Proactive preparations

Michael SchoutenPete Lawley + 5 other experts

Prevent unnecessary surprises

Early warning signals are visible in the business – but operations teams or lower management may not recognise them, unaware of the company's wider exposure. Education on a changing environment or on disruptive forces will help prevent unnecessary surprises.

Asking the right questions ahead of time

In most companies, the people entrusted to monitor and mitigate risks are often not part of the statutory board or the management team and there may be some hesitation to bring early warning signs to the management's attention. As a result, in a crisis caused by external factors, leadership is often taken by surprise – even if the risk and/or legal teams may have seen it coming. Boards that ask the right questions ahead of time and come to the table prepared to also address more adverse scenarios, are generally able to stay the course and survive.

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Pro-actively focus on no-regret preparations

In most companies, the people entrusted to monitor and mitigate risks are often not part of the statutory board or the management team and there may be some hesitation to bring early warning signs to the management's attention. As a result, in a crisis caused by external factors, leadership is often taken by surprise – even if the risk and/or legal teams may have seen it coming. Boards that ask the right questions ahead of time and come to the table prepared to also address more adverse scenarios, are generally able to stay the course and survive. Management could proactively focus on a couple of 'no-regret' preparations.

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Liquidity

Distress can take many shapes or forms and can be driven by various factors. Many of the issues that could cause a crisis, have an immediate knock-on effect on discussions with auditors about impairments, and on group financing documentation. But the first knock-on effect of nearly any distress event is an increase in working capital requirements. This is not at all helpful, as the company will instead seek additional liquidity headroom to weather the storm.

If companies do not have to worry about their cash position and can instead focus on addressing the root cause of the problem they are facing, they will likely be able to retain control over the situation (or regain it more quickly). In other words, establishing a stable basis to be able to weather changing headwinds is key for companies to remain unaffected.

Board members could increase the liquidity forecasts and proactively schedule inflows and outflow. They could also run theoretical-risk sensitivity tests, which should include intra-week liquidity swings. These types of forecasts, along with a sensitivity analysis, can serve as a corporate readiness self-check to test management assumptions on the effectiveness of existing buffers in its budget. The outcome can often give ideas on how best to improve the robustness of the company’s platform. The Board could further proactively identify potential alternative financing sources and unsecured group assets.

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Good governance and clear responsibility

Boards can proactively consider how the group structure and board composition of each legal entity within the group can withstand an adverse scenario. Questions such as who does what in a crisis scenario and who is going to speak to which stakeholder and at what level advisers should be engaged can all be proactively thought through.

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Stakeholder and contract mapping

Boards can proactively identify their most important stakeholders, such as creditors, shareholders, tax and regulatory authorities, key suppliers and customers, credit insurers, subsidiaries' directors, works council, society, etc. and consider who will be responsible for which stakeholder in times of uncertainty to create a stable platform.

Proactively mapping key contracts and contact persons may save time and nuisance in times of uncertainty.

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Mapping cross-dependencies and cross-liabilities

Even the most reputable, resilient companies have suffered from contingent liabilities triggered by a "black swan" event – events that were not within their control, such as key suppliers going under, market sentiment pushing down the stock price, or credit insurers reducing their limits. To limit the risk of cross-contamination, ring-fencing certain assets and entities is often the most pragmatic and effective option to consider.

Being prepared is therefore essential to limit loss of value: if a crisis materialises, this can make the difference between frenzied firefighting or calm and well-considered decision-making - or even between bankruptcy or going concern scenarios. Contingency planning can be done mostly in-house as a desktop exercise by.

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