilt and will soon be back to full capacity, returning the company to profitability, says Sheptor. In anticipation of that, its stock has climbed out of its lows of around $5 and into the more respectable mid-teens, with several analysts rating Imperial a “buy.”  Sheptor also has been successful in forming numerous joint ventures that will net additional profit for the company.

Now more than ever, and particularly over the past 12–18 months as the recession has tested companies’ mettle, CEOs have been turning to their boards to help them through crises, whether in the form of a financial liquidity challenge, a public relations imbroglio or other emergency. “I see CEOs on a weekly basis interacting very well not only with the lead  director but key directors who have relationships with regulatory bodies or external constituents, and it’s become almost  a team effort, not just the CEO driving the ship,” says Keith Meyer, vice chairman and managing partner of Heidrick & Struggles’ global board advisory services practice. “If there’s capability there, they’re using it.”

At one financial services company, several board members have stepped up to play a significant strategic role. “Throughout this year they’ve been working in tandem,” he says. “Forget board meetings every three months. This is a weekly exercise… they’re almost part of the management team, from a level of frequency.”

At Arvin Meritor, an automotive supplier based in Troy, Mich., CEO Chip McClure relied on frequent meetings with his board to strategize about how to survive the crisis in his industry. “Sometimes we’d literally come into an airport and meet for four to six hours and then keep moving,” says McClure. He was also able to pick up the phone and reach any of his directors one-on-one when he needed counsel or to bounce off an idea.

McClure consulted the board on numerous strategic decisions, including the move away from automotive and back to commercial vehicle and industrial. “They were very much involved as far as me walking them through this strategy, and  oftentimes, because of their experiences in the past, would help me modify or rethink timing or direction or even potential buyers for parts of the business,” says McClure, who points to the board’s voluntary pay cut last year as evidence of its team spirit. The company had already asked senior managers to take a 10 percent salary cut and even outside the U.S., where they could not mandate a decrease, 70 percent of management in Europe agreed to lower pay. That the directors volunteered to do the same “speaks volumes,” says McClure. “It’s just another indication of our board being totally involved and supportive of the action. And it made my job easier when I could sit there and say, the board is helping to support the cause and leading that way, too.”

Make It Personal

One key reason McClure has been able to lean so heavily on his board during this past year’s auto industry collapse has been the work he’s put into nurturing those relationships. One of his assistant’s priorities is to arrange a private lunch or dinner with each director at least once per year. “It’s important to build the relationship that way,” he says. By keeping the communication open, he adds, “I make sure I have the kind of relationship with the board where I can reach out and, when I need to, seek their counsel and get them pulled together.” To that end, McClure makes sure he’s keeping the board informed at all times, with good news and bad. “My thing is, communicate, communicate, communicate,” says McClure.  “You can’t communicate enough.” His other mantra is “no surprises,” he adds. “If there’s bad news out there, let’s get it on the table.”

That steady stream of information puts board members at ease and makes directors more likely to support their CEOs later, says Nicole Sanford, partner in Deloitte & Touche LLP and governance service leader, who recalls one company she worked with several years ago in the midst of a high-profile crisis. “One of the reasons the board was so effective in supporting the CEO is that the CEO was effective in building the board’s confidence in him by giving them as much information as he  possibly could as it became available,” she says. “That real-time feeding of what’s actually happening to the board is critically important.”

Some CEOs are reluctant to bring a crisis to the board for fear they’ll be seen as indecisive at best, or incompetent, at worst. “CEOs are type A’s,” says Dave Roberts, CEO of Carlisle Companies, based in Charlotte, N.C. “They have a very difficult time going to someone and saying, ‘I don’t have the answer.’ It’s ego.” The key, says Roberts, is to have thought it through to some extent and bring solutions to the board just as your own direct reports would to you. “No one likes to go to a board member and say, ‘I have this problem and I have no idea what to do,’” he notes. “You have to make sure you’ve formulated an idea and say, ‘This is the problem, this is what I think. What do you think?’”

Other CEOs don’t have a good enough sense of the skills they have available to them in the boardroom. “You have to know what they’re good at. And that’s not always going to be obvious from the bio on the page,” says Sanford. Even when they do have a sense of those director talents, they don’t always leverage them when they need them most, she adds. “They don’t do the same kind of return-on-investment analysis on what they’re spending on their board as they do for other investments—and boards can be a sizable investment.”

Know Thy Director

If the company is in a regulatory jam, for example, it would help to know that one of the board members has a great network on the Hill. Or a company looking to break into new markets could benefit tremendously from a director who has done it successfully at his own company. At Carlisle, Roberts has specifically looked for board members with skills that can help the company expand its operations in China. If they’re looking at targeting a new customer there, he’ll run the strategy by one of his board members. “I’ll say, ‘This is the way we’re approaching it, what do you think?’”

Sometimes, board skills can fill in for what would have been costly outside consultants. When Exact Target, an Indianapolis- based e-mail marketing company, was thinking about going public last year, CEO Scott Dorsey was able to draw from the collective experience of his board, many of whom are venture capitalists and investors themselves. Ultimately, because the market for IPOs had dried up completely by summer 2008, at the last minute they decided against it in favor of another round of venture capital. And when they did, they were able to manage it themselves. “We did not hire a bank because with my experience, coupled with the board’s experience, we had enough that we didn’t need an outside advisor.”

Making sure there is diversity around the boardroom table, and a sufficient number of outside directors, is one way to ensure the CEO will have the necessary skills to help get the company through a crisis. “Whatever crisis you might bump into, you have a greater chance of your outside directors having had that experience somewhere else, either as a CEO himself or herself, or on another board they’re serving on,” says Sanford.

Americans will forgive mistakes, they’ll forgive a bad quarter, but what they won’t forgive is the arrogance that comes with the absence of leadership.

And boards have actually become more collegial despite their different backgrounds and a higher ratio of independent directors to insiders, says Barbara Hackman Franklin, CEO of Barbara Franklin Enterprises, an international trade consulting and investment firm in Washington, D.C., and chairman of the National Association of Corporate Directors. “There’s a different kind of relationship. It’s not as distant as it used to be. When I first joined boards in the 1980s, it was an imperial kind of CEO and the board was more of a ‘yes, sir’ cheerleading session. But that’s not that same culture you have today, where you have a lot of candor in the boardroom, a lot of candid exchange that sharpens management’s views. And that’s what boards ought to be doing, it’s what good oversight is all about.”

Bring on the Balance

That makes it all the more important to ensure that not only do you have the strategic skills in the boardroom, but a group of talented individuals who mix well together. “You want both constructive challenging and questioning of everything, but also the ability to cooperate when something arises,” says Franklin.

Achieving that healthy balance in good times will make crises much easier to deal with, which means CEOs and directors should not ignore board dysfunction simply because things are going well otherwise. “The natural inclination is: If it’s not horrible, I’m not going to deal with it,” says Sanford. “Then when a crisis comes along, whatever dysfunction is laying beneath the surface is going to come out and make it much more difficult for you as a CEO to deal with it. Now you’ve compounded your problem. Deal with whatever dysfunction you have at the time. Don’t let those things fester.”

Most important is that the CEO and board together present a united front and exhibit the kind of leadership investors can trust. “I think one of the reasons we’re seeing stockholder revolts is Americans will forgive mistakes, they’ll forgive a bad quarter, but what they won’t forgive is the arrogance that comes with the absence of leadership,” says Richard Levick, CEO of Levick Strategic Communications, a crisis communications firm that has spearheaded the responses to the recent spinach, pet food and toy recalls. “Silence in a crisis is just arrogance whispered. We’ve got to take the bull by the horns and show real leadership.”

It behooves boards to roll up their sleeves since their own accountability and liability has grown in their expanded roles as overseers and shepherds of corporate governance. When the company fails, they do too. That’s why boards are asking for more information, and why CEOs ought to view their boards not only as bosses, but strategic partners, turning to them in both good and bad times. “A smart CEO wants the board to be right there, understanding it all,” says Franklin. “If you’re a CEO, you get much more out of the board that way.”