Author, CEO and performance measurement expert Greg Milano gives advice on what business leaders should be doing in a downturn:
First priority is protecting the business, so be sure to carefully manage cash flow and liquidity, and for companies that have heavy debt burdens this could require full attention. Along these same lines, be sure to stay in close communication with employees, customers and suppliers so they know what is happening, how it affects them and what they can do.
Next priority, for those not consumed with item 1, is identifying opportunities that the downturn creates. Within the business, this can be a great time to reset strategy, consider bold business changes and rationalize operations that need it, while the warts of poor performance are extra visible. As I believe Winston Churchill said, “Never let a good crisis go to waste.”
Winston Churchill said, “Never let a good crisis go to waste.”
For those companies that have truly nothing negative happening to their business, which is the case for many healthcare companies, for example, but where the share prices for the company and its peers have declined, there can be opportunistic value creation situations.
As I wrote in Curing Corporate Short-Termism, “From the 2007 peak to the trough of the market in the 2009 financial crisis, the median utility company suffered TSR of –41%. Utilities are not viewed as being cyclical. Indeed, the median utility, Exelon, saw its EPS increase slightly from $4.03 to $4.09 from 2007 to 2009, a period when its EBITDA increased 9.5%. So why was its TSR –41%? Market fear. Exelon acquired no competitors that year, but perhaps it could have improved its long-run performance by buying a very stable competitor that would have essentially been on sale”.
For those that don’t see any decent acquisition opportunities, and have available debt capacity, buybacks may be good at this time as well.
Greg is the founder and chief executive officer of Fortuna Advisors LLC. A leading expert in capital allocation, behavioral finance, and incentive compensation design, he has nearly 30 years’ experience in management consulting. Before founding Fortuna Advisors, he was a partner at Stern Stewart and a managing director at Credit Suisse. He began his career as flight systems design engineer with the Grumman Corporation. Greg is on the Editorial Board of the Journal of Applied Corporate Finance, has published hundreds of industry articles, and has appeared as a corporate finance thought leader on dozens of national broadcast outlets including CFO, FEI Daily, Workspan, The Sunday Times, Sunday Business, Financial Director and the Financial Times, CNBC, Bloomberg and Sky Business News.