1: “It’s ten years out, and Netflix is a failed firm. Estimate the probabilities of the different causes.”
That’s the exercise Netflix CEO Reed Hastings poses to his leadership team.
“Let’s say one cause is that a plane crash takes out Netflix’s headquarters,” Carolyn Dewar, Scott Keller, and Vikram Malhotra write in their book CEO Excellence: The Six Mindsets That Distinguish the Best Leaders from the Rest.
“The probability of that is 0.00001,” the authors note. “Then Reed and his team work through the rest of the list, making assessments of the respective probabilities.
“It’s surprisingly challenging,” Reed says, “to assess what those scenarios are. Sometimes the discussion turns to what we can do about some of these risks. But many times, just defining what risks we face will prompt people to adjust behavior in smart ways that make us more resilient.”
2: Here’s a dose of reality: “No matter how well a company is run,” Carolyn, Scott, and Vikram surmise, “the question for even the best CEOs isn’t ‘if’ they’ll have to lead through a crisis, it’s ‘when.'”
Research shows that in the last ten years, headlines with the word “crisis” alongside the names of the 100 largest companies on Forbes The Global 2000 occurred 80 percent more often than they did in the prior ten years.
Is this surprising?
No. Because of “the ever-increasing complexity of products and services driven by technology and global supply chains,” the authors reason.
“Further amplifying matters,” they observe, “are, first, higher and higher stakeholder expectations, second, social media platforms like Twitter and Facebook that quickly and effectively amplify concerns, and thrid, governments in many regions that have shown an increased willingness to intervene on behalf of their constituents.”
Yesterday, we explored how fatal car crashes involving faulty ignition switches in some of GM’s automobiles became a flashpoint as CEO Mary Barra began her term as GM CEO. Other recent, large-scale corporate crises include United Airlines’ injuring a passenger while forcibly removing him from a United Airlines flight and a widespread cyber-breach at the credit agency Equifax.
Be it a “costly safety issue, an ethical-conduct issue, a hostile takeover attempt—the possibilities are endless,” the authors write. “Macroeconomic events, pandemics, international conflicts, natural disasters, social conflict, terrorist attacks, and countless other external factors can all create crisis conditions for CEOs.”
3: So, what do the best CEOs do?
They embrace the timeless wisdom in the saying: “An ounce of prevention is worth a pound of cure.”
“The way you get prepared for a crisis is never on the day of the crisis,” says Ecolab CEO Doug Baker. “It’s creating resilience before it ever happens.”
Observes Esquel Group CEO Marjorie Yang: “When you have a crisis it’s like a sailboat going into a storm. You’ve got to prepare your boat before you head into the storm, and once you’re underway you can’t expect people will know what needs to be done at the last minute.”
Understanding that there is a crisis is an important first step: “One secret about crisis management,” reasons General Mills CEO Ken Powell, “is recognizing when you have one. They’re not always as apparent as the COVID-19 pandemic. Sometimes, you really have to bang the drum because it may not be quite so apparent.”
Carolyn, Scott, and Vikram outline three levels of preparation.
“Virtually every company uses some form of forecasting methodology to predict the future.
“The better companies,” they note, “do such forecasting based on a ‘best,’ ‘middle,’ and ‘worst’ case scenarios. By contrasting the extremes, contingency plans can be made to mitigate downsides and maximize upsides.
“The best companies,” they explain, “go one step further and also stress-test their company’s ability to respond to a small number of ‘black swan’ events: Crises that are rare, severe but often obvious in hindsight.”
The best CEOs regularly “stress test” their organizations and create crisis management playbooks.
Former Intuit CEO Brad Smith observes: “While each crisis is unique, if you step back and look at them, they share seventy to eighty percent of the same characteristics. The same playbooks work, but you have to tailor them to the specific situation.”
What does a good crisis playbook look like?
It must detail “the leadership protocols, war-room configuration, action plans, and communications approaches for when a crisis hits,” Carolyn, Scott, and Vikram write. “It will also define and measure the leading indicators of an escalating threat.”
Having a playbook, however, is only step one. Regularly running the plays is the essential second requirement.
“I had all of the divisions tell me what they’d do to maintain profitability in their businesses if they were hit by the worst cyclical drop in the last twenty-five years,” says Caterpillar CEO Jim Owens.
“Everybody had to go through that exercise once a year. They all were beginning to think it was a stupid exercise after five years of record growth and profit. But in the sixth year, it turns out that was a pretty good exercise. In November of 2008 [during the global financial crisis], we said, ‘Okay. Get your deep recession scenario out and implement it.'”
Dangote Group CEO Aliko Dangote utilized a similar approach, which ultimately allowed the firm to navigate the COVID-19 crisis. “Prior to the pandemic, we strengthened and improved our business processes, governance, and organizational structure. During this exercise, for example, we instituted a robust risk management function to ensure preparedness for such times as these.”
This preparation allowed Aliko to be proactive when the COVID crisis hit: “Having a well-functioning business continuity framework,” he reflects, “helped ensure we kept our businesses running across the Group.”
This ability to anticipate potential problems is a trait all of the best CEOs share.
“A crisis can come from a very committed start-up that is about to beat you,” says General Mills CEO Ken Powell. “You’ve got to be on the lookout for those companies who have a thousand rabid users. Let it grab your attention, and then react early, or you won’t see the crisis coming.”
Caterpillar CEO Jim Owens describes how being proactive regarding early warning signs had a profound impact on the organization: “In 2007–2008, everyone on my team was convinced we needed to double the capacity of our mining equipment. But I was spending time in New York and Washington, and I could see that although the optimism at Caterpillar was running high, we were cruising toward the waterfall. . .
“We chose not to increase production because we were worried about the global economy—meanwhile, the mining companies were telling us we weren’t building enough to satisfy their demand.
“The next year they took less than half of what they had on order!”
More tomorrow!
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Reflection: How often do I honestly assess the potential risks facing my organization, and am I truly prepared for the unexpected?
Action: Identify one major risk my organization could face and outline a simple crisis response plan to strengthen our resilience.