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March 2020

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.

Whether it be pandemics or other calamities, the time is now to start preparing every business for a world in which these disruptions are the new norm. Business leaders who do will put their enterprises in a position not only to endure the next crisis but to seize opportunities for growth, investment and long-term success in the recoveries that follow.

Here are five steps they should be taking – or at least considering – in preparation for an uncertain future.

Reserve and protect cash.

An abrupt economic shutdown like the one we’re in now can decimate cash flow, slowing revenue to a trickle at a time when credit lines could begin to dry up.

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 answers may vary by organization, and the ramifications will likely raise issues of their own. The COVID-19 response has shown that working remotely, at critical mass, creates all sorts of technological, data privacy and psychosocial challenges.

Preparing for these eventualities, Cheng suggests, requires business leaders to stress test workforce contingency plans once a year. “Try instituting a one-week period where half of all employees work from home,” he suggests. “See whether the plans you’ve put in place – IT, communications or otherwise – play out as intended. If a week is too long for the entire staff, using sample employee populations can work as well.”

For Cheng, stress tests are a simple, cost-effective way to stay sharp in a world full of unknowns – but frequency is key. He advises clients to test once a year so the knowledge stays fresh, especially as employees come and go and needs evolve. And it’s not just the workers on the production line who need to be engaged in this process. “It should be an all-hands-on-deck situation, and that starts at the top,” Cheng says.

Diversify supply chains.

During a crisis of COVID-19’s magnitude, the reality is, unfortunately, quite simple. “If your business depends on other businesses to function, it will face knockdown effects,” Cheng says.

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?

Hedge against exchange rate risks.

The COVID-19 crisis has prompted interest rate cuts, creating huge gyrations in bonds markets that in turn caused drastic exchange rate volatility.

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.”

Ensure highly leveraged collateral can withstand shocks.

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.

A crisis like COVID-19 leaves no individual or business untouched. And while it moves quickly, it also didn’t come out of nowhere. A UN-commissioned report last year warned of a “very real threat” of a pandemic that could take out almost 5 percent of the global economy; despite weeks of news from China, many in the U.S. and Europe were still caught off guard. “By simply paying attention to geopolitical developments – and having some plans in place – many could have been far more prepared for this downturn,” Cheng says.

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.
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