The Long View

Corporate executives often criticise business-school academics for being remote, relying on outdated research and case studies that bear little relation to current conditions. But as the recession challenges what most managers thought they knew about business cycles — few will have experienced a downturn as severe as this one during their working lives — many are scrambling for guidance. Now the professors' knowledge of history may provide the key to unlock some of the most vexing issues facing executives today. With this in mind, CFO Europe spoke with leading academics to find out more about past downturns so as to manage more effectively in the months ahead.

"As always," says Philippe Haspeslagh, dean of the Vlerick Leuven Gent Management School in Belgium, "serious downturns stem from fear and a loss of trust that comes after exuberance." In this regard, the current recession is not unique, he notes. As in the past, companies' strategic, financial and operational priorities need to be reassessed, advice on which academics hold forth in the following pages. And for those who still criticise professors for being out of touch, Haspeslagh notes that a dean is not unlike "a CEO of a medium-sized company." Like a chief exec, he is investigating the impact of the downturn on the business school, learning lessons of his own along the way. As he knows from both experience and study, "credible" external communications and "focusing, energising and reassuring" internal messages are critical in times such as these. "People are scared," he says.

Bolster the Balance Sheet
Manuel Ammann, University of St Gallen

Manuel Ammann sees a silver lining in the current crisis, at least for those in his line of work. What's happening today "isn't totally inconsistent with what we've always taught," says the professor of finance at the University of St Gallen in Switzerland. The crash is providing "excellent" new case studies that he can use at the lectern for years to come.

One of the "old topics" that Ammann reckons finance chiefs need to think hard about in the coming quarters is capital structure. Determining optimal leverage is a subject the professor never tires of discussing with CFOs. But it's not as straightforward as many would like. "There's no such thing as an optimal balance-sheet structure that cuts across entire business cycles," he says. The challenge is to remain vigilant and adjust balance sheets in concert with business cycles. "If there's an important lesson of past crises and the current one for CFOs, that's probably it," he adds.

It's a lesson the banks are taking in, which in turn makes it difficult for those that rely on the credit markets to get their own balance sheets in shape. While he acknowledges the frustration that finance chiefs must feel as few of the bailout funds make their way into corporate loans, Ammann, who is also director of the Swiss Institute of Banking and Finance, is more conciliatory. "I wouldn't deny that there was some irresponsible behaviour [but] the reason the banks need the bailouts is not to lend more, but to fix their balance sheets," he says. "Whether it's good for the economy is another matter."

Remember Japan
Jean-Pierre Lehmann, IMD

Based on his experience of living and working in Japan in the late 1980s and early 1990s, Jean-Pierre Lehmann sees similarities between the country's "lost decade" after the bursting of its asset-price bubble and the current downturn rocking western economies. Foremost among these similarities, notes the professor of international political economy at Swiss business school IMD, is the "level of hubris."

In the late 1980s, the country's financial institutions — convinced that the model developed by corporate Japan marked a paradigm shift — forecast that the economy would soon grow to become the largest in the world. "They were the Muhammad Ali of the global economy, and were not about to accept being knocked out," as Lehmann describes it. As a result, the crash was met with a period of prolonged denial, delaying a recovery.

There was a similar sense of invincibility among the financial community leading up to the present downturn. But thankfully economies in the West have been faster to acknowledge the severity of their situations, with governments and companies acting aggressively to address the crisis.

That said, executives can still learn much from Japan. Companies such as Toyota "remained at the top, through good times and bad," Lehmann says. A key element of their success has had to do with incentives. "Whenever something goes wrong, the top takes a 30% or 40% reduction in salaries," the professor says. Given that these executives are generally paid far less than their western counterparts, the cuts are "more than symbolic," he adds, but help junior staff accept reductions, while also fostering a sense of loyalty during morale-sapping times.

Today, with excessive executive compensation in the public spotlight yet again, it's a practice to bear in mind. "If the boss makes 300 times more than the guy on the shop floor, it's just wrong," Lehmann says. "The biggest hope that I have is that this crisis knocks some sense into us."

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