Poor culture ‘root cause’ of company failures

Poor culture is the root cause of almost every company failure and early warning signs emerge years before a crisis hits, according to a turnaround specialist.

Product recalls, staff turnover and tighter credit present as symptoms of this deeper problem, the CEO of Vantage Performance Michael Fingland told the latest Accountants Daily podcast, and unless it was addressed intervention would fail.

“Ninety per cent of the time when you’re looking at the key issues that a business is facing and why they’re in this chronic situation you can go back two or three years, it always starts with a culture issue. Always,” he said.

“So there’s been a change in management or a change in policy or change in communication, morale and culture starts to drop, they stop caring about the business, product returns go up, quality drops, the workforce is no longer as committed as they were.

“Then it turns up in financial metrics, which might take a year or two to come through, but it actually started with a cultural issue.

“One of the big things you have to focus on in turnaround is yes, you can come up with a plan to stabilise the business for the first 100 days, develop the plan, do a whole range of initiatives to secure support. But if you haven’t got a plan to deal with morale and culture, and the plan will start to unravel.”

He said the holy grail of turnaround management was early intervention but company directors typically delayed asking for help due to pride, denial or, overwhelmingly, because they genuinely believed they could solve the problem themselves.

“Human nature is what it is, and they will always try to do it themselves,” he said. “They will keep trying everything they know.”

“They need to be nudged, typically, to go and get help, or their accountant or lawyer needs to actually identify the signs for them because often, by that stage, the director is under so much stress they actually lose sight of perspective.

“Only one in 10 directors will actually see the writing and actually go and get help.”

“When you’re under really critical high levels of stress you become insular, you stop trusting and you become more fearful. So you start fearing the bank, which is why they don’t talk to their bank. You become insular, you stop talking, you’re not talking to your key stakeholders. You’re not keeping people informed. You’re not keeping your creditors informed. So all of those things actually exacerbate the issues.”

“So by the time they come to us, their creditors are antsy because they’ve failed two or three payment plans.

“You’ve typically got staff turnover on the rise because your employees are very smart – they’re the first ones to see that things aren’t working. So if you start to see staff turnover increasing or critical people in the management team have started losing, because the good people typically will leave belief first.

“Cash flow is becoming tighter, the bank is starting to put more pressure on in terms of reporting, you might be breaching some covenants.

“The other one is product recall. So this is more of an early stage, when you’re starting to see an increase in product recall because of defects you know something’s going wrong in the production line. So it could be a staff morale issue, because they’re losing faith or they’re no longer happy with management. “And it might take a year or two. But it turns up in product recall, customers not paying their bills on time and then that starts the spiral, then you’re having to stretch creditors, sell assets to try and boost your cash flow, talk to the bank about extensions.”

“There’s one phrase that I’ve heard more than any other phrase from a client, it’s, ‘If only I’d met you six months ago.’”

This article was originally published on HR Leader's sister brand Accountants Daily.