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What sort of decisions about the crisis improved, or worsened, shareholder value?

It is useful to look back at the types of responses and decisions various organisations had to the credit crisis, and their speed, to see if there are patterns that influence performance, and shareholder return.  A new book, Managing uncertainty [1], reports on how it tried to do that.  ‘Managing Uncertainty’ looks at the effect on total shareholder return of the types of decisions being made by organisations in response to the economic crisis.

The authors [2], surveyed 92 companies comparing their Total Shareholder Return (TSR) over the following years against the decisions and responses they made after the credit crisis broke.  There are three main areas of research that I want to highlight:

  1. The organisations speed of realisation and response to the crisis;
  2. Responses to the crisis
  3. How austerity and cost cutting was managed; and
  4. The organisation’s approach towards the crisis.

To gauge the effectiveness of various strategies, they looked at the choices and decisions against company’s total shareholder return compared to its peers.  In other words, did the organisation perform better than its competition and what decisions did they make?  let us look at these three areas in turn.

Speed of response and action

The first  area of investigation looks at  two questions: “How long did it take you to realise there was a crisis?” and “How long did it take you to react, once you realised?”.   At Excitant we see this as a three stage management process: “Awareness” (when did you know?),  “Responsiveness”  (When did you decide to act?) and Agility (When did things change?).   The research looked at when the organisations realised there was a crisis against the time line of events, and also how quickly they then took action.

What did they find?   Well it is no surprise that the companies that were able to identify changes in the market more quickly and respond had a higher shareholder value after 3-4 years.  However what is interesting is the speed of recognition and response.  The faster companies were recognising the crisis earlier, (Their sensors were working much more effectively) and they were responding within  just 4 months.

In contrast the poorer performing companies took up to 12 months to react to the  changes and another 6 months to respond with changes.  This is a dramatic difference.

These faster reacting companies were not compromising either costs or decision quality in their speed.  In fact they were performing better, with better quality decisions than those that dithered, hesitated or over-analysed.

What the surveys does not make clear is the difference between awareness and realisation.  The executives might have been aware of issues, but when did they realise that these issues constituted a credit crisis, that required a response.  This is about the speed of picking up external signals (At Excitant we call these External Predictive Indicators -EPIs) that are monitored to inform strategic insights, turning them into a strategic insight, and then acting on that insight.  The whole process is important.  That is why this is built into the Strategic learning model that we help clients implement and use, to become more aware, responsive and agile.

Responses to the crisis

How do the types of response influence Total Shareholder Return?  In the pre-release material published by PA [3] they list fifteen potential responses.  The top eight (with % of respondents ) being:

  1. Improved operational effectiveness 83%
  2. Cutting costs 83%
  3. Focus on profitable core 68%
  4. Instil strong leadership & governance 66%
  5. Reduce staff costs 66%
  6. Stronger, closer relationships with customers 62%
  7. Flexible strategic planning 54%
  8. Empowering, enabling and mobilising staff 54%

Unfortunately, the summaries ignore aspects of flexible strategic planning and empowering staff, to concentrate on the approach to cost cutting.

Approach to cost cutting

They say that whether the cut costs of not is not a differentiator.  What does differentiate the companies is the depth of cost cutting.   Those that made significant cuts had there TSR drop by 1% against their peers. In contrast those that only made moderate costs cutting measures had their TSR rise by 5%.  in fact those that did not cut staff at all, had a TSR rise by over 6% relative to those that cut staff.

What does this mean?

Well it was pretty clear that this was not a fundamental recession, but a credit crisis.  In other words business did not fundamentally go away, but organisations reacted to the uncertainty.  At Excitant we saw this very early on in the crisis, with organisations putting managers and staff on three and four day weeks rather than laying them off or making them redundant.  (Examples include JCB, KPMG and Honda.)  The big difference in this recession, compared with the previous two,  time around was that organisations recognised they needed to retain core staff and capability: Shedding them would be a mistake.  In fact the more cunning ones were looking for staff ,shed from those that panicked.

So, this suggests that cutting costs dramatically and frequently damages your share price (as well as your longer term capability). In contrast, those organisations that cut more moderately and carefully, had better long term returns.  The difference comes down to the consequences of cuts.  Those that cut customer service or cut core capabilities that took time to build, did most damage.  They had lower total shareholder return (TSR).

But cost cutting is not enough

Not surprisingly, two-thirds of the respondents saw the crisis as a threat and sought solely to ride it out.  They reacted defensively.  One third saw it as an opportunity.  What happened to their respective TSRs?  Well the defensive ones lost up to 5% TSR. The more aggressive, opportunistic ones saw their TSR rise by up to 5%. Those companies who viewed the crisis as an opportunity had a higher TSR than those who viewed the crisis as a threat.

The question is, what constituted an aggressive action?  Well, they cite three main ones.  The third being bold strategic moves such as acquiring new businesses.
It is the other two, the first two listed that I want to focus on, as this is where we also help clients. What were they?

  1. Better planning: consciously putting in place flexible planning – moving from budgets to rolling forecasts and from forecasts to scenario planning – and being aware of competitor moves
  2. Better management: strengthening governance, empowering staff.

So as I would expect, improving how you manage, introducing a more responsive management and planning process, makes a difference.  What is interesting is that, behind this is a resurgence in scenario planning, to identify risks, test fly tour strategy and think through options more thoroughly.  Notice this more thorough, systematic and thoughtful approach to strategy and planning is also a characteristic of those organisations that responded faster.  This is, all part of out strategic learning approach.

I am delighted to see “empowering staff”, “pushing down decision” and “strengthening governance”.  This combination often seems a contradiction: How can I empower people, yet still improve governance?  In fact as we have seen with our clients, the process of   empowering staff improves both results and increases governance when the approach makes decision making, clearer: Giving people The information to know, the ability to decide, the freedom to act and the opportunity to learn.   It this increased delegation also means that executives and managers have more time to look at, and consider, the wider issues and think beyond the operational, day to day aspects.

Conclusions (and a helpful note on methodology)

So, are you attracted by a 5% TSR differential over your competitors? First let us look briefly at the validity of the  approach.

Not many papers explain their methodology or statistical validation. I am delighted to say, this one does.  It used information from 92 organisations, and says,

“This survey has not been fully able to prove causality between actions and performance. To help overcome questions around causality in comparisons between actions and performance, we have used ‘delta TSR’. […]  The key results have been tested for statistical validity and were found to be significant to a minimum of the 90% level, and in some cases to the 95% level.”

In other words there is a pretty good, though not perfect, correlation between these factors.  It is certain enough to consider action.  Enough to make you think about your actions and response to the crisis, and importantly, the economic uncertainty which won’t be going away. And 5% TSR differentials cannot be sniffed at in the current climate.

Are you ready to manage under uncertainty?  If you want to hear how others are benefiting and what you might do, talk to us.

References:
[1] Marion Devine and Michel Syrett, 2012 Managing Uncertainty, Published by Economist Press (available November 2012)
[2] Journalist Michel Syrett and Ashridge research associate Marion Devine. (The research was commissioned by PA Consulting).
[3] Managing Uncertainty: Navigating the Minefield, International survey of how business leaders have responded to major uncertainty (PA Consulting) 2012