Remedial measures for a failing business

When you see your business showing signs of imminent failure, it’s time you take some remedial measures so that you turnaround the situation. To stop the company from failing one needs to address the issues that have been observed as causes of an impending failure. I have highlighted the critical issues that the board and management need to address to avert corporate failure.
As highlighted in my previous discussions, risk of failure could be a result of poor corporate governance or poor management as managers fail to run operations effectively. I will discuss some of the remedial measures below.

The factor that caused major corporate failures of big organisations like Enron and AIG is related to board effectiveness. It’s critical to get this issue right and then all other factors will fall into place. The board should be serious in dealing with risk management issues rather than paying lip service to it.

The first issue to address is lack of board effectiveness. Ineffective boards are a result of lack of or limitations on skills and competence within the board members about the business. The committee dealing with board recruitment and remuneration should address this with a proper recruitment policy that recruits members based on the skills matrix that the board wants filled. Appointment of board members should be based on whether the members have the requisite skills and competence about the industry. One should not be appointed only because they are well known without looking at the skills they bring. Otherwise, the members will not be able to question the decisions management will be making and the risks attached to those decisions. Lack of skills and competence usually impacts on the ability of the nonexecutive directors’ (NED) to monitor and control senior executives effectively. For instance, if one is a board member of a financial institution and does not appreciate lending, that member will struggle to monitor or control what executive management is doing on lending. It is therefore critical that board members are appointed because of their industry expertise or relevant skills or knowledge.

The other issue related to the board is what is called boards’ risk blindness which is characterised by a board’s failure to deal with important risks. Instead of addressing key risks that impact on the business’ survival they will concentrate on minor risks of less importance.

For instance instead of concentrating on issues related to issues that will ensure a company gets its trading license the board might be concentrating on reward rather than ensuring the business gets its banking license. The board should be concerned with ensuring that risks related to the core responsibilities of the business are addressed rather than casting a blind eye to such key issues thereby putting the business at risk of losing its “licence to operate”.

Where the CEO is autocratic and has a weak board there is likely to be serious omissions by the board in monitoring and controlling the executive management. Once the CEO is not held accountable there will be problems when a company is not performing well because no one will be able to bring to book the executive team. The Chairman of the board should be a strong individual who with his board members should be able to question the CEO’s decisions. The board’s effectiveness in monitoring performance can be inhibited if the position of the Board Chair and the CEO are held by one person. No one will be able to question the Chairman/CEO’s decisions. It is recommended that the two positions should be held by two separate individuals.

When the CEO has more power than the board information “glass ceiling” may creep in as internal audit or risk management teams cannot report on risks originating from higher levels in their organisations’ hierarchy because of fear or because they cannot report directly to the audit committee. Any serious violations of compliance will not be raised by internal audit and such violations might impact negatively on the company’s survival. The board should put in processes that will allow red flags raised by internal compliance to be followed up without fear from interference by the executive team.

One of the factors that brought businesses down during the 2008 financial crisis was inappropriate incentives for the executive team. The excessive bonuses rewarded staff on short term profitability rather than long term survival of the business. It is recommended that every bonus scheme should therefore balance between short term profits and long term growth in shareholder wealth and other important issues such as achieving good health and safety standards, for instance, for companies like BP. This will ensure that management will not adopt a myopic view of the business.

The other issues that cause business failure are operational issues. The major factor in this area causing corporate failure is managerial inefficiency and ineffectiveness. This constitutes the most pronounced source of corporate failure. This manifests as a lack of a well-articulated corporate strategic plan, poor marketing, lack of proper cash planning, over expansion, ineffective sales force, high production costs, inappropriate costing strategies, low productivity, poor financial management strategy, poor risk assessment strategy. Some of these issues are discussed below on how they should be corrected to avoid corporate failure.

Most businesses fail not because they don’t have a good product but because they fail to bring out their value proposition; that innovation, service, or feature intended to make a company or product attractive to customers. When marketing your product or service, it’s imperative that you bring out what sets your business apart from competitors.  Show how your business is unique from your competitors. You need to say exactly what you are doing better than the competition. Your value proposition should attract attention and interest from your customers. That unique attribute should separate you from the rest of the pack and put your product or service on a pedestal above the competition. You should present your company’s unique value proposition so that the market understands what you are offering them. A customer will be attracted to those features that address his/her needs and as a result your market share will grow and this will ensure that your business survives.

A business is there to serve customers. If as a leader you neglect customers you are setting up your business for failure. You need to have your pulse on the customers’ needs by being in constant touch with your customers. Know exactly what your customers value about your product or service. There are certain features or attributes that they like and if you don’t know those things you might stop providing those features and as result lose your customers. Sometimes, customers change their interests or what they value on a product because of a change in trends. A forward looking business leader keeps his eyes on the horizon watching for any new trends and how they impact on customers. You can get most of the customers’ requirements from the sales representatives who should be talking to customers regularly and getting up-to-date information or by undertaking a customer satisfaction survey once in a while so that you know what they need.

Some businesses fail not because the business idea is bad but because the entrepreneur fails to structure the business model properly; the way a company generates revenue and makes profit from its operations. A business is bound to fail if an entrepreneur builds a business on a model that is not sound, or is very complex. A company should draw up a business model that can be understood by staff. The company should fine tune its business model as it prepares its business plan. The business plan should indicate how revenue streams will be generated and how reliable those revenue streams are.

Some businesses fail due to rapid growth or overtrading. Growth is normally positive but however unplanned rapid growth can be disastrous because if a business grows much faster than it can keep up with the growth, it might be inundated with orders which it is not able to fulfil because of lack of funding to pay for stocks to meet the orders. If customers cannot get their orders delivered they will not take the company seriously and so will leave and move on to other businesses. You need to plan your business very carefully. You need to draw up a business plan which looks at your strengths, the market, the local demographics and their spending trends, any future local government development plans that might impact on your business and ensure that you gear the growth of your business based on these trends. Avoid getting too much inventory unless it’s justified by demand. Recruit staff as dictated by the demand of the product. Following the above will ensure that you avoid unnecessary business failure.

The other cause of business failure is financing operations using too much debt. A company that is highly geared can easily go under due to failure to pay loans. Every business should monitor its debt levels by looking at its gearing ratio. If the debt levels are high then management should avoid financing the business with a high level of debt.
Other factors that management should address to stop a business from failing is to do cash flow plans so that a business does not get into cash shortages that impact on operations. A regular review of cash flow, debtors collections and payments to suppliers will ensure a healthy cash position.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

Stewart Jakarasi