Managing business cycles
By Businesses run in cycles; boom and bust, peak and trough, good and bad, great and tough. However, irrespective of the cycle in which a business finds itself, the stakeholders’ expectations remain unchanged – value must be delivered to them; customers expect quality services and products, employees expect regular salaries as well as promotion, while shareholders expect good dividends. While delivering value in peak periods is relatively easy because the business has everything going for it, it is a different kettle of fish when the company is in a trough due to the hostility of the operating environment, increasing challenges and declining revenue. Therefore, bad times remain the nightmare of many company executives because the chances of going down are quite high.
But a well-managed company is made for all seasons. Therefore, even in difficult times, a good business thrives because it has put in place measures that keep it up even when it is going through a trough.
How to survive all economic cycles
To thrive even in hard times, a company must put certain measures in place. Here are some of them.
Corporate governance observance
Corporate governance is the set of rules, policies and resolutions by which a company is controlled. It provides the framework through which a company’s objective is achieved by dictating the behaviour of the management and staff of the company. Behaviour is determined by the value of the organization, while value is derived from the vision. Therefore, corporate governance is a set of practices that will facilitate the actualization of a company’s vision.
It spells out what a company stands for, what it intends to accomplish, how it hopes to achieve its objective, and what it will not do in the pursuit of its objective.
Good practices don’t just happen, there must be conditions precedent for compliance to be assured. According to Murphy’s Law, whatever can go wrong will go wrong. The only assurance that things will work right is to put measures in place that will make it impossible for the situation to turn out otherwise. That is the essence of corporate governance.
The rules and policies that form the corporate governance are usually put together by a board of directors. Therefore, corporate governance requires the emplacement of a strong and knowledgeable board which cannot be hoodwinked by the management. A board should be knowledgeable enough to allow the management a free rein to run the company in the best way possible but should also be strong enough to rein in the management whenever it veers off the course.
The decline of many companies is traceable to the violation of corporate governance principles. Non-adherence to corporate governance principles results in insider abuse and other malpractices that can threaten the continued existence of a company. This usually happens when the board is tied to the apron string of the management. The management, because it is in charge of the day to day running of the company, has access to its resources and can dangle carrots at board members to undermine due process and shortchange other stakeholders such as the shareholders, workers, the community and government. This is why a strong and independent board is indispensable for a company that will go far. If a board is composed of those who can stand their ground and cannot be swayed by the largesse thrown by the management, the company will remain strong for long. But a board that is composed of individuals who are given to greed will have no qualms collaborating with the management to compromise principles and as a result bring down the company.
The death knell was sounded for Enron Corporation, as successful and huge as it was, when it stood its own corporate governance rules on the head. The board connived with the management to mask the underhand dealings going on in the company. If the board had nipped the unethical conducts of the management in the bud, the company would have been saved. But it did not. So, when the gale came, not just the board and the management were swept away, the corporation itself went under.
According to a 1995 study conducted by both the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC), four factors are responsible for distress in Nigerian banks. These are economic depression (25 per cent), political crises (17.9 per cent), bad credit policy (25 per cent) and undue interference by board members (corporate governance) (32.1 per cent).
The principal culprit for a company failure is the inability to adhere to corporate governance. With sound corporate governance, a company can weather strong storms and come out stronger.
Engage in risk management
Every business has as much chance of succeeding as it has of failing. The opportunities it appropriates provide the platform for its success while the risk it discountenances can bring it down on its knees. So, every business organization must incorporate risk management in its operation to stay afloat at all times.
Risk management is moving against threats or risks with a view to mitigating their effects so that they do not stand between a company and the achievement of its corporate objectives. When unattended to, risks hinder a company from attaining its objectives. Risks come in various shapes and forms. They can be financial, strategic management errors, a competitive brand, accidents, natural disasters, disruptive technologies or political risks.
One of the major functions of leadership is to identify risks before they become manifest. The best way to do this is to study the trends in an industry and understand same. Outstanding business leaders can predict when there will be a boom in an industry or when there will be a bust. They are able to do this because they have taken time to study trends in the industry; they know the twists and turns and can predict with a measure of certitude what will happen in future. Those who lead business organizations must be familiar with the trend in the industry well enough to know what will likely happen before it happens. Knowing this will reduce their exposure to risks and enable them to put measures in place that will mitigate such risks and ensure that the business keeps going through thick and thin.
According to experts, risk management involves five steps.
The first step is identification of the risks. This is important because unless the threat or risk is identified, nothing can be done about it. The risk must be identified early enough to stop it in its track. Business risk is like a cancerous growth, if it is detected early enough, the damage would be minimal. But if it goes undetected for long, the effect may be calamitous. So, leaders must know their business well enough to sniff a risk a mile away.
The second step is analyzing the risk. This involves stripping the threat to its bare bones, that is piercing through it to get to its heart. The diagnosis of the risk must be accurate for the right therapy to be recommended. Analyzing a risk leads to getting to its root and critical to dealing with it. Without doing this properly, it would be difficult to come up with the right remedy or strategy to deal with it.
This is followed by risk evaluation, that is gauging its impact. This is done by comparing the risk with the structure in place in the organization. This is a way of measuring the capacity of the organization to deal with the risk if it does manifest. If it is a natural disaster risk, the company must look at the insurance policies in place and how well they can serve as a bulwark for the business. If it is a financial risk, what options are open to the company in shoring up its finances should the threat become real? These are some of the issues that will come up in risk evaluation.
The next step is to treat the risk. This involves putting in place measures that will result in the total avoidance of the risk or minimizing its effects. If the measures on ground can handle the risk, then, it could be done internally. If the case is otherwise, then external help could be sourced.
Finally, the process must be monitored to ensure compliance.
When risks are well-managed, the impact on a business is minimal and that puts the company in a position to continue in business.
Ensure regular returns to shareholders
It is the business of businesses to delight their shareholders. This is because the shareholders, who own the company, did not invest in the business as a form of charity; they put their money in the business with the expectations of returns on their investments. However, while employees get paid every month, shareholders have to wait till the end of a financial year before they get a return on their investments. And that is if the company is able to declare a profit. If a company ends a year in the red, the shareholders who made available their financial resources to get the company going do not get anything. Meanwhile, should the company need additional capital to increase its capacity, it runs back to the shareholders to increase their stake in the business by making available additional resources. So, for the shareholders to keep availing the company of their resources, the business must make it worth their while by paying dividends every year or as regularly as possible. The business can even take it a step further by declaring bonus shares. With that, shareholders will beat themselves to increase their stakes in the business.
The reality is that why some stocks are hot cakes and attract investors, others are spurned by investors. The difference is in the yield that each stock gives the shareholders. A stock that pays dividend regularly will have shareholders swarming round it but the one that does not pay dividend as regularly as it should, will labour very hard to woo investors to part with their money.
Contributing to the growth of host communities
Businesses do not exist just to make money, they exist to build communities and grow economies. So, deliberately, a business must contribute to the development of the communities in which it operates. That is what makes it sustainable.
To remain sustainable, a business must impact on the community where it operates. It must go outside its primary area of operation to embark on programmes and projects that will help the development of the community. It must also deliberately work on growing the economy of both the community and the state as a whole. This is what endears it to the people and government who will spare no effort to work for its continued progress.
At a parley, in Lagos, organized by the FCMB on Sustainable Banking in Nigeria: The Role of the Media the Group CEO, Ladi Balogun, observed that, “Banks in Nigeria need to change their narrative. Over the years we have always talked about how profitable our banks are, how big we are and the new products we are bringing out. The fact is that these things don’t interest the communities where we operate. We need to change the narrative and talk more about those things that interest the public. Banks should talk more about their impacts on their communities. We need to talk about what we are doing to empower the people, we need to talk more about how we are helping small and medium enterprises, we need to talk more about financial inclusion, we need to talk about gender balancing.”
As it is for banks, so it is for other companies.
However, a number of companies have construed connecting with the community to mean merely embarking on corporate social responsibility which they vigorously pursue. But it is much more than that. To connect with the community means to desist from manufacturing harmful products or conducting business in ways that are injurious to the community. There is no way a community can buy into the vision of a company whose activities result in the pollution of the community’s source of water supply, for instance. So, to be sustainable and enjoy the support of the community where it operates, a company must ensure that its operation is not in any way deleterious to the wellbeing of its host communities.
Last line
When businesses do the right things, they get the right results.
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