Troubled Companies

The following text has been prepared by Arthur Lipper III for British Far East Holdings Ltd. and is intended to be part of a book, “Troubled Companies”. No reproduction or publication of these writings is authorized, except with written consent of the author and owner.

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Chapter 5

Holding People Responsible for Company Troubles

It’s a natural desire to find and punish the culprit who has hurt others.

By the time companies become troubled people have been hurt. Be it investors, customers, suppliers and almost always associates, some or many have born pain resulting from the company not performing as had been expected and/or promised.

Is the company the entity to be saved or is it some members of the executive team which have a right to use more of the company’s resources in order to themselves survive? Clearly, it is a matter of personal perspective.

From the perspective of investors and other providers of resources to the company the answer is clear - it is the corporate entity which must prosper, with or without specific personalities.

“Find the guilty” is a corporate political game played in all corporations, large and small. It is destructive in that one of the results of blame naming is a squelching of creativity and prompting of conformity. “Find the guilty” is also a game played by those fearing for their own position in the decision making process, such as investors, investment bankers, Officers and Directors,

I believe it much more important to identify the basis for the errors in judgment, and there almost always are many errors in judgment in troubled companies, than in who made the mistake(s). Was it bad data or bad interpretation of the data? Were the right questions asked and who provided the answers? Was it a single person or group who defined the course which turned out to be less than well advised?

It’s easy to lop off heads in troubled companies and sometimes such executions are necessary and constructive. However, frequently those available to troubled companies are not of the same quality as those who were before the company became challenged. Most good managers accept challenges but seek clearer paths to success than turn arounds. Fixing up something may be fun and challenging but most would rather ride a clear winner to the finish line of option and golden parachute heaven.

The saying “show me a person who makes no mistakes and I will show you a person who makes no decisions” is apt and the penalty for making mistakes should not be so severe as to discourage constructive and divergent thought and action. Indeed, it is likely the troubled company’s solution will require the taking of a different course of action as had previously been embraced. The risk of staying the course will probably be greater than changing direction.

The key to identifying and controlling problems is the development of a series of early warning measurement tools, possibly applied weekly, which indicate variance from anticipation and plan. Each of us have “to do” lists and the successful completion of projects is one measure of effectiveness as in some periods we will do better than in others and this fact may be indicative of something being amiss or positive.

The issue of the wisdom of companies executing employment agreements which do not have escape clauses based upon corporate developments is called into question. Why would it be unfair for an employment agreement with a CEO to include a clause permitting the termination of the CEO, without further enrichment in the case of stipulated events? Although a change of corporate circumstance may not be the fault of the CEO, though in most cases it can be argued that some level of responsibility was present, the Board of Directors of the company certainly need the greatest degree of flexibility possible during periods of pressure and stress. It is possible the Board will decide the CEO is the best person to guide the ship through turbulent seas. However, if they wish to change Captains should the company have to bear additional expense, when it can least afford it, possibly to right the prior Captain’s wrongs? And what CEO candidate, at the time of negotiating employment, wouldn’t agree that if the company, during his watch, got into trouble that he'd leave the vessel on request, at the next port of call? I’d have reservations about a prospective CEO who only wanted to sail on calm waters, with favorable currents and winds. After all, it is the job of the Captain to steer clear of storms or bear the pain or risk of being jettisoned.

The flip side of the equation does not work for the company as the CEO is not bound be employment agreements to the extent the company is and the courts certainly do not usually protect the corporations in disputes with executives having employment agreements.

There is also a point to be recognized, those having management skills are different from those having entrepreneurial skills and likewise, those managing companies when all is well have different characteristics than those experienced in turn arounds. It takes a different sort of person to fill different roles and different circumstances.

There is also a benefit in a company being managed during a period of trouble by someone not burdened by the personal relationships which naturally develop during earlier stages of building the company. It is said that a “new broom sweeps clean” and that is not always a bad thing.

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Reader comments and suggestions as to specific examples are welcome. All submissions will become the property of British Far East Holdings Ltd. with our appreciation, but without compensation to the party making the submission.

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