The Certainty of Uncertainty: How CEO’s Can Work Their Way Through the Economic Correction

The big freeze in the financial world has led to a big squeeze for legions of CEO’s trying to work their way through the current economic correction.

This vise-like grip stems from the numbers: boards and private equity investors with majority stakes want growing businesses, but in today’s environment, CEO’s are confronted by contracting revenues and profits, which are exacerbated by the absence of leverage in an increasingly competitive and challenging marketplace.

Many CEO’s are still scratching their heads, trying to figure out what happened – how the world changed so fast, and at such an accelerated rate.

Others, who are not proactive in getting the right things done, are facing the stark fact that time is a constricting asset; there simply isn’t a moment to wait or waste in terms of putting together a short-term survival plan that allows for the possibility of long-term prosperity as a new normal is created.

Good Companies, Bad Companies
Finally, as this realization takes hold, some CEO’s are being forced to confront the brutal truth that bad companies with poor management may soon disappear while good companies with excessive leverage may soon default.

For their part, private equity owners are pressuring CEO’s to stop the bleeding now in the context of a long-term competitive repositioning. If the negative flow can’t be stanched, PE firms – some of whom have scores of companies in trouble – will have to decide which assets to bet on and which to let go.

That’s hardly comforting news for already stressed CEO’s, who clearly can’t depend on their private equity investors for real help or a way out of this mess. In fact, the best advice I can give to CEO’s is this: figure it out by yourself so that you can help create your own outcomes.

Survival Strategist
Unfortunately, most CEO’s have never seen an economic correction; and most are trained as managers of a business, which isn’t the same thing as being a survival strategist.

So, to help clarify and bracket things, I’d like to pose the following critical questions for CEO’s to consider as they’re mulling their company’s prospects and potential in this intensifying economic correction:

  • Is your company, business plan and investment thesis still relevant, given the current, burgeoning new realities?
  • How strong is your financial position? Do you have the capital, or
    access to capital, to sustain your company and invest in a prolonged downturn?
  • How strong is your competitive position? If your business went away, could others fill the gap?
  • Where do the real and reachable opportunities lie? Can your company execute in a timely manner to execute against these opportunities?
  • Can you / will you be best in class – number 1, 2, or 3 – when the economy pulls out of the current downturn?
  • What are the realistic new end games – wind down, stabilize to sell, or dominate? 
  • Are your business relationships strong with your current investors?
  • Can / will your current PE funding source provide the necessary capital?
  • Do you need outside capital? If so, is the dilution worth it?
  • Can you bring all parties – your team, investors, board, executive leadership, management and employees – together to meet the new opportunities and agreed upon end games?
  • Are you the right person to be leading your company in this
    environment? Are you objective enough and experienced enough to make the right decisions?

If the answer to the last question is ”no,” then the CEO should augment his or her skills by using external situational experts on an interim basis to round off his or her talents or set up an incentivized succession plan. Even if the answer is “yes,” the CEO is best advised to bring in external and objective expertise to help make his or her case to the board when it comes to the direction of the business and organization.

Once there’s consensus on the situation analysis, the CEO and the board must make a momentous decision: do they close down the company, borrow and get it ready for sale, or do they redefine the business and move ahead with an eye toward eventual market dominance?

Three New Horizons
If the meeting ends, and the decision is to redefine the business, then there are three different horizons that the CEO and his or her team need to consider and choose from – no matter how difficult the financial operating climate may be.

First, there’s stabilization. This means trimming, cutting and rationalizing until they get to the right size. If possible, the re-sizing must be done without carving up organizational muscle and bone. During this process, the CEO and senior executives must constantly be aware of the fact that the short-term viability of the company is job one, and only after the business is truly stabilized can long-term planning be implemented.

Second, there’s sustaining the company. This means strengthening the balance sheet and targeting new investments so that the business emerges from the economic correction in a stronger position than before.
The CEO and his or her team must do all that they can to make certain the company never falls back into financial peril on their watch.

Third, there’s re-emergence. This means going back to the original business plan and investment thesis and cherry picking the best ideas and opportunities that still make sense; it’s critical that those original assumptions are juxtaposed against the burgeoning opportunities of the new norm and then executed in the dramatically altered landscape. To do this well, the business has to have the right people and processes in place; and the CEO and his or her team must close any gaps in these areas quickly and effectively. The right people also have to have the right incentives in order to drive performance.

Check List for Success
Regardless of which horizon is selected, the CEO must focus on the following seven items in order to succeed:

  • Align the stakeholders so there is consensus about the current situation and the targeted end game
  • Detail the end game as well as the intermediate beachheads to be achieved in getting to the end game; redefine the decision parameters
  • Manage for cash; seek capital as required; re-negotiate current equity and debt investor terms
  • Achieve a sense of urgency to deliver the intended outcome; reinforce strategic decision-making governance tools such as transparency, accountability and measurement
  • Reconstitute your team with internal and external expertise
  • Offer the right incentives so your team achieves end-game success
  • Model and build a culture that stresses can-do success

Staying Open
The CEO must bring a very different approach to this phase of business rejuvenation.

He or she must be laser-locked on targeted objectives but, at the same time, be completely flexible, open and willing to re-calibrate on the fly as the markets change. He or she must also know, along with the company’s private equity owners, that bruising battles will still need to be fought in the name of sustained success. Finally, he or she must exude a genuine sense of confidence to inspire the organization and pull all of this off.

The Resourceful Improviser
The role of the CEO in American companies has changed radically over the past decade. Ten years ago, when General Electric’s Jack Welch set the corner office standard, the model was the CEO as Capitalist Icon; five years ago, in the wake of the Enron scandals and Sarbanes Oxley, the model was the CEO as Transparent Team Captain; today, as we attempt to keep up and cope with an unprecedented financial unraveling, the model is the CEO as Resourceful Improviser.

In the end, this new, fluid and instinctive role will require different skill sets and mind sets than those that were used to create value through leverage and excess; and no matter how self-reliant and self-confident today’s CEO’s may be, they can’t tackle the tattered macro-economy and expect to win without bringing outside expertise aboard. Being a Capitalist Icon was hard; serving as Transparent Team Captain was complex; but out-running the current economic correction as the Resourceful Improviser may well prove to be the most daunting and demanding job of the three.

Richard T. Cavalli is founder, CEO and president of professional services firm Black Box Principals. His previous peHUB posts can be found here.