When the economy is uncertain, boards must be prepared to deal with rapidly deteriorating circumstances that could push a company into insolvency. Directors who know the warning signs can help their companies head off bankruptcy—or at least be in a better position to emerge successfully.
Typically, businesses, industries and the economy as a whole run in cycles. Any company can become susceptible to financial distress at some point. A lengthy economic downturn can affect consumer cyclicals such as automotive, housing, entertainment and retail. New technology may fundamentally change the relationship between certain businesses and their customers. Companies may also face unique existential threats brought on by regulatory changes, senior management turnover or increased competitive pressures.
On top of these more predictable signals, companies are also vulnerable to the unexpected. Few could have predicted the COVID-19 pandemic of 2020 and the widespread economic disruption it brought.
Directors need to recognize that even a seemingly healthy company could, at some point, face liquidity challenges or even total dissolution. And so directors and management must be prepared to deal with rapidly changing circumstances that could lead to financial distress.
Ensuring that the company is well-prepared can be difficult for directors, especially since they aren’t managing the day-to-day operations at the company. And unless there are obvious fires to put out, executives may not want to admit to their board—or to themselves—that their company soon could be struggling.
Accept the possibility that in fast-changing circumstances, your company may need to have an unexpected conversation about restructuring. While management handles the day-to-day, boards should be looking ahead for the need to shift strategy.