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 9

Denial is both natural and can be delaying of taking corrective action

I recently received a good deal of adverse reaction in prefacing my remarks at a board meeting regarding the primary wisdom I have gained from writing Troubled Companies, namely that dramatic change of some sort and not doing more of the same seemed to be a common characteristic of companies regaining the desired profitability trajectory.

“We are not a troubled company” was the immediate reaction of the Chair. Yet, this particular company, though having a very strong balance sheet, was at the same revenue levels as many years earlier and was suffering shrinking profit margins. Unless something was done the company was going to be in trouble.

Perhaps all companies are, at a point in their development and evolution, troubled in the sense there are problems which are not self-correcting. Perhaps, many companies go through periods where if something isn't done to correct the present course the company will fail. Perhaps some companies are burdened with independent directors and advisors who envision problems those managing the company choose not to see or, at least, recognize as being as serious as those not involved in the daily decision making.

The premise is the same. If it isn't working think of changing it as a means of fixing it versus the normal approach of attempting to produce the product more efficiently and therefore less expensively. The very need to produce a product less expensively is prompted by competitive pricing concerns and these concerns reflect a lack of customer appreciation for the uniqueness or specific relative superior value or utility of the products.

As with some many aspects of management and communications, it would be better if terms and concepts could be defined at a time when those involved were not likely to be defensive and therefore having a greater than otherwise reluctance to embrace change.

Definitions of the company being “troubled” could be agreed in advance as when for more than a year; revenues failed to increase absolutely or relatively to a measure,

• profit margins declined,
• cash flow declined,
• revenues per employee declined,
• accounts were lost or new accounts were not added at a desired rate,
• executive and staff turn-over rates exceeded prior periods, etc.

Whatever the specific markers of trouble are used a pre-recognition of their possibly be indicative of trouble will permit a more open dialogue and consideration of remedial actions.

Of course, if it is working no one should want to fix it. But what happens when it isn't?

The great entrepreneurial managers I've known have been constructively insecure and always concerned that something bad was going to happen, especially when things were going well.

No manager wants to be thought of as spending all of his/her time in being like the lookout on the Titanic. However, that is exactly the role of a manager, to be ever alert and steer the enterprise away from danger.

Labels are difficult to use without hedging or disagreement early in a changing situation, especially when the situation is changing for the worse. We all like to be responsible for an emerging or improving enterprise and not for a deteriorating or troubled company.

I was sorry to have upset the Chairperson of my client company, especially as I have a long-term and close personal relationship with this person, who I admire greatly, but the role of an independent director and advisor is to take a constructively intended alarmist view when similarities with companies in trouble are noted.

I can't resist. Question. Why couldn't Cleopatra go into therapy to allay her fears? Answer. Because she was Queen of denial.

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