Safe Harbour

First published in QLDdirector, an Australian Institute of Company Directors publication

Those who have helped lead a business through a company-led turnaround will have experienced the amplified threats to value and the complexities of maintaining the continued support of affected stakeholders.

What is a ‘company-led turnaround’?

‘Turnaround’ is the sustainable return to viability of underperforming organisations*.

The most successful turnarounds are those where the company remains in control. Adequately addressing the issues and risks faced in a turnaround situation demands that competing priorities are balanced. This balance can be achieved when the board recognise:

• High-impact, sustainable change needs implementing with a sense of urgency
• Sufficient time, funding and buy-in depends on transparent engagement with affected stakeholders; and
• Restoring competitive health must be the primary objective and common measure of success

Maintaining stability in funding structures, anticipating unforeseen risks and opportunities, and engaging with key stakeholders are all essential to building consensus, managing expectations and retaining control of the turnaround.

Having supported many clients through company-led turnarounds, we have identified 7 interdependent challenges that reflect the features of a typical turnaround situation:

1. Business performance is in decline so urgent management intervention with effective corporate governance is required to protect and enhance stakeholder value
2. Time and resources need to be secured to develop and implement a company-led turnaround plan
3. Continued support of key stakeholders is required to enable the company-led turnaround plan to be developed, communicated, accepted and implemented
4. The strategic focus of the business needs to be aligned to its market to enhance stakeholder value
5. The organisation demands engagement with incentives aligned to the implementation of a company-led turnaround plan
6. Key weaknesses within and threats to the operating model require addressing to build a sustainable future
7. The turnaround plan needs to be fully funded by a sustainable capital structure

Given the increased burden these issues place on management, it is necessary to modify corporate governance protocols. A company’s risk management framework should be adapted to help identify and mitigate the risks particular to company turnaround situations, and recognise the breadth of stakeholders who may influence or be affected by the potential outcomes.

Increasingly, companies seeking to retain control of a turnaround are engaging situational experts to augment the leadership team, assist with the overall coordination of the turnaround response and provide the transparency demanded in complex and dynamic circumstances.

Early intervention – keeping your options open

In an environment of global economic uncertainty, aggressively managed capital and rapidly changing markets - companies and their stakeholders are recognising the continuous need to challenge the resilience of a business.

Typically, when a company’s performance has been in decline or adversely impacted by unexpected events, preservation becomes a priority for the capital agenda. Where leadership intervenes early enough, a company can retain stakeholder support, preserve optionality and navigate the best path towards restoring full potential value.

Ensuring the board is not being told what the management thinks they would like to hear has always been a key concern of a Non-executive Director. ‘Hope’ is not a viable strategy, but you’re left with little else when the default option is to collectively deny that intervention is necessary.

External stakeholders often choose to intervene, which can lead to a significant divergence of interests. An external stakeholder’s desire to preserve their own capital can considerably reduce the options available to rebuild value for the benefit of a company’s stakeholders as a whole – therefore, early intervention is critical to turnaround success.

Frustratingly, ‘corporate denial’ is the most common issue that leads to external stakeholder intervention, which impairs the credibility of and the trust in the leadership team.

Preserving value, on fair terms

In recent times, opportunistic investors have targeted companies facing turnaround situations. By combining their capital with the skills of seasoned turnaround executives, they have successfully intervened and made significant returns by taking control of the capital agenda as a precursor to restoring corporate health. In a number of cases, independent experts and regulators have deemed the terms of recapitalisation solutions as ‘not fair but reasonable’. This demonstrates the value at stake and highlights the importance of the company retaining the initiative.

A company-led turnaround enables a business to remain in control of its destiny, seek capital from appropriate sources on fair terms and do the right thing to build value for its stakeholders.

Questions to consider:

1. Do we fully understand the perspective of key stakeholders whose support is necessary to restore corporate health?
2. Does our management team have sufficient bandwidth to balance the competing priorities of urgently implementing sustainable change and maintaining the support of key stakeholders?
3. Is the strategic focus of the business aligned with restoring the full value potential for all stakeholders?
4. Have we adapted our corporate governance and risk management frameworks to provide appropriate direction and challenge to the management team and fulfil the company’s obligations to its shareholders and other stakeholders?

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