Failed Entities - Lessons for Managers

This is an article by me published in Financial Times (page 10) on November 27, 2009.

http://www.ft.lk/epaper/index.php?option=com_blog_calendar&year...

Failed Entities - Lessons for Managers
By Shanta R Yapa


The financial turmoil that began in the United States last year entered to the rest of the globe and we see signs of recoveries as well. Despite various opinions on our resilience to a global economic crisis local firms also started showing symptoms. Some misearbly failed in advance not even allowing experts to attribute such mishaps to global crisis. The reasons for failures are both internal and external. This article attempts to discuss few important points as highlighted from the failed and failing firms as they can help others to learn lessons. As a society we cannot afford to loose firms and key individuals behind them once identified as major contributors for the success and growth of our nation. Learning from mistakes at this stage is mandatory to avoid such failures and to retain the ‘face’ values of everybody. The role and the responsibility of a manager is also revisited in this article from the context of what the majority observed in the failed enterprises.


Value Based Management

Entrepreneurs set up business entities which create value to stakeholders namely investors, employees, buyers, suppliers, public, the government etc. Keeping all the stakeholders happy in a dynamic business environment is obviously a challenging and a daunting task for managers. Moreover, in turbulent times when things go wrong the entrepreneurs and managers are facing a much tougher challenge as they have to ride against the tide with no blessings from many of the stakeholders who were with them sharing the joy during good times. Both what the top management has done in the past and how they have done same will also be tested in turbulent times.

In a society where the majority is seeking employment than employment creation, avoid taking risks by themselves and expect somebody else to face same on behalf of them, entrepreneurs deserve above average gains and prominence by everybody. Yet, entities recording attractive profits without adding economic value to the society can collapse at any time sooner or later but much faster in turbulent times. You got to create value to the society to claim, enjoy and sustain profits of your business. A conscious effort by all top managers to see whether the firm is in a fair business and aligned with stated mission is vital to avoid collapses and ensure sustainability irrespective of the level of maturity of the firm or its industry.

Use of Lead Indicators

Some of the failed enterprises were well known for their management style similar to driving a car looking at the dash board. No where in the world you can run firms by looking at figures on papers. Board room discussions may obviously end up behind bars. Delegation and empowerment have their own limitations and demand a strong culture with deep rooted values for successful implementation as prerequisites. The reported corporate failures during the recent times adequately endorse the consequences of adopting wrong management practices.

It would be prudent for firms to identify few critical ‘lead’ indicators than emphasizing only on ‘lag’ indicators. Unfortunately, most of the commonly used financial indicators are falling under the lag indicators where results are reviewed after the event. During tough times managers tend to increase the intensity and frequency of such evaluations usually to end up with ‘paralysis by analysis’. Instead, lead indicators can guide an entity and will allow managers to take corrective actions before it is too late. Identifying lead indicators demand expertise and out of the box thinking. Yet, it is the practicing manager who can best identify them. This also suggests us to re-examine the use of the whistle blowers in organizations.

Avoid Extinct by Instinct

Over reliance on past success is detrimental. As witnessed in the case of failed financial institutions, the room for un-biased evaluations is constrained when the promoters as well as financiers are from the same entity. Poor corporate governance further deteriorates the situation. When the national development policy oscillates between inward and outward oriented policies, over exposure in long term projects can expose your company to irreversible risks. A careful analysis of exposure to different industry sectors is compulsory. One might question here the importance of relying on core competencies of a firm. Still, having the right balance is of utmost importance when your planned growth rate exceeds the organic. Striking the balance needs professionalism, maturity and strong values.


Culture as a Control

It is increasingly accepted globally the use of corporate culture as a management control strategy. A strong culture that fosters common values of a society or a nation is an asset to any enterprise. Articulated norms and practices shift values away from the employees. The tensed business environment always pressurized by ‘achieve the targets’ mentality can transform the organizational culture to a very susceptible one that can shatter in no time due to both internal and external forces in difficult times. This obviously creates issues with regard to attitudes, behavior and values. In this ‘controlled environment’ things cannot be predicted easily. Trust and loyalty are mere words. History continues to show us examples which we generally fail to understand until and unless we experience such events by ourselves. We are witnessing such mishaps today reminding us the costly lesson of failing to learn from the past.

It is high time for business firms to bring corporate governance hitherto printed in annual reports and brochures to actual practice. Not doing so can be very costly as proven by firms around the globe.

Stick to Basics

Paying the price for forgetting the basics is inevitable in turbulent times. Managerial jargons, advertising gimmicks, window dressing and overemphasize on targets can mislead everybody. Today, some firms are struggling to identify where they really stand in terms of finance, customer and employee loyalty and market share as they have been living with fabricated and fancy environments where they fail to realize the true picture and gravity of the issues until they collapse.

Failed financial institutions here and abroad provide us ample evidence of the cost of non adherence to basics. In an oligopoly – most of the important and vibrant industry sectors of any economy would fall in to this market structure- the basic economic teaching is not to use price as a factor to compete with each other. Aren’t we paying the price for using price to compete with each other? It is prudent to examine the interest rates offered for depositors by failed financial institutions to meet stiff competition simply forgetting the increasing overheads and lowering returns from their investments exposing the firms to a double blow.

This is the period where business firms will have to re-examine their alignment with basics. These basics are not necessarily limited to economics or finance but would cover all functional areas such as marketing, logistics, operations, human resources etc. However, adhering to basics does not mean that you should continue to play defensive. Innovations can make a difference as turbulent times have enabled above average performers to thrive.

Profitability Vs Responsibility

Are managers responsible only for profits? This is well explained by many scholars in the paradox of profitability and responsibility. Management cannot forget the stakeholder value purely concentrating on shareholder value. The pluralistic view usually safeguards the firm by guiding the managers in tough times.

Managers should take into consideration the interests of all stakeholders in making business decisions. Trying to safeguard the interests of one party would expedite negative results in a turbulent market. It is up to the professional managers to ensure that their companies adhere to ethics whilst achieving business objectives. Failure to do so would eventually depart such organizations from the public and high cost of attracting customers will make their sustainability challenging. It is the duty and responsibility of managers to guide the key decision makers of the organization as and when things go wrong or preferably in advance rather than staying quiet until the collapse of the firms/ Unfortunately we see such quiet managers once paid heavily by the firm join the public to stage protests against regulators and directors of the failed firms.


Ethical Practices

Unethical practices are reported in all ill fated firms. Those who resorted to such practices are now collapsing naked with no opportunity to hide things from fancy statements or abuse of power as they did in the past. Those who were criticizing the state bureaucracy and inefficiencies and challenging even for taking legal actions for wrong policies were to be bailed out by the government.

Proper stakeholder management practices will enable corporate firms to survive in a crisis. Loyalty of stakeholders is crucial when things go wrong. No firm can withstand a public outcry and a strike of employees at the same time. Actions of law enforcement agencies may hinder any hopes of a turnaround by the top management. When the firm looses the public trust –reciprocal faith on intentions and behavior- collapsing is obvious. Yet, the big question remains. Collapsing at whose cost? It is the responsibility of the professional manager to ensure that the firm adheres to ethical practices.

Conclusion

In a crisis similar to what we have been experiencing for the past one year or so, it is not the biggest or the most intelligent ones who can survive. Those who can identify the misalignments quickly and adapt to changes as appropriate will survive. Revisiting the corporate strategies is mandatory.

Firms which were failing are institutions at least at one time or the other that helped the national economy to grow. They created hundreds and thousands of employment opportunities. Moreover, they contributed to the growth of the nation by helping new enterprises to set up operations, grow and expand. Those who created such entities gained respect from everybody. The reasons for failures will be unveiled in time to come and would be attributed to an array of external and internal factors. However, there are many lessons for others to learn from these stories to avoid such failures.

It is the duty and responsibility of the managers of corporate firms to check their alignments before it is too late. As explained in this short article the areas to examine include but not limited to value creation process, culture, exposure, direction etc. In some areas firms will have to develop different strategies to address the short term and long term issues. Needless to say that it is during these periods the competencies of leaders and managers are being tested and made visible.

There will be books written on the failed entities in time to come. As stated before it is not prudent to come to conclusions so early without adequate contextual facts. Nevertheless, this article attempted to highlight some of the facets of the problems of the ill fated firms with no intention of insulting the victims but to guide managers to avoid failures.

Finally, it is important to accept the fact that managers of an organization are also equally responsible for good results as well as for bad results. It is their professional obligation to guide and help the key people of the organization in their decision making process. Execution of the business plans forms only a part of the duty of a manager. Managers must create a reasonable dialogue vertically in order to provide a continuous feedback. ‘Managing upwards’ should not only be a popular seminar topic in business schools. Keeping quiet until things go completely wrong and joining the public to be surprised of what has happened in the organization is not ethical and acceptable. In short, either you should quit or you must assume responsibility of what is happening in your organization. and this is the key message of this article for practicing managers.