“Taking your treasury report that’s maybe two pages and expanding it to six pages actually will save time and show the board that you’re on top of that particular risk,” Hall said.
One type of detail board members should not expect is accurate financial forecasts. “It’s just not going to be there in this day and age,” said Edwards. “I don’t think anybody could have imagined what’s happening right now, so it’s really hard for a board to have a lot of confidence in a forecast.”
Instead, CFOs should redouble their efforts to communicate their plans and the assumptions that went into them, but also provide a variety of scenarios. And that means going beyond just the “good, expected, and bad” scenarios, said Hall, noting that these days it is reasonable to present as many as seven scenarios. Similarly, Edwards said CFOs should deliberately create one scenario that is far more dire than what they actually consider to be the worst case. “If the worst case minus 25 percent says the company won’t be around, you really have to change things immediately,” he said.
Such a case might even present an opportunity. “One good thing about a crisis is that it gets everybody out of their comfort zone and thinking about doing things differently,” said Charles Noski, former finance chief of AT&T, Hughes Electronics, and Northrup Grumman, who’s now audit committee chair for both Microsoft and Morgan Stanley. “You should never forgo the opportunity to create constructive change in the organization.”
Christopher Johns, CFO and treasurer at PG&E, said he was well prepared for the financial crisis because the utility had been in crisis mode just a few years ago during California’s energy crisis.
He said PG&E management now has a solid history of performing “stress tests” with the board, painting various scenarios having to do with the direction of the economy, the impact of regulatory changes, or other major events. The board, he said, has helped create new metrics to spot warning signs.
The company, for example, uses a metric called liquidity-at-risk, which measures not only cash liquidity, but also availability of credit facilities. “That metric came out of one of those stress tests we did with the board where we said, ‘How do we know we won’t go through another energy crisis and have the same lack of ability to utilize commercial paper or get to the capital markets?’ “
What directors want more than anything from CFOs during these tough times is full candor and transparency, according to Noski. “This is not a time for the CFO to go native,” he said. “Let the board in on the thinking of management.” That means providing transparency on key assumptions and discussing how possible scenarios might play out, including “imagining the unimaginable.”