The difficulty is in determining what should be cut-back to get through the immediate crisis with least effect on the future prospects of the business. While Telco was in the midst of a large
capital expenditure program to expand its design and production facilities in Pune in the early 1980s the truck market went into recession. Finances became tight. The board had to consider whether to reduce the bonus to employees or reduce dividends to shareholders. One view was that since the company could not disappoint investors whose support it needed through the crisis, dividends must be maintained and cuts made elsewhere — in the bonuses and benefits of employees perhaps. An opposing view was that the company needed the dedication of its employees more than ever in tough times and hence the company could not afford to demoralise them.
The lesson was that, in a crisis, the company must retain the support of all its stakeholders. Stakeholders are, by definition, all those who depend on the company and on whom the company depends in turn. Their trust in the management is an invaluable asset that can be lost by short term actions in the pressure of a crisis. Any group of stakeholders that feels it is not being treated fairly because it is being asked to bear a disproportionate share of the burden vis-à-vis others will lose its confidence in management. This does not bode well for the future because the company will be less resilient whenever tough times return.
Crises are opportunities to strengthen bonds and build trust. This leads to the most important lesson perhaps that I have learned from observing leaders who have handled crises well. Leaders must be more visible in a crisis than before. They must communicate more frequently and honestly to build trust. Their credibility rests on their admission of the problem as well as acceptance of any failure of judgement. They must walk the talk and take a greater burden of sacrifice upon themselves — in reduction of personal benefits, for example — than what they expect of others. It is remarkable how people will rally behind such a leader.
I learned this lesson when I was called upon to lead a turnaround of Tatab Industries in Malaysia, which, having run out of cash and the support of its stakeholders, was threatened with closure. The management team was in disarray. The only action that was entirely within my own control was to reduce the salary the board had offered me, which I did as a first step. I was overwhelmed by the support from the management team that followed. Many even volunteered to reduce their salaries. The company turned around much faster than anyone expected and became the market leader too. Its Japanese and European competitors noted that the unbeatable spirit of the Tatab team was the principal cause of its success.
Any guesses where Arun’s pointing us and why? If you have the right answers, 2009 is going to be your best year yet!!!
UPDATE: on 28th December …
From another discussion thread on LinkedIn
Biplob says >>
Some good illustrations in the article – Sunil, thanks!
Arun Maira’s mantras – a) retaining stakeholder support, and b) leader’s role in strengthening bonds and building trust with stakeholders – for great companies – these are valid at all times – crisis or no crisis. Those who manage these well in good times are the only ones who would be naturally able to manage these fundamentals in bad times.
Conventional risk analysis can identify potential crisis of “hard” stuff, which Maira mentions. But, how easy it is for companies to identify a leadership crisis because of aspiration inertia, and take mitigation steps when its still going well in the balance sheet! Can building trust and capitalising on stakeholder aspiration ever get “old fashioned”!