Ian Matthews, Head of Business Development at Bravura, highlights the need for South African companies to display resilience amidst the country’s COVID-19 lockdown period.
“For some organisations, near-term survival is the only agenda item. Others are peering through the fog of uncertainty, thinking about how to position themselves once the crisis has passed and things return to, a so called, “normal”. The question is, ‘What will normal look like?’ While no one can say how long the crisis will last, what we find on the other side will not look like the normal of recent years.”
It might be expected that these words were written as a response to the impact of the COVID-19 pandemic that has surged across the globe and is set for another round, as first evidenced in countries such as China and South Korea. In fact they were written in 2009 by Ian Davis, a then Managing Partner at global consulting firm McKinsey. He was responding to the financial crisis of 2007/08 that ruptured global financial markets, decimated major organisations and led to a global recession.
More than a decade later, financial systems still feel the effects of that crisis which saw global GDP fall by 1.9%; its steepest and most widespread contraction in the modern era. In contrast, the effects of the COVID-19 pandemic is expected to usurp this dramatic drop with the International Monetary Fund (IMF) estimating a contraction of 4.9% in GDP for the year (this estimate was dated late June 2020 and may still worsen). Advanced economies are projected to shrink by 7%. Developing economies are expected to contract by 2.5% as they cope with their own domestic outbreaks of the virus, representing the weakest performance by this group of economies in at least sixty years.
Local business is only too aware that the COVID-19 effect will be felt long after the virus has run its course. Companies are cognisant of the urgent need to demonstrate flexibility and agility in the way they deliver their products and services in the fight for survival. Yet many are rooted in reactive mode, given the speed with which the current scenarios are changing. Furthermore, as South Africa eases lockdown restrictions, the curve of infection grows steeper with around 125 000 confirmed cases in late June 2020. Some businesses, only just venturing into a form of on-site activity, are potentially faced with further closures as staff members contract – or come into contact with – the virus.
Across the globe we are operating in uncharted territory and few can know with any certainty what the best route will be to guide our companies through the anticipated impacts and hidden shocks that lie ahead as markets grapple with the virus-driven economic fallout.
It may be helpful to look retrospectively at how companies were able to weather the storms of previous global crises. In early 2019, before we knew of the existence of COVID-19, McKinsey published an article on just this, exploring the salient features exhibited by those companies that survived the 2008 financial crisis.
McKinsey scrutinised the performance of a thousand listed companies from diverse industry sectors during and after the crisis. It was found that a sub-group of organisations displayed more resilience than others. Resilience is defined as the capacity to quickly recover from difficulties; an ability to adapt well in the face of adversity and to bounce back.
Resilient companies were able to deliver growth in total return to shareholders that were structurally higher than the median in their sector after the financial crisis. It was found that the performance of these companies had dropped less during the recession, and improved faster as economies began to recover. A decade later, the cumulative total return to shareholders of these companies had grown to more than 150% over those that were less resilient.
The McKinsey report indicates that these companies were not necessarily better prepared for the crisis: “Resilient companies were not insulated from the impact of the downturn: their revenues fell in line with their peers during its early stages. By 2009, however, the earnings (EBITDA) of resilient companies had risen by 10%, while industry peers had lost nearly 15%”.
The McKinsey analysis suggests that these companies moved further and faster before, during and after the crisis. At the beginning of the crisis the resilient companies were focused on cleaning up their balance sheets and reducing debt as opposed to the majority of companies that were accumulating debt and selling off underperforming businesses. As the financial crisis became full-blown, resilient companies began to cut their operating costs (by one percent) – giving them access to cash – while other companies’ operating costs grew. The resilient companies then used the cash more wisely by maintaining their relationships with key customers through the recession and acquiring assets and companies from distressed competitors as the upturn began.
Being resilient requires honest scrutiny of the traditional organisational structure and recognising whether this could be impeding the ability to deal timeously with operational issues that emerge through the COVID-19 crisis. In this environment, swift decision making and execution become a priority. Adopting an agile approach might require a reconfiguration of strategy, processes, people and technology to enable value creation and value-protection opportunities. Decentralisation may need to be enhanced with flatter decision-making structures that enable speed and flexibility. Decentralisation does not mean a loss of accountability which should be ensured by the tracking and measurement of specifically articulated outcomes.
While companies must be responsive to immediate crises, it is critical to keep in mind the long-term view. Pursuing shareholder value cannot be the only goal. Although businesses must reward their investors for the risks they take, there is also a responsibility towards company executives and employees who belong to the wider community. Delivering shareholder value and serving the interests of employees, communities and the environment do not have to be diametrically opposed. Long-term value has been demonstrably been linked to a thoughtful, holistic outlook which ultimately provides superior value for shareholders.
It is anticipated that the COVID-19 pandemic will be with us for some time. Futurist Graeme Codrington of TomorrowToday (a South African scenario planning company with more than twenty years of experience), cautions that from June 2020 there could be a further eighteen months of having to manage the COVID-19 pandemic across the globe, based on the data of previous pandemics such as the Spanish Flu (a form of coronavirus H1N1). The world’s pandemics over the last century have displayed similar patterns of infection, with three “waves” that have dipped and surged according to the seasons (becoming most severe in winter).
Codrington says that society will potentially remain deeply disrupted for most of next year and that we will have to learn to live with COVID-19 for far longer than anticipated. He urges companies to find their “marathon pace” in dealing with the impact of COVID-19.
Although it is critical for companies to look urgently at strategies for survival now, the survival strategy must be thoughtfully conceptualised in order to expand into a new normal way of doing business. Like marathon runners, a short-term view that expends too much energy at the beginning of the race will damage the ability to go the distance. Resilience in runners and companies alike requires finding intelligent methods to conserve energy in the early moments of the race, having the ability to make decisions swiftly but not rashly, and remaining cognisant of the bigger gains that may only be realised over time.
Categories: Economy, News
Published: Institute of Directors’ Directorship magazine and Accountancy SA