Commercial Pragmatism v’s Corporate Denier: See the whole board!

A professional colleague recently asked me to meet with a director who had recently observed financial difficulties in her company.? The onset of problems was recent and the scale was large.? The director was bullish about the future but could not identify the factors driving the situation.? After not too long, I realised where the issues originated.

It wasn't impossible to resolve the problems themselves. A range of options were still available to deal with the issues, and time was on our side. It was feasible for the company to recover its profitability and continue long into the future, due largely to the availability of outside money to satisfy debts (or a substantial part of them).? But the elephant in the room loomed large, and larger by the minute as we talked.

What had caused the situation to deteriorate so much and so quickly?? It soon became obvious that there was a reluctance to make serious and significant changes to her execution of strategy, board relations and staff engagement.? It wasn’t so much the business…it was her!

Financial Difficulties? Symptoms of Underlying Issues

It is so often the case that financial difficulties are symptoms of other underlying causes - emotional, mental, family and so forth. There is rarely a case where bills go unpaid by someone simply refusing to pay them. A closer look often reveals the contributors, if not the cause. In initial conferences with directors and advisors, there is a question that constantly demands attention: do you scratch the obvious itch, and if so, how hard do you scratch?

Implementing a rescue package is always less effective than it could be unless the drivers of financial difficulty can be identified, understood and mitigated, or preferably, eradicated. Too soon the ineloquent will reach for the heavy blunt tool to subdue the patient, rather than adopt the skilled wielding of the surgeon’s blade to remove only that portion that is truly lost.

Unfortunately for many businesses, unaddressed symptoms over the long term tend to repeat themselves. Although this isn't always the case, experience shows it's better to rely on good, early management than hope.? Hope is not a strategy!

Denial of dysfunction is not the problem - it's a symptom

Restructuring arrangements (formal or informal) are pragmatic only if they address the causes of financial dysfunction. That much is axiomatic. The challenge is getting traction with those overseeing and managing a company that is facing the very real threat of insolvency, especially if the reticence to engage stems from denial alone, rather than any ‘real’ difficulty.

Too many directors I have seen simply deny the existence of the factors driving their financial distress - in this case, the personal issues creating internal instability - based in many cases on simple irrationality.? Denial. Logic is rarely effective in overcoming such a position. Tackling the issue from a strictly technical standpoint is unlikely to unlock the puzzle - the engagement must be personal and there must be a felt need for change, not from the advisor side, but from the business owners and operators themselves.? They have to own it.??

As a technician, I can devise the most appropriate plan, a beautiful restructuring solution, that reflects all the hallmarks of the most thoroughly researched and well-reasoned rescue package, which delivers the best possible outcome only for it to be rejected, almost before it’s even hit the table. It is often difficult to promote engagement without first addressing the very real emotions that orbit these matters? -? like shame, failure, frustration and isolation, among many others.

So how should these issues be handled?? If we concede to the protagonist's wants, does that only fuel the fire rather than persuade them to adopt the more financially responsible path??

The answer is clearly no, and any suggestion that it is otherwise is hubris. A short-term backward step to provide a platform for recovery is often necessary…to the point of being cathartic. Rather than trying to force a commercially pragmatic and financially expedient outcome, we believe achieving the result by treating the causes and not just the symptoms (and the people) is better. Far better. Infinitely better!

The outcome is just as important as the journey

The people ultimately responsible for implementing a corporate rescue must own it to succeed. If there is a way of paying unmanaged debts in full, that clearly represents the best outcome. Undoubtedly, the other parties to the transactions would hold the same view. With positive engagement on some of the prevailing psychological factors, there may be room to investigate the causes and develop a collaborative plan to address them, while reducing any increased risk caused by the payment (which is usually over time).? Managing the people and the business…together!??

A collaborative approach to designing and implementing the plan is critical here. The decoupling of the company's directors from trusted advisors, and their replacement with others who appear more diligent is often less beneficial than it seems.? Leveraging existing relationships and reinvigorating all the participants has real benefits over and above tossing out the old and bringing in the new, especially where there are long term insights from incumbents that can be deployed in business improvement planning.?

In the absence of a transaction to demonstrate better credentials, claims that a new participant can 'do better than the current advisors’ are likely of little merit. Many incumbents are more knowledgeable than they are given credit for and have perhaps realised that the rot had set in long before the director.? If the director had no ‘felt need’ for change, was it the case that any extra effort was just tilting at windmills?. It may be these players are now better placed, with revived enthusiasm from owners and managers, to be part of the team that revives the struggling company.

Whilst it has long been accepted that repetition of the same practices will produce the same results, it is equally valid that forcing someone to drink from the cup of salvation when they are un(der)prepared might be equally pointless. There’s many a slip twixt the cup and the lip.

In practice, the best way to engage a corporate denier in financial distress is to reaffirm the benefits of solving the problem in a way they can manage financially, emotionally, mentally and pragmatically. The appeal to logic when all preceding markers are heightened reveals a simple lack of understanding of daily life's complexities.? Square pegs into round holes is a highly-uncomfortable and always temporary solution.

We are not psychologists, but recognizing that the issues cannot simply be resolved with the penmanship of well-constructed and articulated reconstruction vision alone, places us in the best possible position to assist our clients and those they represent.? No one will care how much you know, until they know how much you care.? Help people and their business may well recover.? Help just the business and you may end up losing both.? It’s not a choice, it's our mission.

At Beacon Advisory we can provide you with the appropriate tools and guidance, but first, we must address the emotional factors that are keeping your business from moving forward.?

If you're ready to take control of your company's future, get in touch.

Disclaimer:

This article is not intended to provide professional advice, but rather general information only. You cannot rely on the content of this article without proper advice in the context of your own circumstances. If you have specific concerns, please consult a professional who can provide advice tailored to your individual circumstances.