Buchanan Harvey & Co.

There is no doubt that the world, over the last eighteen months, has changed and sectors such as investment banking, may not be the same again in our lifetimes.

We are living through a recession which is the most severe in decades. It has some similarities with previous recessions; one or two sectors which had got a bit carried away and which needed a correction have landed with a thump. In 2000, we saw the same happen to the telecoms, media and telephones sector. The problem on this occasion, however, is that since it is the banking sector which has hit the buffers; all other sectors of the economy are suffering severe repercussions. There is no doubt that a correction in financial services and property was badly needed. However, when banks go down they take a lot of other businesses and individuals with them.

The question facing the Boards of PLCs is how best to navigate these rather treacherous waters? From the point of view of Boards, the single biggest change is in their level of alertness. Good Boards have started reviewing more detailed information and have also started meeting executives lower down the chain. This helps them in keeping their fingers on the pulse and trying to spot the first signs of trouble, rather than wait for it to become a substantial problem before they hear about it.

Now is the time when the calibre of the Non-Executives and Chairmen matters. Companies, which during the good times, found it convenient to recruit compliant Chairmen and Non-Executives, are now discovering that they do not have sufficient high calibre people around the table. A FTSE 100 Chief Executive, who repeatedly boasted to me of having manoeuvred the board into appointing a mediocre Chairman because he wanted to be left alone, started complaining about how useless the Chairman was when the company got into trouble. I had to remind him that mediocrity was unlikely to transform itself into genius at the first sign of trouble. A Board which is constructive but challenging remains the recipe for success even if it is not one for a cushy life.

The Chairman and Non-Executives can add enormous value during troubled times. They can provide much needed support and advice to a Chief Executive, who is being buffeted by the waves. They can provide reassurance to shareholders by being more visible, and their experience and contacts can be of great help in raising more capital. Chairmen and Non-Executives, who try to disassociate themselves from any difficulty in order to protect their reputations, ought to be avoided.

Another challenge that Boards face is how to balance fire-fighting with long term growth. Companies fighting for their survival have no option but to retreat from everywhere and try to survive in some shrunken form, to fight another day. However, companies which are in a slightly better position than that must not take their eye off the long term growth plans. The natural instinct of the executives at times like this is to bunker down and try to do their best to deliver respectable quarterly results. It falls to the Chairman and Non-Executives to keep long term initiatives on the agenda.

India, for instance, is still growing at 6%. For most British companies, it does not require a substantial amount of capital in order to start something in India. This is particularly true because slow and steady rather than flamboyance is the preferable approach for U. K. companies going to India. There may be no returns in the first three years but in the medium to long term, there will be. It is too big an emerging market for companies to ignore. However, executives can fall into the trap of taking the view that they may have moved on by the time the company receives the credit for returns from India but are there to be rebuked, if the following quarter does not meet expectations. Therefore, the safer bet is to focus on the short term. The Board, as a whole, needs to ensure that the long term interests of the company do not fall off the agenda during a period of short term difficulty.

There are some signs of the debt markets recovering. When the recession ends, the PLCs will again be in a dominant position. They were rather under attack from private equity, which on the back of cheap and plentiful debt was not only making bids for ever bigger ones but also, presenting an obstacle to growth by outbidding them for strategic acquisitions. It will be a long time before private equity can do that again. A balance of sensible debt and equity will once again become the prevalent financing model.

A lot of fat will be cut and much needed corrections in the world of financial engineering will take place. We will return to an era of hard work and creating value as the keys to success rather than wheeling and dealing. The businesses that survive will be leaner and fitter and will grow again. We must remember that the darkest hour is just before dawn.

Samuel Johar is Chairman of Buchanan Harvey & Co., an Executive Search and India Advisory firm.

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