NEWS & INSIGHTS

IN THE GAME OF LIFE, HE’S JUST A DREADFUL GOALHANGER!
ARE THE CAUSES OF BUSINESS FAILURE SIMPLE OR COMPLEX?

In an earlier article, we looked at the symptoms of business failure. Symptoms are easily seen, but they are often seen too late.  The causes of decline are identifiable, can be spotted earlier and (at least sometimes!) are manageable.  One might say the underlying factors are internal to the business (largely controllable) or external (less controllable) factors:

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As a Safe Harbour Advisory Firm, we are always looking at the causes of failure, and we are examining management about the reasons the challenging business conditions.

One could also say that all the reasons for poor performance ultimately just reside in management.  That it was either poor decisions, or no decisions – or watching and criticising without acting – that were the cause of all the other problems.  Even if the cause of failure is something external (like a pandemic), can we say that management were poorly prepared, or did not respond properly, or didn’t have the business set up to specifically address that risk?  Is the secret to a good business just good management and good luck?  If that is right, it’s interesting but not helpful, as it doesn’t provide any assistance to the people analysing the problem diagnostically (like Safe Harbour Advisors and turnaround consultants!)  Changing management is of assistance, but you need a plan for success, you need to know the other things.  For example, was the failure due to low market share (external), or poor financial policy and lack of investment in establishing better market share (internal), or the inability of management to clearly see that issue?

So – ultimately, it’s about (a) knowing the complex web of casual factors, and how internal and external factors co-relate and (b) knowing the ability of leaders to identify and respond to those factors.

We will cover the other factors another time, but for now we begin with Management and Governance.

MANAGEMENT AND GOVERANCE FAILURE FACTORS

Some of the common casual factors are briefly set out below:

Dominating Leader

Dominating CEO not tolerating dissent is a common feature of failure. An autocratic leader is often described as an inspiring leader, and can be the principal reason for financial success, but as soon as trouble occurs, that person can become the root cause of the problem. A successful, but dominating executive will generally be open to changing business conditions and receptive to new ideas from subordinates, whereas the unsuccessful one will not.
 

Combined Chair and CEO    

While it can be a valuable temporary measure in times of crisis, combining these roles can result in no effective watchdog over the CEO’s activities. In every scenario, it is important to ensure there is a strong Chairman, who has the time and space to properly monitor and counsel the CEO.

Ineffective Boards

It is critical that the business strategy is clearly set and aligned to the operations of the business to implement that strategy.  With a weak Board, it is difficult to align those objectives. Where the Board are just a ‘rubber stamp’ for the Chairman or CEO there is generally no check that strategy is objectively and sensibly set. 

Inactive Non Executive Directors

It is critical the Board are involved and participating, and are there for the right reasons. Lack of broad based involvement, or unbalanced Boards lacking a range of skills related to key areas of influence often signal possible failure. Boards lacking consensus or operating as Federations, or Parliaments, generally will have more difficulty coming up with consistent, appropriate objectives. 

Ineffective Management

Many Managers are not ‘Managers’ but ‘Administrators’, maintaining the status quo.  Managers resistant to change are inevitably a cause of decline. It is critical management have the intellectual capability to deal with the problems they face and to make and implement decisions. 

Neglect of Core Business

Whilst diversification is interesting and challenging, it is costly and makes use of the scarcest and best resources. It is critical that Management remain focused on the success and profitability of the core business that generates the cashflow needed to fund new ventures. 

Lack of Management Depth

A range of skills below CEO are necessary and lack of adequate management skill in a range of people is a typical reason for failure. Lack of management depth often signals a slow decline, as better managers have left well before the crisis. A more sudden crisis might signal less of a problem with management depth, but a more fundamental problem with appropriate business strategy and other internal causes of decline.

LET’S BLAME THE MAN!

His lack of humility defies imagination
And he hangs round like a fart in a Russian space station
He does not even notice as he sells you down the river
Cause he is one of life’s takers and he’s looking for a giver
He smirks and shrugs his shoulders as he drops another clanger
In the game of life, he’s just a dreadful goal-hanger

Billy Bragg 1996

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Around the water cooler, it is easy to blame management, their focus on analytics, and their personalities.   But its more complex than that.  It is the people inside the organisation that view the symptoms of decline, and the reactions management have.  It is an early diagnosis of the causes of decline that will result in the best chance of turnaround, and we will focus on more of those in a later article.

*Disclaimer

Wexted Advisors communications are intended to provide commentary and general information. They should not be relied upon as financial or legal advice. Formal financial or legal advice should be sought in particular transactions or on matters of interest arising from this communication.