Managing director as representative

Six ways businesses can avoid self-destructive denial in a crisis and achieve a successful turnaround.

Most corporate restructuring and insolvency professionals know the senior executives and important stakeholders of companies prefer denial instead of acceptance when their company is facing major operational or financial difficulties.

Denial is part of human nature and it does not stop at the C-suite. In Earnest Hemmingway’s novel the The Sun Also Rises a character asks, “How did you go bankrupt?“ and the reply is: “Two ways. Gradually, then suddenly.” What seems to be self-contradictory is in reality an excellent description of the denial process.

Signals of a developing crisis or below-target performance can easily be attributed to factors without an obvious cause-and-effect link.

Two of the more common reasons and explanations for denying or missing crisis signals and symptoms of an operational or financial crisis are worth mentioning.

Firstly, attributing the warning signs to changes in company strategy – such as developing and launching new products or services ,or the launch of corporate initiatives involving large parts of the organisation – and then wrongly interpreting these deeper problems as ‘temporary’.

Secondly, seeing problems as stemming from short-term external factors outside the company’s control, such as the slow economic development of a region or market segment, exchange rate fluctuations, or periods of governmental transition.

Lack of experience

Denial only goes as far as the financial resources of a company allow. Once confronted with a stressful corporate restructuring or even legal bankruptcy procedure, senior executives and major stakeholders experience a once in a lifetime situation, usually without the necessary experience to manage a company in distress.

So, what is most important in such a moment of corporate distress? How should priorities be set and what guidance can we give to senior executives?

Below are six recommendations for a successful management of corporate turnarounds.

Face the crisis

Businesses should not to hide or downplay a crisis if analysis shows one is coming. The firm should admit the issue and not try to hide it from employees, clients or suppliers who – depending on the market segment – will sooner or later notice a company’s crisis signals way before the senior management is ready to switch from denial to admission.

It is better to prepare and start executing a detailed, well-structured turnaround plan to get ahead of any potentially negative news cycle and be ready to provide details on how the company will get back on track.

Put business and cash flow first

A corporate crisis usually goes hand in hand with cashflow problems, where it turns negative or drops significantly.

The core business and cashflow must be given high priority! Expensive market-launch activities and trade show activities can be dropped and investments with long payback times delayed. Board and senior management need to be aware their behaviour sets an example to the company and they should reduce expenses accordingly.

The focus should be on what needs to be done and is right for the business and not, for example, prioritising or protecting the firm’s bonus plan.

Revise business strategy

The business strategy should be evaluated to see if it clearly defines where to operate and how to win. Is the company still operating in the right market segment and, if so, what steps are necessary to become a winner again?

Identify what adjustments are required and act fast to develop or revise the organisation’s strategic goals, corporate mission and vision.

Given there won’t be time for a full-blown strategy exercise for several months, it is best to take an 80/20 approach and revisit the strategy once most of your restructuring plan has been implemented.

Change the management style

Corporate restructuring brings a new and different reality to a company, usually requiring a different management style. Most senior corporate executives are trained to work in environments with calmer waters, sufficient financial and human resources and regular frequencies for reporting or decision making. Macro-management might do the job.

Experienced turnaround executives are properly trained to work under different kinds of pressure. A well-developed sense of urgency and ability to meet changing priorities and focus within hours, or take a more proactive lead, are key skills needed for a successful ‘turnaround’ management style.

It could be worth the board employing a temporary external restructuring officer to bring such capabilities on board.

Actively execute the restructuring plan

A successful turnaround is not based on some magic coming from lawyers, consultants or financial advisors. It is hard work and requires experience and discipline, especially during implementation of the restructuring plan.

Watching and supervising in a distant, removed way, won’t do the job. The firm’s leadership needs to get involved and work closely with internal team members and those providing external support. Short term goals for top and middle management should be revised and the immediate focus shifted to executing the restructuring plan.

Bring in professional assistance

Last, but not least, while the CEO or chair may be an excellent performer in ‘normal’ times, managing a successful turnaround requires a specific skill set, so the business needs to look for relevant professional assistance externally – an invaluable asset when facing a turnaround situation.

As the world’s most famous firefighter Paul ‘Red’ Adair once said: “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur!”

For more information, contact:

Rainer Koellgen

PP&C Auditores Independentes

T: +55-11-3883-1600

E: r.koellgen@ppc.com.br/pj.carvalho@ppc.com.br

W: www.ppc.com.br

Date: March 2020