Winston Churchill has been credited with saying, “Never waste a good crisis.”
The idea is that, in times of turmoil, you can make big changes that otherwise would have been blocked.
When the status quo dominates, it’s hard to get buy-in for radical proposals. But when chaos abounds and everything is in flux, what was once considered radical might now be considered acceptable (or appropriate to the situation at hand).
“Never waste a good crisis” is thus a common rule of thumb in political circles. But it applies just as much, if not more, to public company CEOs and the strategies they deploy.
In normal times, a public company CEO operates with shareholder constraints and political constraints.
For example, a CEO might love the idea of spending tens of billions of dollars on a new e-commerce initiative. She might even see the initiative as crucial to the company’s long-term success.
But shareholders might hate this idea — because the costs would eat up a year’s worth of profits — and so the initiative rolls out at a snail’s pace, or perhaps not at all.
On the political front, the CEO of a large corporation might realize that, thanks to process improvements, 30% of the workforce could be cut, in a way that boosts margins without losing revenue or market share.
But layoffs at a mass scale would be a political spectacle and a public relations debacle — the press would be awful, and regulatory backlash would be a risk, too. So again, the CEO holds off.
These are the “normal” rules of the game. As a public company CEO, you can’t unleash expensive plans if your shareholders are used to steady profits. You can’t fire workers en masse if a U.S. senator will call you out and possibly legislate against you, and so on.
In a crisis, though, those normal rules get suspended. For instance, we saw this in the 2008-2009 window of the global financial crisis, when U.S. corporations took a chainsaw to their labor force.
In normal times, firing thousands of workers would generate an unbearable amount of political heat. But when everyone is firing workers at the same time as a matter of survival, and the CEO can shrug and say. “global financial crisis, what can you do.” It becomes possible to act with impunity.
U.S. corporations came out of 2008 in lean and mean fighting shape in part because, under cover of the 2008 financial crisis, they took the opportunity to completely clean house. They didn’t just fire workers who had to go because of the financial crisis, in other words; they used that rationale as cover to go further.
In 2020, we are seeing comparable moves. Take company dividends, for example.
In normal times, a company’s dividend is sacrosanct. Many investors rely on dividends as a form of income, and cutting the dividend is a potential distress signal.
If a public company has maintained a dividend for years or even decades, and suddenly cuts that dividend, investors will be surprised in a negative way, and many will be angry, and Wall Street analysts will wonder if something is wrong.
As a result of all that, “never cut the dividend” is standard public company CEO advice. Except in a crisis!
“More companies have suspended or canceled their dividends so far this year than in the previous 10 years combined,” the Wall Street Journal reports, “with companies scrambling to preserve cash as the coronavirus pandemic saps revenue.”
Some of those dividend cutters are no doubt hard-up for cash. But others are simply following the guideline to “never waste a good crisis.”
For any CEO who has wanted to cut his company’s dividend for years, or even to suspend it entirely, now is a great time to act because, for one, lots of others are doing it, which provides the cover of being in a large group — and for two, “Hey, it’s a pandemic, what can you do.”
Then, too, while a fair number of companies are thinking about survival, others are thinking about strategic dominance, and the opportunity to make bold and unconventional moves that would otherwise be unfeasible or impossible.
As with the mass layoffs of 2008, the pandemic provides a kind of Get-Out-of-Jail-Free card on this front.
At this moment in time, public company CEOs have the cover to say something like the following on earnings calls: “Because of the pandemic, our normal outlook is suspended — we can’t be sure what will happen in the next few quarters.”
That statement has the benefit of being true in most cases. But it also provides room to maneuver.
Smart CEOs, if they have the luxury of thinking more about strategic dominance than outright survival, can push through extraordinary measures under the cover of crisis response.
Shareholders, meanwhile, will generally not be getting angry over a hit to profit margins or reduced earnings per share, because they are already expecting these changes.
As an example of this, think about Reed Hastings, the CEO of Netflix.
Next to The Tiger King — a wacky documentary that went viral — the global pandemic is one of the best things that ever happened to Netflix, in terms of getting hundreds of millions of people to stay home and sit on the couch — escalating their hunger for Netflix content — while shutting down the production capacity and revenue streams for Netflix’s big rivals at the same time.
As the CEO of Netflix, Hastings gains all kinds of fascinating options. Does the company renegotiate their back catalog deals from a position of strength? Buy into a major studio? Raise more capital to expand their own studio to mega-scale, locating it in a COVID-19 “green zone” like Iceland (where content production has already resumed)? The chess board is tantalizing.
Or think about the giant automakers, who normally have to deal with huge amounts of bureaucracy, red tape, and conservative shareholder expectations.
On the one hand, the pandemic is a mortal threat to the automakers, to the extent that global recession combined with reduced consumer mobility will send car sales falling off a cliff. (We are already seeing evidence of this, as Ford’s numbers were horrific.)
On the other hand, precisely because a mortal threat exists — because automaker CEOs can say to their boards, “we have to get radical, and we have to do it fast, or else we’re going to die” — it becomes possible to chainsaw through the normal red tape and bureaucratic slowness and accelerate big, bold initiatives in the name of survival.
In evolutionary terms, a crisis is like a landscape shift that triggers a chain of extinction events.
When a habitat changes dramatically, a great number of species in the local ecosystem will die out. But for some species, the shift can present opportunities to radically expand or even dominate.
For investors this reality will have a two-way impact. A great many public companies will see their competitive advantage reduced, or even wiped out completely — and their share prices could follow suit.
But a handful of winners will figure out how to innovate even faster — and push through bold moves under cover of a crisis footing — in order to compound their core advantages like never before.
As a general rule of thumb, you want to be bearish on the first group and bullish on the second (with a means for determining which is which).