Everyone’s world has rapidly evolved in 2020 with the onset of COVID-19. Its impact has been extraordinary in the field of governance where decision making timelines have been condensed like never before.
“Never let a good crisis go to waste”
Before we get much further into this discussion, let’s be plain about the only real positive opportunity presented by COVID-19. It’s the perfect distraction to bury the sins of the past. For all those businesses which were over-leveraged on debt, struggling to grow, over-staffed, inefficient, stuck with the wrong business strategy, getting smashed by competitors, falling behind on innovation, etc., now certainly looks like the time for Fast Governance.
Announcing that due to COVID-19 the business has decided to impair the value of its assets, create provisions, stand-down staff, streamline its management, means the sins of the past are buried and the business can continue with a new plan, raise capital and change direction to survive or simply maintain integrity. For the purposes of this discussion, let’s call these actions “Never let a good crisis go to waste” as per Winston Churchill’s famous observation – made during the bleakest days of World War II. However, to clarify, Fast Governance is not about covering up poor management decision-making, it’s about authentically addressing a crisis and finding solutions in a time and process which was not possible before the pandemic.
The problem with governance
In a word association game, governance is associated with the words and phrases:
- Power games
While it hurts me to admit this, the negative impression of “governance” is real. The very mention of the Sarbanes-Oxley Act (2002) and the extensive compliance costs in dollars and hours continues to be a barrier to entry for example to Australian life sciences businesses which attempt to list on US exchanges like the NASDAQ. While American investors seem to have much higher valuations on the high-quality innovation from Australia, to be considered for listing in the US, substantial seed capital and governance / internal controls and reporting are required.
Governance is often considered an impediment to the business model which looks to take (reasonable) risks for the benefit of maximising profitable opportunities in markets. And yes, we are all aware of the Enron & WorldCom scandals in the US, which led to the SOX governance requirements. Currently in 2020, we are watching the unravelling of the German payments giant Wirecard which has filed for insolvency in the midst of a major accounting scandal linked to a €1.9bn hole in its finances (i.e. reported cash which doesn’t seem to exist).
In Australia, governance failures in our financial services sector have led to several recent damning reports, such as the Australian Prudential Regulation Authority (APRA) CBA Prudential Inquiry Report in May 2018. The report censured the CBA for a “slow, legalistic and reactive, at times dismissive, culture” and criticised the bank for having “an overly collegial and collaborative working environment which lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes”.
The problem with governance is that people will manipulate it for their own personal gain if the culture of the organisation lacks relevance and genuine purpose. The flow on effect becomes the apathy of people in the organisation as governance becomes a tool for achieving the desired outcomes of the cabal in control. Slowing the rate of change keeps these people in control which is why governance is often considered an impediment to change, even if the systems implemented seem appropriate to manage the risks of the organisation.
Fast Governance cuts through the barriers of yesterday
Fast forward to the realities of 2020 and the protection racket that governance has afforded many of those in control has been torn down. You cannot underestimate the economic consequences of this pandemic. Reserve Bank of Australia Governor Philip Lowe in August 2020 said that Australia’s economy was experiencing its biggest contraction since the 1930s, but the downturn was not as severe as earlier expected and a recovery was now underway in most of Australia. He said the RBA is now forecasting economic activity will decline by 6 per cent over 2020.
One reality of this pandemic is that decisions are required faster than at any time in our history. Survival of the fittest is the new game in town and the old governance systems of the past don’t work well in this environment. Consider the issue of employment which accounts for 30 – 45% of the cost base of most services and manufacturing businesses. Tough decisions were required in March & April 2020, one way or the other, employers were required to make decisions on whether to ride out the storm, retrench employees, stand down employees with or without the support of JobKeeper and risk losing some of the key drivers of their business. The normal process of developing a business case to fully address the consequences of rapidly falling revenues with fixed cost base including the key costs of employment was not an option. Decisions were needed to be made. Fast!
We have seen some very shrewd decision-making by business like Premier Investments Limited (ASX: PMV) which owns retails outlets such as Smiggle, Peter Alexander & Just Jeans. While they refused to pay rent on stores which were closed for two months during the initial COVID-19 lockdown, they applied for JobKeeper subsidies, focused on online merchandising and despite global sales being down 18% for the six-month period ended 25 July 2020 (vs the corresponding period in 2019), delivered record profits for the year. Ordinarily, decisions of the magnitude made by Premier Investments would have taken considerable time to research, analyse, consult, clear management and attain Board approval. Clearly times have changed.
Another spectacular success story is the online powerhouse Kogan.com Ltd (ASX: KGN) which reported a 13% increase in revenues to nearly $500m in FY2020 with Profit before Tax up 66% to $39m. In the five months since 16 March 2020, the market capitalisation of the company increased from $400m to $2.3 billion (noting a $100m capital raise to institutional investors in June 2020).
The CEO & Founder Mr Ruslan Kogan said “The second half of FY2020 was an extremely turbulent and challenging period for the world, the country, and the company. We have built a diversified, resilient business over many years, which enabled us to help Australians in their time of need. In the midst of the crisis, our teams mobilised all our resources to ensure our supply chains remained open, our logistics operations continued functioning, and in-demand products remained available for speedy delivery. There is a retail revolution taking place as more and more shoppers learn about the benefits of eCommerce.”
With Kogan, it’s important to appreciate that while Fast Governance was a key strategy in 2020, the business, which was founded in 2006, had well positioned itself before the pandemic to be ready for such growth and success.
Fast Governance is now in vogue
Fast Governance may well be in vogue now, because decision-making has been disrupted by huge shifts in normal market conditions across the entire economy, affecting employment, supply chains and the ability to generate income and positive cash flow. Outcomes in our new world of Fast Governance will be unknown until the dust settles on this pandemic, which may take a year or more.
While management is still empowered to react to changes in market activity, communicate with their Board and retain accountability for the success or failure of their decisions, those decisions can occur so quickly now that the decision making is more clearly focused on maintaining financial viability in the short-term rather than satisfying the needs of those few who previously were more focused on their own outcomes.
Perhaps Fast Governance will become a more permanent feature of our economy in future, one which is more outcomes based for the greater benefit of people, businesses and our community?