Beyond COVID-19: How Business Leaders Can Prepare for a New Reality
It may be a public health crisis above all, but the COVID-19 outbreak has quickly become a profound and unprecedented business disruption, poised to wreak global havoc at levels no financial model, economic forecast or business plan could have predicted, and with no clear end in sight.
While we may not know how this global crisis will play out, we do know it won’t be the only one business leaders will face in the coming years. With global value chains, increased migration and climate change creating massive new risks, neither executives nor directors can afford to treat the COVID-19 crisis as an anomaly.
With global value chains, increased migration and climate change creating massive new risks, neither executives nor directors can afford to treat the COVID-19 crisis as an anomaly.
Here are five steps they should be taking – or at least considering – in preparation for an uncertain future.
Reserve and protect cash.
But Tai-Heng Cheng, global co-head of Sidley’s international arbitration practice, says there are immediate measures executives can take to head off a cash squeeze. “In the future, being prepared will probably require being aggressive in going out and getting all the credit a business can get before it becomes restricted,” he says. “They can also call their vendors and ask to defer payments in the near-term, to temporarily dampen the need for cash.”
And when the dust settles, “Leadership should get into the habit of checking their cash position almost obsessively,” Cheng says. He recommends building up at least a six-month reserve, with adjustments according to industry and where we are in the economic cycle, and then holding it in cash or easily liquidated securities.
Test workforce contingency plans.
During any disruption, ensuring employee safety will raise urgent, critical questions for every business leader. Should they split up the workforce? Will employees be forced to work from home? How can production continue in the meantime?
The best way to mitigate risk in anticipation of a disruption like this is by diversifying your supply chain among different vendors in different regions. Of course, it may not be that simple. “If due to personal relationships, your business depends on a single supplier, make sure that supplier at least has diversified production sites so that it can better withstand economic shock,” Cheng advises.
Leadership should also be sure force majeure clauses are updated to address common problems caused by pandemics and the allocation of reduced supplies. For instance: How does a given supplier allocate remaining inventory? Do you request interim relief in important cases?
Moving forward, Cheng says, “International businesses should take a long-term view on currencies, if they have the resources, buying up currencies or options to hedge against fluctuations that may occur during a disruption.”
Outstanding leveraged loans now amount to about $1.2 trillion, roughly double pre-2008 crisis levels. Yet despite talk of a corporate debt bubble, leverage, according to Cheng, isn’t necessarily a bad thing – it’s simply a matter of making sure enterprises are sufficiently protected against the downside.
“In the past, credit risk came predominantly from economic conditions,” he says. “But now, sudden events like the COVID-19 outbreak must be factored in. Executives should be asking: Do we have solid plans in place to deleverage quickly?
Attacking it from a crisis management standpoint may be one way of approaching the issue. “Business leaders should assess where their organizations can stop spending, what’s discretionary, what can be put off for a year and what costs can be cut that otherwise drag on cash flow,” Cheng says.
And for those that find themselves well-capitalized and cash-rich, Cheng suggests they may do well to head the opposite direction – by making high-value distressed investments when the tide starts to turn.
Smart business leaders will eventually come to see COVID-19 as a case study for what to do – and what not to do – in the face of a global disruption.
Given the unprecedented nature of this crisis, the slow reaction is understandable. That shouldn’t be the case next time. Smart business leaders will eventually come to see COVID-19 as a case study for what to do – and what not to do – in the face of a global disruption.
“Being prepared for economic shocks should enable CEOs to avoid having to scramble for cover,” Cheng says, “so they can focus instead on seizing the growth and investment opportunities that will inevitability present themselves when recessions end.”
This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.
Tai-Heng Cheng
is global co-head of the international arbitration practice at Sidley Austin LLP. He is a preeminent arbitration practitioner whom clients across industries turn to for sound strategic advice in managing risk, and successfully addressing and solving a myriad of complex business issues. He has been a trusted advisor to companies and boards for more than 20 years.Wherever they turn, today’s business leaders face unprecedented challenges on a global scale. As the challenges mount and shift, and as the pace of change accelerates, so do the questions that keep boards and executives awake at night. They need answers – fast. Insights for Leaders delivers the perspective leaders need to understand what today’s news will mean for tomorrow’s world, and to make smart, agile decisions that will ensure their organizations not only survive, but thrive in an uncertain world.
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