September 17, 2013 4:27 pm
By Luke Johnson
Most large and failing companies can be saved. But they need
fresh leaders
The phrase “hitting rock-bottom” is normally reserved for
addicts. It defines the point at which their life cannot get worse: they either
die or reinvent themselves – and recover. I believe this concept has a broader
application: it can be used for companies, cities and even countries.
Reaching rock-bottom is necessary for rehabilitation,
because until an addict falls that far, they tend not to make the radical
reforms necessary to save themselves. Without a nadir to act as a wake-up call,
they are likely to remain in denial, blaming others and finding excuses for
their problems – and not making the difficult changes necessary.
Bad management in broken companies behaves in the same way.
It is always someone else’s fault. Decline happens stealthily, masking the true
state of affairs. Almost every turnround I have tackled had executives
unwilling to take responsibility for their blunders. As they say in the 12-step
programme of Alcoholics Anonymous, an addict should take a searching and
fearless moral inventory. How many chief executives and finance directors of
insolvent companies do that, and admit they are unfit to lead?
Politicians running destitute cities and countries are
similar. Only those companies, towns and states that seriously alter their
habits really improve – otherwise organisations are liquidated, while countries
remain mired in poverty and stagnation. We should watch the progress of Detroit
with interest. Here is a once proud metropolis that has certainly hit
rock-bottom.
There can be no pretending if a municipality goes bust: the
old model does not work and cannot continue. Will its bankruptcy oblige the
creditors, City Hall and the unions to take the painful medicine and
restructure? Or will they fudge the issues and try once more to push the hard
choices into the future?
Similarly, Greece has been forced to face its demons after
effectively defaulting on its obligations. Its citizens will all have to pay
more taxes, work until they are older, borrow less and ensure their spending
does not exceed the earning capacity of their economy in the 21st century. Only
by taking these excruciating but necessary steps will they become more
productive and competitive. The addiction to foreign debt and living beyond
their means is over.
Last week I had lunch with the Colombian ambassador in
London. He told me about the remarkable improvements his country has made in
the past 15 years. The murder rate and cocaine crops have both fallen by more
than 60 per cent; inflation has declined by 90 per cent to just 3 per cent;
unemployment has halved; foreign direct investment has risen tenfold to $15bn a
year; while the government deficit has fallen to 2 per cent of gross domestic
product.
This impressive comeback happened because the nation decided
to reconstruct itself. It was declared a failed state by Foreign Policy
magazine: a place notorious for lawlessness, drug barons such as Pablo Escobar
and terrorist organisations such as Farc. All this chaos and misery, despite
abundant natural resources.
But thanks to the strong leadership of successive presidents
Alvaro Uribe and Juan Manuel Santos and others, open admission that the system
was broken and the energy of entrepreneurs, the vast majority of hard-working
Colombian citizens forced change. The country was lucky – its renewal happened
during a worldwide commodity and mining boom, from which it has benefited
greatly. But it also took the will of tens of millions of people who wanted
something better than violence, corruption and a reputation as a pariah nation.
Most large but failing companies can be saved. But they need
fresh leaders, an admission of previous mistakes, a new culture and transformed
operations. Unfortunately it is always easier to repeat the actions of the past
than to change and perform differently. Institutions can find it especially
difficult to reform, because they are less likely to have owners and creditors
clamouring for change, and they tend to have more history – which always
militates against innovation.
From Nissan to Apple to Next to Ford, there are plenty of
case studies of epic corporate rebound after hitting rock-bottom. I would wager
each one had to take the challenging steps I have outlined above to succeed
once more.
lukej@riskcapitalpartners.co.uk
The writer runs Risk Capital Partners, a private equity
firm, and is chairman of StartUp Britain
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