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Feature

Mel Bergstein
Chairman
Diamond Management & Technology Consultants Inc.

Surviving a Deep Downdraft: What the Board Can Do
The descent following the bursting of the tech bubble was horrifying. From this near-death experience, there are lots of lessons to be learned for today’s managers and board members.

By Mel Bergstein

Ed Note: Mel Bergstein’s public company had a near-death experience during the tech crash eight years ago. For the cover story in the First Quarter 2009 edition of Directors & Boards, he recounted that experience and the management and governance lessons learned that are applicable in today’s recessionary downturn. Following is a brief excerpt from his article.

The economic recession is probably going to be deeper and longer than we’d like it to be. This is going to be a new experience for most of the executive management teams who are leading companies today. You would have to reflect back to the early 1980s to have an experience that even approaches the potential of the coming economic slowdown.

The inability to forecast revenue in a prolonged descent is horribly destabilizing, demoralizing, and flat out debilitating to the management team and the employees as well. It is quite unimaginable until you’ve experienced it. And, it creates the context in which one must live and operate.

Then, of course, there is the existential question — i.e., can the entity survive? That, to me at least, is the one question that the leadership cannot seriously publicly entertain because it is, inevitably I believe, self-fulfilling. So, the leadership is left to ponder that question during sleepless nights and, at best, hushed conversations among the few trusted lieutenants and advisers.

Desire for Hard Answers
By the way, there is not a lot of sympathy around during all this tumult. Everybody — investors, the board, the employees — wants hard answers and certainty and they want it immediately. And, of course, it’s the one thing that can’t be given because it doesn’t exist.

During the bursting of the tech bubble, our management developed a set of principles, or objectives, which would guide it through the downturn, however long and deep that might be. The principles are probably somewhat generic, but perhaps could be tuned for each situation. Our principles were: “We will attempt to remain cash flow neutral while protecting our key assets — which are our people, our client relationships, and our intellectual property.”

That simple set of objectives, communicated to all constituents — employees, investors, and the board, as well as clients — seemed to have a positive effect, even if it wasn’t a certain answer about how, when, or if the business would recover. It gave everyone a consistent set of rules within which management could develop and then explain its quarter-to-quarter tactical moves as the business descended to wherever it was going. While it didn’t provide certainty, it did provide some ability to forecast how the management group might make decisions, and that was comforting.

An Arm Around the Shoulder
For the board of directors, it’s important to understand the pressure and sense of helplessness that the CEO feels in these times.

I was always encouraged by one director in particular who would put his arm around my shoulder and tell me I was doing the right things and the business would recover. I knew he hadn’t a clue more than I did. But, hearing him say it to me helped me not feel so alone and burdened. He earned his director comp 10 times over because he was sensitive enough to understand. He’d been through it himself in the S&L crisis in the 1980s.

Here are a few more pointers on how the board can help management work through hard times:

1. A tough economy is not an environment conducive to fixing secular problems caused by a faulty business model or weak leadership. Those problems should have been addressed when times were favorable. Addressing CEO succession or major business model change in a challenging macroeconomic environment points to board failure and adds significant business risk.

2. Directors, even on the most independent board, need to understand that they are part of the fabric of the company — not observers. In hard economic times, management, employees, and customers will be particularly sensitive to cues from directors.

3. Significant stress for long periods can lead to poor decision making and destructive behavior. When economic headwinds are strong, directors need to be proactive in their relationships with senior managers and the CEO. Directors should be particularly sensitive to changes in affect, physical appearance, and lifestyle among the management team. Directors need to provide support, not additional pressure.

4. Research suggests that when costs need to be cut, they be cut with a scalpel, not a hatchet. Proposals for across-the-board cutting, particularly of personnel, may indicate a lack of thought by the management — or, worse, desperation.

5. Directors should encourage the CEO and senior managers to spend time in the market with customers and prospects. In hard times, managers can get swamped by the need for investor and employee communications as well as internal problem solving. There is no substitute for firsthand knowledge of customers.

A Supreme Test
Unfortunately, Diamond’s experience in the tech bubble burst of 2001 will be repeated by many companies across many industries in the coming year(s). It will be unpleasant, and it will test each management team’s resilience and ingenuity — to say nothing of their integrity and commitment.

But, at the end of the day, on the theory that what doesn’t kill you makes you stronger, management teams that survive will be better, seasoned leaders.

Mel Bergstein is chairman of the board of Diamond Management & Technology Consultants Inc.. He also serves on the board of the Simon Property Group, where he chairs the compensation committee and is a member of the audit and nominating committees. He is a member of the advisory board of Cross Atlantic Partners, a venture capital fund focused on the U.S. and Europe; a member of the dean’s advisory board of the Kellogg School of Management; and a trustee of the Chicago Symphony Orchestra.

He can be contacted at mel.bergstein@diamondconsultants.com.

For an electronic copy of Mr. Bergstein’s published article, contact Jim Kristie at jkristie@directorsandboards.com.