Navigating unchartered waters
Alan Cameron AM FAICD
Chairman, ASX Market Supervision
Directors are concentrating on cash (and creditors), and on cash (and lines of credit) – and when they have done that, they look at ... the cash. Trading while insolvent in the present climate of class actions and regulator litigation is too high a risk for reasonable and sensibly risk-averse directors. Listed company directors must also focus on disclosure – when is an update to the market needed? – to avoid leaving a wrong impression of the company’s prospects.
Directors are preparing for a recovery in two ways. Firstly, by conserving their cash, but also by not trying to pick the bottom. There will be opportunities out there, but insisting on buying at the absolute bottom may mean missing out altogether. Secondly, retaining staff for the future should also be a priority where that is possible.
Professor Ian Harper FAICD
Senior consultant, Access Economics
Directors are calling on the full spectrum of their business experience and acumen to respond to circumstances unfolding almost minute by minute. Under these conditions, there’s not a lot of science involved, especially since some of the foundations – most notably in the financial arena – have been shaken by this crisis. It’s almost like we’re in a fog and the best you can do is to grope your way forward inch by inch, taking depth soundings continually and sounding your fog horn to let everyone know where you are and that you’re still afloat. Directors are drawing on all their knowledge, experience and business intuition and just waiting for the fog to lift. These are very testing, but also exciting, times. This is when directors get to demonstrate their mettle and add vastly to their experience. Younger directors will tell their grandchildren about this crisis. Older directors already are.
What goes up comes down – sooner or later, this crisis was going to break and it now has. But what goes down, goes up. One of the cardinal errors in business is to assume trends will continue into the indefinite future. Just as the crisis broke suddenly, it is just as likely to recover unexpectedly. The trick is to manage your business so that you survive the crisis, but not to the point where you compromise the business’ ability to respond to a sudden improvement in conditions. If history is any guide, this crisis will bottom and turn quite quickly – of course, predicting when this might occur is no easy matter. But turn it will, and directors need to be planning for the upturn in the midst of the turmoil – the night is darkest just before the dawn. Businesses that emerge strongly from this crisis will not be those who just survived, but those that survived and set their sails for the upturn. You need to ensure you have little enough canvas aloft to avoid being blown over in the storm but a large enough sail area to pull ahead strongly once fairer conditions start to break.
Liz Bossley
CEO, CEAG
It is understandable if directors are just preoccupied with survival while the economy is crashing around their ears. But those of us who have been around a while and have lived through cycles before know the bad times present an ideal opportunity not only to correct mistakes by pruning dead wood, but to pick up good assets that will never be this cheap again. To buy assets, you need cash and that is in short supply. Some companies are going counter-cyclical and using the trading instruments being blamed for the recession to raise cash. For example, some natural resource producers are selling out-of-the-money call options on future production streams to raise cash now. They are selling these at strike prices well above market levels and if later the option means they have to sell production at those levels because the market has moved higher, they will be only too happy to do so. Some of those subject to emissions trading schemes and which have been given a free allocation of allowances to cover their emissions up to the end of 2012 are selling some of them now to raise cash. That is fine if the recession means they are cutting production and don’t need the allowances. But the price of carbon is very unpredictable. If they need to buy allowances later, they may find themselves in trouble.
When preparing for a recovery, think green. Love it or loathe it, the climate agenda is now inextricably linked with economic growth. Every investment at home or abroad should be tested for its environmental credentials. If you can cut carbon quicker and deeper than your competitors, you can generate surplus permits to sell for hard cash or reduce your cost base by not having to buy emissions allowances in the first place. When investing in projects abroad, the Kyoto project mechanisms can provide extra cash to top up the economics of environmentally friendly projects. There is money in emissions.
Paul Binsted MAICD
Chairman, Sydney Ports Corporation and member of the Financial Sector Advisory Council
The global financial crisis has produced three negative effects for most businesses – lower demand for business outputs, an often reduced selling price and a large decline in the availability of bank credit. Directors have dealt with this by postponing capital expenditure and raising new equity. Some have raised long-term debt through the bond market, by-passing the credit-constrained banking system.
Directors should prepare for the recovery through a combination of operational discipline (driving the unit cost of production down) and financial conservatism. The latter will include lower gearing than that commonly adopted in the 1993 to 2007 super boom, and also viewing bank credit as likely to be in short supply for some years. In some cases, companies can reduce their use of bank credit by entering the corporate bond market. In other cases, they can reduce their derivatives exposures as these are heavy users of bank credit. A prime example is currency swaps. Usage of these could be reduced by changing the currencies in which export contracts are written and loans are denominated. For example, exporters of coal or iron ore to Japan might request customers to write long-term contracts partly in Australian dollars (to service cash production costs) and Yen to service long-term Yen-denominated loans. This would avoid the need to use scarce bank credit swapping US dollars revenue into Australian dollars.
Michael Coleman FAICD
National managing partner, Risk and Regulation, KPMG
Directors are taking a back-to-basics approach to business, ensuring business fundamentals are in place, such as good cash and cost management practices, that the business can meet its liabilities as and when they fall due and that business plans and strategies are taking into consideration the changed business environment. Also, the ability to access working capital is paramount so directors need to ensure plans are in place to obtain new funding on the expiry or existing arrangements. By ensuring organisations are as efficient and resilient as they can be now will mean they are well placed for any upturn in the economy.