Risk management is an important responsibility of corporate boards, but specifically how boards determine the level of acceptable risk that is appropriate for their companies appears to be of increasing importance. Many corporate executives are feeling pressure to improve profits in the current high inflation, high interest rate environment. As major stock exchanges continue to set records and some companies post record profits, investors wonder why our company isn't doing so. Members of a company's board of directors should re-evaluate the risk assumptions they have already made for their business plans and whether they are still acceptable after factoring in future changes in market conditions and expected rate cuts by the Federal Reserve. You may want to determine.
Hertz Corporation CEO Stephen Scherr recently resigned after the company's decision to build North America's largest electric vehicle rental fleet backfired. According to a report on CNN.com, after he purchased 60,000 EVs from Tesla and two other automakers, the price of electric cars unexpectedly fell and customer demand for EV rentals exceeded expectations. It fell below. In January, Hertz announced plans to sell 20,000 of the EVs it purchased in an effort to reverse its failed strategy, but sales of each vehicle were lower than planned, resulting in a It was decided to incur costs of $45 million. Perhaps the company wanted to accelerate a quick turnaround after emerging from bankruptcy in 2020. Unfortunately, the EV bet didn't pan out.
What was supposed to be a bold move aimed at capitalizing on the popularity of EVs among car buyers turned out to be a dangerous miscalculation. Electric vehicle buyers and rental car users have not embraced electric vehicles with the same enthusiasm. Although EV sales were on the rise, EV rentals were not. Additionally, an “unthinkable” situation occurred in which an EV automaker decided to lower prices to maintain sales levels, hurting the resale value of the EVs Hertz purchased.
While all business strategies present risks, corporate boards may want to consider more thoroughly examining the level of risk to which their companies are exposed if they follow a particular business strategy. . Boards are being held to higher standards on these issues. To do this, the director may need to:
Determine what risks the board considers acceptable. The board may need to agree on certain red lines that the company must not cross as it seeks to achieve sustainable growth. For example, some companies use Bitcoin as a financial hedge against investing in stocks, even though Bitcoin has proven to be a highly volatile investment vehicle. What level of exposure to Bitcoin does your board consider acceptable? What risk is acceptable when gauging customer demand for a particular product? Or do you use a “supply on demand” model? These small nuances can have a big impact on your company. Once board members agree, risk considerations can be clearly communicated to her CEO and management team.
Prepare for the worst-case scenario. No one wants to highlight potential flaws in a business strategy, but refusing to accept the idea that things might not go as planned is unacceptable. If a strategy's worst-case scenario could cause irreparable harm to investors or the company, it may not be worth the risk. Does the board and management have a contingency plan in place should the worst-case scenario unfold? How will the company communicate its recovery efforts to shareholders and financial markets?
Maintain succession planning for both the CEO and the board of directors. There can be disagreements about how much risk is appropriate when running a company, which could force someone to leave. According to reports, Hertz has had four CEOs in the past five years. At some point, shareholders may hold the Hertz board accountable for the CEO change. Boards can reduce the likelihood of such occurrences by hiring directors who are sensitive to making decisions within “acceptable risks” that reduce losses for investors. . Perhaps board members would choose a CEO who would do the same.
