How to manage executive liability in times of crisis

In times of crisis, the decisions executives make will come under scrutiny. For good and bad. Superwomen and -men will be crowned for their timely decisions, actions and leadership. At the same time, villains will be identified, and some will meet a harsh judge in the public realm, where social media and shitstorms may act as judge, jury and executioner.

Villains will not only be executive management teams. Boards and owners will be held accountable for their roles and actions (and inactions).

Social media “verdicts” are not the only ones to be handed out. Historically, the number of lawsuits, settlements and court dates increases in the wake of a financial crisis. Accordingly, the number of claims on directors and officers liability insurance skyrockets. The most frequent claims are related to non-compliance, negligence or maladministration.

Staying in control in turbulence

During and after a crisis, normal decision-making processes are often put on hold. Informal gatherings, gut feeling, speed, improvisation and “being agile” take over to meet the need for speed and the large number of decisions to be made. It must take over. COVID-19 has pushed us firmly into the realm of “fast and roughly right” as Rita McGrath puts it in her book “The End of Competitive Advantage”. This is the realm of risk and uncertainty. But also of opportunity and action. We will find that a fair share of the bureaucratic activities that used to occupy us do not provide the intended control and value.

That said, as figure 1 illustrates, the current decision-making environment should not open the door for carte blanche, ill-informed, untimely, negligent decisions and poorly executed actions.

Decision-making may be delegated to make it faster and more adaptive and responsive to local situations, customer demands/concerns, supply chain issues and regulatory changes etc.

Nevertheless, the decentralisation of decisions does not remove the responsibilities of executive management and boards. It’s an interesting twist that they need to get close enough and stay away at the same time.

Executives need to first and foremost ensure that they protect the health of their employees and stakeholders and that the company stays financially sound and complies with legislation. But executives also need to be able to explain how they have steered the company: how, what and why decisions are made both centrally and decentrally.

So, what to do?

To enable agile and decentral decision-making while also reducing the risk of liability for board members and executive management, consider these initiatives:

1. Continue to manage the immediate situation/crisis

The immediate management of the COVID-19 crisis continues. Stay safe and help your community and society. In the second wave of the crisis, fatigue starts to set in, and it’s crucial to allocate separate resources for the “firefighting activities” and for the business recovery phases.

2. Update governance so that it’s fit for the crisis

Adjust decision mandates to not only focus on size of decisions but also the urgency and changeability of decisions. Decisions that can be monitored and changed can to a larger degree be made decentrally or delegated. Use the learning opportunity that the crisis provides to simplify bureaucratic processes and define the low-risk-appetite areas where the board and executive management need to be involved.

3. Review your risk landscape and financial scenarios

The risk landscape changes dramatically in turbulent times. Make sure that you have an updated view on the risk exposure and take appropriate actions to mitigate risks. You don’t want to be caught off guard from the rise of a new major risk or changes to known risks while everybody is preoccupied with COVID-19 issues.

4. Create a timeline of events and critical decisions

Consider that some decisions become significantly easier to make by delaying them and leveraging more information while other decisions just need to be made. Chop up decisions to enable a “trial-and-error” or “start-and-adjust” approach.

5. Coordinate, align and document decision-making

Set up a central task force that continuously identifies and coordinates the most critical decisions made across the organisation. Integrated business planning and, in particular, sales and operational execution are even more important now to get decisions made and implemented. Document the reasoning and assumptions supporting these decisions. Agree “premortem” on the “turning points” for the major decisions to help the organisation change its mind and avoid “sunk cost biases”.

Make sure turbulence does not lead to liability by default

Executives need a balanced approach. On the one hand, they need to leverage their internal team by delegating responsibility and decisions, allowing the organisation to move faster. We should never waste a good crisis. In our experience, a crisis offers an opportunity to review and simplify our bureaucratic processes and focus more on what creates value.

On the other hand, executives need to stay close enough to major decisions and points of no return. It’s still their responsibility when the jury is out.

Boards are in a similar situation. They need to stay close, review whether the executive management team is the right team in a crisis and ensure that the business looks at safety, values, financials and long-term business perspectives at the same time. But they need to do this by providing advice and be a sounding board rather than becoming an untimely bottleneck.