Who could've known?
By Gary Sutton

D oes the board adequately consider unknown threats to the business?” There’s a stupid question. Our blue-chip law firm asks this in the questionnaire each director fills out an- nually as part of the board’s self-evalu- ation. My answer probably satis- fied the requirement. But the words might not pass muster w ith the SEC geniuses and legislators who think direc- tors must know-all and see- all. “No, thank God,” I said. “We’ve got enough challeng- es with known competitors, real markets, and technology shifts. Thinking about the 500 outside instances that could blindside this business is a distraction from the im- mediate dangers.” Okay, when testifying be- fore Congress, could I defend that answer? Sure. But not with a sound bite. I’d need more time to ex- plain the futility of trying to anticipate everything. I’d use other busi- nesses where I’m a director as examples. Take the recent spike in oil prices and its consequences. First, I’d explain how our insurance processing ser vice, based in a declin- ing Texas town, just started losing ex- perienced employees to the rebound- ing drillers. Suddenly we’ve got a talent drain. This is a labor-intense business, but the oilmen are now hiring again and paying better. Who could’ve known? Insurance pro- cessing? Oil prices? Then I’d talk about our temperature measuring startup, with wireless trans- mitters in trucks, that immediately tell food companies when the goods enroute somehow got dangerously warm. This service adds to the transportation cost; but the price of just one E.coli lawsuit makes it seem smart. Our main com- petitor is cheaper, with indicators on the packages re vealing the current temperature. It seems many truck driv- ers, faced with new prices at the gas pump, started to turn off their air conditioning in the back during the middle of each journey, saving gas, and flipped the cooling back on a hundred miles before deliver y. Sure, bacteria may have spawned, but the tem- peratures passed muster on the receiving dock using our competitor’s method. So our business prospers as this new problem is understood. W h o c o u l d ’ v e k n o w n ? Temperature measuring? Oil prices? F i n a l l y I ’d m e n t i o n o u r real estate owned near down- town. For a while, vacancies were around 6 percent. But as gas went from under $2 to over $3 in a two-year period, outlying apartments, cheaper per month, began costing more in com- mute expense. Our occupancies jumped back to 99 percent. Yeah, yeah, we also lose some of that because the city bumps every service cost, from garbage to water to power, as it feels gas prices. It’s not clear whether we’ll come out ahead or behind on that one. Bu t w h o co u l d ’ve k n ow n ? Re n t a l property? Oil prices? Forget oil prices. Consider other un- predictable events. I co-founded Teledesic a long time ago. Forbes called us “Possibly the biggest cash-generating machine in the history of the world.” I’d settle for less. This was a low earth satellite constellation that would bring phone service to sparsely settled parts of the world. But as our market cap passed $3 bil- lion, the telecom bubble burst. And two similar app ear ing ventures, Ir idium and Globalstar, entered bankruptcy. So we folded. Strangely, all early investors made money on an idea that was never to be, as Bill Gates bought us out so he could wait for the cycle to come back. Could we have predicted any of that? The failure? Or the limited success? Okay, we’ve got a high-resolution sur- veillance video camera business, which struggled and lost money but had a bet- ter product for years until 9/11. Sudden- ly, each year’s growth doubles, and cash flow gushes. Did any of us predict 9/11? Here’s more. Our service for mobile phones got lots of attention from every telecom. But those guys move with gla- cial speed. Finally one committed, as long as we’d give them an exclusive for two years. Okay. This was our first customer. Then, take a guess…. They merged — within three months — with another large telco. Suddenly our service was or- phaned. Predictable? Sorry. Directors cannot predict the strange things that happen to ever y business. They guide the reactions to those unex- pected events. Directors do immerse themselves in the strateg ies for the know n threats. That’s what we do. Recent convulsions in markets and trends encourage government proposals for boards to consider all possible threats to every business. Balderdash. I still want to put a paragraph in a 10-K sometime that says: “The sun might not rise to- morrow, and this could have a serious impact on our business.” My bet is that the blue-chip lawyers will allow it. ■ The author can be contacted at garysutton@ san.rr.com. His website is www.sixmonthfix. com. Sutton’S Law S 10 directors & boards Gary Sutton has been a CEO and director of a number of private and public companies in his career as a special- ist in startups and turnarounds. He is the author of Six- Month Fix. Who could’ve known? Directors cannot predict the strange things that happen to every business. What they do is guide the reactions. By Gary Sutton ‘

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