Artcile originally published in Hebrew in The Marker 30.12.2018
The sharp falls on the US and the local stock exchange indicate that we are facing a period of instability in the markets, and perhaps even an international financial crisis. ■ The stability demonstrated by the Israeli economy over the last decade, since the crisis in 2008, proves how important it is to be prepared for the crisis.
The sharp declines on Wall Street, and now on the Tel Aviv Stock Exchange as well, indicate that we are facing a prolonged period of instability in the markets, and perhaps even an international financial crisis. In Israel, it is customary to boast, and largely justifiably so, that the previous crisis in 2008 passed us by, almost without disturbing the local market at all. However, past achievements should not lead to complacency. If anything, the stability demonstrated by the Israeli economy over the past decade shows how important it is to be prepared in advance for a crisis. For this purpose, here are 10 rules that directors are recommended to adopt during such a sensitive period:
- Information, information, information. Directors must demand and receive detailed and real-time information regarding each of the possible scenarios relating to the company’s situation in light of the crisis. The information should be used by the directors to prepare orderly risk management plans and to assess the exposure to each of the risks.
- Sensitivity, and plenty of it. In times of crisis, it is the directors’ responsibility to establish sensitivity tests based on quantitative measures and as many positive and negative variables as possible. These tests are intended to predetermine what is the most tangible risk facing the company – and prepare to minimize the damage that may be caused to the business.
- Exactly the opposite. Like the IDF Intelligence Unit, or even the State Attorney's Office, the Board of Directors is required to appoint a senior manager whose job is to think the opposite of what the management thinks and from what the professional executives in the company think. If the company has a conception, the goal is to challenge it.
- Don’t be smart in hindsight. In order to prepare for the worst possible scenario, directors must act on the assumption that the main scenario that the company created will ultimately go wrong. Such an assumption should already exist now, even before the grave event occurs (pre-evaluation as opposed to a post-evaluation), and from this assumption a comprehensive examination is required of what could go wrong along the way.
- To hold or to sell? As with any business transaction, the decision whether to stay in the market or to withdraw from it in the event that the declines increase, should be examined according to cost-benefit considerations. The directors must demand that they be presented with a cold and mathematical calculation of the costs and risks regarding the continued investment compared with the sale thereof.
- To move up a gear at the meetings. Crisis periods are characterized by changes around the clock, at short notice, and when one event chases another. In these periods, it is forbidden to stick to routine, but the Board of Directors and its committees (and especially the investment committee) should be convened frequently, preferably once every few days.
- To consult – and as much as possible. This is the time to intensify the company’s consulting system with experienced and skilled consultants with a diverse background in crisis management. Do not be afraid of the costs – not only will it pay off, but engaging with consultants can also be done on a short-term basis.
- Are you thinking short term? This is also good. When the markets are turbulent, and the prices of securities and assets rise and fall (especially when they fall), any decision that is considered by the Board of Directors must examine its implications with respect to the following three possible time ranges: short, medium and long-term.
- Time to set up a war room. The flow of information about market changes is critical; however, in a crisis, it is forbidden to rely on the normal channels for obtaining information. A dedicated mechanism should be established within the company and in the format of a war room, whose function will be to work directly with the Board of Directors and the Investment Committee so as to ensure that they are informed in real time about what is happening.
- Be on standby. The directors must supervise the preparation of contingency plans that can be retrieved and implemented immediately – in accordance with changes in the markets and given a series of cases and responses.
Finally, in times of crisis, there is no substitute for confident leadership that radiates an environment of stability and reliability. When the stability in the markets is undermined, the ones faced with this task are the Chairman of the Board of Directors and the Chairman of the Investment Committee. They are required to lead the ship in stormy waters and to navigate it, as the crisis subsides, to safety.