Corporate crisis: the readiness is all; Does your board have the competencies to meet the most common dangers? A board assessment can prepare you for these potentially ruinous 'turning points.'.

• Author: Jones, Dale E.
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

COMPANY CRISES come in all shapes and sizes--defective products, hostile takeovers, executive misconduct, natural disasters that threaten operations, and many more. But from the point of view of directors, they all have one thing in common: They threaten the stock price and sometimes the continued existence of the company.

In 1993, an allegation of E. coli contamination in the beef served by the Jack in the Box hamburger chain caused the company's share price to plummet from $14 to about $3. A similar allegation against Taco Bell at the end of last year drove down the stock of its parent company 5.6 percent in just three trading sessions. When allegations of insider trading against Martha Stewart were first leaked to the press, the stock price of Martha Stewart Omnimedia fell some 40 percent in just three weeks. The A.H. Robins Co., the maker of the Dalkon Shield, simply no longer exists, having been driven into oblivion by personal injury lawsuits.

As those examples attest, there are few situations in which the director's fiduciary duty to the stockholders is so starkly in play as in times of crisis. Yet, in survey after survey the majority of directors responding report that they have not discussed what they will do in the event of a crisis. Moreover, many crises come unexpectedly--JetBlue certainly did not foresee the recent debacle of its passengers stranded for hours in snowbound planes. And because crises come in many different forms, it is impossible to have a detailed plan for all contingencies.

Nevertheless, by ensuring that the board has the right mix of competencies and skills for the major and most familiar kinds of corporate crises, directors can help see to it that their companies get through hard times with as little damage to the company and the stockholders as possible--and, in many cases, avoid a crisis altogether. As Hamlet famously says, "The readiness is all."

The intersection of crises and competencies

The most common and potentially ruinous corporate crises, and the board competencies that should be in readiness to meet or avoid them, include the following:

Financial: Crisis here can encompass a number of difficulties--poor sales, unacceptable operating costs, excessive debt, and other acute financial problems. Whether a financial problem becomes a full-blown crisis is often a matter of magnitude. Poor sales may be cyclical or merely a temporary slump. But they can also become a matter of grave concern, as with the automotive...