From cashflow and capital raising to taking care of key talent and stakeholders, here are 5 considerations for boards in response to the COVID-19 disruption.
Cash and capital raising
Deloitte Australia chair Tom Imbesi advises tapping into any stimulus available from federal and state governments.
“Cash is more important now than profitability,” he says. “From a cash perspective, what can be deferred? Talking to your bankers and over-communicating with your financiers is critical.”
David Larocca, EY Oceania transactions advisory leader, says most listed companies are better capitalised now than they were during the global financial crisis, but for some industries — for example, travel, education and media — near-term cashflow is drying up faster than it did during the GFC. Boards should consider alternatives for raising equity sooner rather than later.
“They don’t want to be caught competing for capital if there’s increased demand on equity from a crisis that is more prolonged than expected.”
Tony Markwell MAICD, national managing partner of private advisory at Grant Thornton Australia, believes boards need to ensure their people remain culturally engaged and aligned.
“People are dealing with stressful situations and want to know the business they work for is under control and setting itself up for the other side,” he says. “If they are part of that plan, they need to know what their role is during this phase.”
Markwell adds that it’s important to protect key assets, including talented staff.
“If you have gone to the trouble of training and developing people, you have an asset you want to protect through to the other side,” he says. “If you’re laying people off, you should consider whether there will be a second phase where you can re-engage with them; let them know you want them to be part of your recovery.”
He notes that good people will come out of organisations that haven’t looked after them and they will be looking for alternatives. “If you are looking to recruit, you might get better people than you thought,” says Markwell. “Now may also be a good time to consider which people you should be retraining.”
8 mistakes to avoid
- Being complacent and not understanding that the market has changed drastically
- Failing to have multiple plans for multiple scenarios
- Board not meeting often enough
- Stepping into management’s role
- Not planning to move quickly when opportunity knocks
- Not communicating with stakeholders enough
- Not acting on the right information — there’s too much around and not all of it is accurate
- Not understanding employment laws and what flexibility you have
Customers and other stakeholders
Markwell says now could also be an opportune time to identify customers you should be investing more time and effort in — and to consider how you could add extra value to their businesses. “It’s a chance to get closer. It can also bond people inside your organisation when they know they are looking at a purpose and have goal to help people.”
He adds directors should seek opportunities in markets they were previously too busy to look at. “If you have idle capacity, could this be an opportunity to look at markets or channels you haven’t tried before?” he says.
KPMG stresses the importance of meaningful communications with shareholders. “This is likely to have the benefit of calming investor sentiment and maintaining confidence in the board. In today’s crisis environment, investors are very likely to assume the worst if they are being met with silence. Come AGM season, shareholders are going to want to hear about your plans anyway.”
Michael Robinson MAICD is a director at executive remuneration consultancy Guerdon Associates. “With all the suffering around them, some executives have cut their own pay,” he says. “However, it’s still crucial to ensure executives are aligned with shareholder interests and have skin in the game. Current incentives are unlikely, in many companies, to pay out or vest. With uncertain financials and target settings, you need to consider something more broad-based. That might be share price improvements or total shareholder return in an absolute sense. You need some agility — it might be forgoing profit for revenues, forgoing revenues for profits, or just breaking even.”
Robinson believes companies could offer employees equity in lieu of fixed pay, which, he says, is akin to a capital raising and will keep more employees employed.
Restructures, mergers and acquisitions
“This is a good time to rationalise the non-core, non-profitable parts of your business to ensure what you have is lean and nimble when you come through this period,” says Markwell. Together with depressed share prices, he says this could lead to some opportunistic mergers and acquisition (M&A) activity.
But Larocca says there’s an understandable reluctance from boards to act. “They are focused internally, rather than externally, to ensure their balance sheets can withstand the impact of a prolonged lockdown. Most boards would only feel confident moving on a target if there was confidence in the timing and outcome of COVID-19, which there isn’t.”
He says it’s a misconception that quality companies can be acquired at a bargain prices during distressed times. “Most quality targets will reject opportunistic approaches, unless they are themselves distressed — except where the offer is at a material premium to current depressed prices. After the GFC, we did see a renewal of M&A, but premiums paid were higher than historical rule of thumb of around 30 per cent.”
Imbesi believes there are other ways of working with potential M&A partners, such as by striking alliances with businesses you’ve considered before.
“Look at how you can cooperate now and come out differently at the other end,” he says. “That could lead to a full integration down the track.”
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