Recession aftermath Featured

8:00pm EDT July 26, 2009

Historically, executives have been able to guide their companies through a negative business cycle by reining in costs and waiting for an economic resurgence. While some aspects of the current recession call for traditional protocols, don’t expect a return to business as usual anytime soon. Unprecedented events in the financial services industry have changed the trajectory of business by ushering in a new era of regulation and an evolution in the way business is transacted.

“Business is built on trust. The collapse of confidence in the financial industry created a tipping point for the entire economy bringing business to a halt,” says Rick Beal, managing consultant with Watson Wyatt Worldwide. “From reinventing the roles and responsibilities of board members to creating a flat organizational structure to foster innovation and nimble decision-making, executives must reposition every aspect of their organizations or risk being left behind.”

Smart Business spoke with Beal about the dramatic changes facing executives and the actions they must initiate to adapt their organizations for future success.

How are changes in the broader economy impacting Northern California?

Two types of companies will emerge from this recession: very large, complex employers that have diversified business portfolios and a global presence and small niche companies focused on a single product or service. We’re already seeing the impact of this evolution in our region, as companies that were once connected to the housing, auto or financial services industries have undergone major restructuring. Thriving businesses will be increasingly reliant on technology, which is good news for Northern California, but they will also require top-flight intellectual capital, so expect to see them engage in a fierce battle for talent.

What other changes are anticipated, and how will they impact human capital?

Given the projected tax and compliance cost increases, companies are looking to lower operating expenses, so they are enhancing strategic partnerships to deliver their products and services to customers. Successful execution of an alliance-based business model will require new technologies and employees who can develop and nurture relationships. In addition, future success will require uninhibited business innovation and the ability to react quickly in a fluid business environment. As a result, we’re seeing large companies addressing organization structures and role leveling systems to foster agile decision-making. Employees who can think independently while mitigating risk will succeed in this environment. Companies with comprehensive talent management programs will be most successful incubating future talent and dissuading defections to competitors.

How will these changes impact the role and composition of corporate boards?

At one time, being a member of a corporate board was a plum assignment, now it’s an exposed position that carries significant personal liability, as boards are being held accountable for the company’s actions in courts of law and in the court of public opinion. Board members must be highly engaged individuals who possess the expertise to assess the company’s risk position without becoming micromanagers. With businesses becoming more reliant on strategic partnerships, board members are expected to bring value by introducing possible alliances. These changes have altered the composition of boards and the profile of candidates, as boards strive to include members who understand best practices in audit and executive compensation.

How can executives manage the increase in government regulation and oversight?

Business lost the trust of the public and now will pay a price. The outcry over evaporating net worth and ill-timed paydays for a few business leaders created a pitchfork moment. The resulting pro-regulatory pendulum swing will likely overshoot its mark. Executives now must:

  • Increase transparency. It’s critical to police your business from the inside. Provide transparency around compensation, risk positions and your company’s relationship to other organizations and industries. While the government’s primary focus will be on preventing the systemic risk that took down the financial services industry and everything else in its wake, easy targets for political intervention will suffer the greatest consequences.
  • Articulate your company’s employee value proposition. In today’s environment, all compensation packages must be proportionate to the return they generate for shareholders, and employees must understand how the payouts contributed to business success. Use communication tools effectively to demonstrate how the company’s compensation and benefit plans flow from and are linked to the achievement of business outcomes.
  • Mitigate risk. Conduct a risk analysis using empirical data and design incentives to mitigate risk into your reward plans. Assess the headline risk but don’t be ruled by it. Resist anecdotal opinions. Make your case to your internal and external constituents based on evidence. Work to improve the bonds of trust with employees, shareholders, business partners and regulators.

Rick Beal is the managing consultant for Watson Wyatt Worldwide in Northern California. Reach him at rick.beal@watsonwyatt.com or (415) 733-4310.