N O N - E X E C U T I V E D I R E C TO R S (N E D s) & T H E B OA R D
With special thanks to a number of NEDs who have asked to remain anonymous owing to the nature of this subject. Also thanks to Duncan Parkes, Director, Institute for Turnaround; and Senthil Alagar, Managing Director, Restructuring, Alvarez & Marsal, for their input. THIS ISSUE
NEXT ISSUE
• Company Failure, Distress & Governance
• Board Reviews
Failures
• Investment & Investor Relations
Non-Executive Directors
MAKING THE RIGHT CALL Most companies operate in complex environments, and so no one rule fits all. However, the guidance set out below is a useful benchmark. • If a company has three bad hits over a period of three to six months, this probably constitutes a trend. • If the accounts rely on significant judgments about revenue recognition, there is a risk of a sudden crisis and profit or cash black holes. • A public profits warning is usually a bad sign, as the executive is likely to have pulled nearly all its levers to avoid this.
Experienced NEDs stress the importance of intuition as well as analysis. Many deploy their own methods and logarithms. These vary from five-year tracking spreadsheets to internal thinking based on years of experience. This can be learnt, but often a baptism of fire is the best way. THE DEMISE CURVE Chief Restructuring Officers (CROs) and the Turnaround Institute refer to this downward trend as the ‘demise curve’. One of the roles of an NED is to help the executive and the board recognise linkages that may not be immediately obvious. For example, if returns increase, customer feedback shows a downward trend and cash is getting stickier, there is likely to be an underlying business issue. The board must join the dots between the market data, analysts and company numbers.
WO R KIN G ACR O S S TH E BUS IN E S S LIFE CYCLE ON CE P E R F O R M A NC E H A S P E A KE D, A B U S INE S S C A N CON TI N U E TO D EC LINE O R IT C A N B E T U R NE D A R O U ND TO P ERH A PS E V E N GR E AT E R S U CC E S S ( T R A NS F O R M AT IO N). TH E KEY IS TO ID E NT IF Y T H E E A R LY WA R NING S IGNS A ND TA KE PR O M P T AC T IO N IN O R D E R TO “B E ND T H E LINE ” S TA R T U P
G ROWTH
MATU RI T Y
TU RN ARO U N D & TRAN SFO RMATI O N
DE
I N N OVATI O N
E NTREPR ENEUR I AL AND PRO FE SSIONAL MANAG EMENT
• First, NEDs must recognise that a demise curve exists. • The board must have the collective desire to fix the problem. • They should agree a strategy and a timeframe. • Early communication with key stakeholders is required, to avoid creating a scare. • If the timeframe starts to slip, the executive team must be made to address this. • The board should regularly review the executive and its capacity to deal with the situation. EX TERNAL INDIC ATORS Company and market analysts, sector surveys and the media can all play a role in flagging up problems. Their role can be particularly significant if the executive is in denial or believing its own propaganda. External actors can be more incisive in the case of large PLCs, which tend to be covered by good analysts; the scope and depth of analysis for mid-market companies is less impressive. W I N M A R K C-S U I T E
FU TU RE G ROWTH
REN EWAL
IS
E
CU
RV
E
FAI LU RE
PER F OR MANCE I MPR OVEMENT TUR NAR OUND MANAG EMENT
Different sectors have different demise curves, and NEDs have an important role in addressing the associated problems.
8
M
Q2
A bank saying ‘no’ to support is a significant red flag as, if the company was not already in significant distress, it is likely to become so very soon. In this situation, the chairman or CRO should immediately convene a board meeting. An approaching crisis often triggers a significant change in board policy, notably the adoption of a high-risk strategy.
TH E DE MIS E CU RVE T H E D E M IS E C U R V E P LOTS THE S TAGE S O F D IS T R E S S IN T HE BU SIN E SS LIF E C YC LE F R O M INITA L STR E SS TO E V E NT UA L CO R P O R AT E FA ILU R E T H R O U GH A N INS O LV E N C Y VA LUE
COMPANIES IN DIS TRESS The board and individual NEDs need to identify whether bad news is just a ‘blip’ or part of a longer-term trend. The board has to understand whether the company is under temporary stress or experiencing distress – and what the difference is. It must recognise whether it needs merely to ‘lean in’ or whether to initiate a fundamental shift in behaviour.
STRESS DI STRESS
CRISIS
INSOLV ENCY T IME