What can finance chiefs learn from history to help navigate the current downturn?

What can finance chiefs learn from history to help navigate the current downturn?
CFO Europe , Feb 2009
Corporate executives often criticise business-school academics for being remote, relying on outdated research and case studies that bear little relation to current conditions. But as the recession challenges what most managers thought they knew about business cycles — few will have experienced a downturn as severe as this one during their working lives — many are scrambling for guidance. Now the professors' knowledge of history may provide the key to unlock some of the most vexing issues facing executives today. With this in mind, CFO Europe spoke with leading academics to find out more about past downturns so as to manage more effectively in the months ahead. - Jason Karaian and Janet Kersnar, CFO Europe Magazine
Bolster the Balance Sheet - Manuel Ammann, University of St Gallen
One of the "old topics" that Ammann reckons finance chiefs need to think hard about in the coming quarters is capital structure. Determining optimal leverage is a subject the professor never tires of discussing with CFOs. But it's not as straightforward as many would like. "There's no such thing as an optimal balance-sheet structure that cuts across entire business cycles," he says. The challenge is to remain vigilant and adjust balance sheets in concert with business cycles. "If there's an important lesson of past crises and the current one for CFOs, that's probably it," he adds.
Remember Japan - Jean-Pierre Lehmann, IMD
In the late 1980s, the country's financial institutions — convinced that the model developed by corporate Japan marked a paradigm shift — forecast that the economy would soon grow to become the largest in the world. "They were the Muhammad Ali of the global economy, and were not about to accept being knocked out," as Lehmann describes it. As a result, the crash was met with a period of prolonged denial, delaying a recovery.
Companies such as Toyota "remained at the top, through good times and bad," Lehmann says. A key element of their success has had to do with incentives. "Whenever something goes wrong, the top takes a 30% or 40% reduction in salaries," the professor says. Given that these executives are generally paid far less than their western counterparts, the cuts are "more than symbolic," he adds, but help junior staff accept reductions, while also fostering a sense of loyalty during morale-sapping times
Grin and Bear It - Valter Lazzari, SDA Bocconi
In terms of its worldwide scope, this downturn is similar to the global recession of 1974, but its severity makes it a problem for public policy rather than private actors. The "output gap" — that is, the shortfall between current activity and potential production — is so large that, practically speaking, the pressure on companies' top lines is overwhelming, the professor believes. Companies, of course, should try to cover the shortfall with restructuring and cost-cutting, "but this can only achieve so much," Lazzari says. "It cannot solve the entire problem." The gap will only be addressed, the professor reckons, by "a huge boost in public spending."In the meantime, the professor advises managers to muster their powers of positive thinking. "The situation is so bad that we need a big government," he says. "Let's hope that a big government is also a good government. This is a big risk."
Judge Value - James Dow, London Business School

It's all about shareholder value. That's what students in James Dow's corporate finance course at the London Business School hear time and time again. "You won't find people who say they don't believe in it, but it's quite a radical idea," he says. "It means that you don't believe in anything else. It doesn't mean shareholder value mixed in with other things; it means shareholder value is your objective."
But as he tells his students, "people don't object to the concept, they object to applying it," even when times are good. For example, the reluctance of companies to conserve surplus cash flow is a "clear breach of the shareholder value maxim," he says. Companies that cave in to stakeholder pressure to invest their cash often skew capital allocation decisions.

Make Heads Count - Eric Weber, IESE
Restoring confidence should be a priority, Weber teaches. "If there's one thing we can learn from past crises — even if they weren't as bad as this one — it's that talent is the key to survival," he claims. Though the professor acknowledges that cutting labour costs is sometimes unavoidable, he advises firms to "clean out the 'tail' of the organisation instead of just reducing everything by a certain percentage."
A hiring freeze shouldn't mean that companies also curtail training, succession planning or even recruiting activities.

Plan for Battle - Marc Buelens, Vlerick Leuven Gent Management School
In this regard, the current recession follows the "classic" model, Buelens notes. "It's much deeper than previous ones, but it's a classic downturn." In thinking about the past, the professor has developed a nine-point plan of practical advice for managing in a recession. See "Recession Survival Guide"

Recession Survival Guide

Keep it simple.
Focus on a few, simple guiding principles.
Speed it up.
Be more responsive to clients. This is why simplicity is important: complex business models are slow to adapt.
Stay loyal to fundamentals.
This is not the time to change your strategy.
There is no substitute for courage.
Intelligence, vision or mathematical models will take managers only so far.
Cut from high to low, when it comes to labour.
Keep communicating, both internally and externally. Address rumours immediately.
Make no idle or empty promises.
Split the company into small, self-contained units.
If one unit has to go, the system still survives. Economies of scale can come later.
Put the best people onto the biggest opportunities, not the worst problems.
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