HOW BOARDS OF DIRECTORS
OFTEN
CONTRIBUTE
TO THEIR COMPANIES’ DEMISE
It is a tragic fact of business life that many healthy companies fail
not
because of an
irrevocable downward spiral of their financial health but because of
management’s inability to face
those problems and take action. In my 15 years as a turnaround consultant, this simple act of
denial has contributed to the demise of a huge number of companies that
might otherwise have
been saved.
Denial is insidious because it delays important actions that, if taken in
the early stages of
underperformance, can dramatically improve the chances of survival. You
don’t have to be a
psychologist to understand why company executives fall into the denial
trap. They have invested
tremendous emotional and intellectual energy into a management strategy
that is failing. To
change direction means admitting failure and exposes them to criticism by
the company’s board of
directors.
The board of directors, in turn, find it hard not to trust the CEO and
admit that the
company has developed substantial problems on their watch. Both parties
are reluctant to
consider outside intervention because of the specter of company upheaval,
mass firings, and other
unpleasantness that is associated with the “chainsaw image” of
turnaround efforts.
How can companies
avoid the denial trap?
First,
a clear-eyed, vigilant, and independent oversight by the board of directors in
four
key
areas will help detect problems early and allow the company to be positioned for
a successful
turnaround:
1)
debt-to-equity ratio deterioration;
2)
Market share/same-store sales declines;
3)
Cash flow/quick ration decline; and
4)
Resignations of key personnel/morale issues.
Second,
the problems that are spotted early need to be addressed in a forthright manner
by
an
independent board member or outside consultant who specializes in reviving
under-performing
businesses.
While this sounds self-serving, it is a critical next step for the company’s
regeneration.
Simply stated, only an outsider can take the decisive steps that are necessary
to help
the
company survive in the near term and provide the necessary long-term strategic
planning that
will
restore the company’s value.
I
cannot emphasize enough the importance of early decisive action and outside
intervention.
Witness this recent example.
A
CEO spent months convincing his board to acquire a competitor. After a seemingly
successful
acquisition the deal almost immediately began falling apart. Sales and margins
started
eroding
due to the maturity of the acquired company’s product, and R&D and
maintenance had
been
drastically reduced to help pay for the hefty purchase price. The acquirer soon
found itself
with
a pending disaster on its hands that could catapult the entire company into
bankruptcy. At
the
same time, the CEO could not bring himself to admit failure and arrest the cash
drain. Once
again, denial froze the decision making
process.
Fortunately,
vigilant board members recognized the paralysis and moved quickly to
organize
a qualified crisis consulting team. The team prescribed the much needed layoffs
and
overhead
cost-cutting until the company could be purchase and license a number of
complimentary
new products, which eventually reinstated sales and stabilized the company. In
the
end, the solution was to recognize how bad the acquisition was and absorb a
one-time
earnings
hit. Before long, the company was back on top, ready for growth.
Unfortunately,
all troubled companies don’t fare as well. A Midwest retailer experienced
a
serious comp store sales decline – a decrease in revenues for a given month as
compared to
revenues
for the same month one year earlier – for almost two years. The board
steadfastly stood
by
the chief executive, who attempted to turn the chain by cutting cost when in
fact the
merchandise
selling concept itself needed changing. The CEO refused to allow outside
consultants
to make a proposal to the board, some said, for fear of losing his job. In the
end, he
lost
his job along with thousands of other employees when the chain was subsequently
liquidated.
It
is clear from these examples that one of the most important responsibilities
that a
director
can have is to actively monitor the health of the company, spot early warning
signs, and
act
decisively.
Selecting
an experienced and skilled turnaround consultant to diagnose the problem,
applying
triage, and set realistic strategies for survival are another matter. The image
of a greedy
Gordon Gekko-like company ravager intent on squeezing short-term profits out of a
company and
then
discarding the empty husk is not founded in reality. Those turnaround
specialists who are on
the
front lines of corporate lifesaving endeavor to build long-term shareholder
value and
participate
in the long-term profitability of the companies they revive. It is only with
great
reluctance that they break-up the company or
recommend a bankruptcy.
Certainly,
good business skills are a prerequisite for a consultant but they must be
combined
with significant operational experience. More importantly, however, the
consultant
must
possess the resources that are needed to service the under performing company.
For
example,
a small turnaround specialist won’t be much help if a company has a troubled
subsidiary
with
multi-state operations or is a multinational.
In
sum, decisive steps at the onset of an under performing company’s problems, not
denial,
ultimately save the day.
