When overall demand slows down

(Second in a series)

In general, a boom covers many sins while a bust uncovers the weaknesses. This second article of a four-part series highlights the visible symptoms of internal wrongdoing and mismanagement that led to the insolvency of Co A (identity withheld).

The failure of the property company was primarily caused by two major events happening at the same time: an external economic crisis triggered by the global financial crisis that eventually took out Co A a few years after, and internal damages due to management’s failure to recognize the red flags even when issues were already starting to emerge before the crisis.

As we initiated our turnaround and restructuring plan, my team started to uncover many symptoms of bad management. Overall, the internal problem stemmed from failed leadership and lack of alignment between ownership (stockholders) and management (professionals), the shallow executive bench, as well as the blurry vision, mission and values of the company which proved to be the deathblow.

I am sharing the primary reasons that brought this troubled organization to its knees. These were issues that may have been quite impossible to detect if we were outsiders; issues that investors, creditors and regulators must be wary of especially at this time when we are experiencing an unprecedented, disruptive crisis that is due to make a hard landing in the third quarter this year:

* founder-centric decision-making/one-man rule;
* passive board that is comprised of family members;
* management team whose members are just order takers;
* departmental kingdoms resulting in power struggles;
* weak financial ecosystem;
* compromised ratios from current, debt to equity, cash to debt and operating cash flow to sale ratios;
* bureaucratic organization;
* poor construction quality;
* ineffective customer service group;
* very high attrition rate;
* wrong pricing policy;
* demotivated workforce/high people turnover rate;
* no governance; and
* no accountability

Majority stockholder, founder, CEO

In our research, we discovered that the founder’s go-to mindset was largely grounded on top lines and nothing else. He was a visionary but his narrow outlook alienated him from other critical areas of management. There was one instance just before the crisis, when he repeatedly ignored the request of his finance head to engage the services of a cost management team to provide oversight on projects that are being planned for construction.

Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over the budget. It does relevant cost analysis so the management team can make sound and evidence-based decisions.

But in the founder’s mind, the scale and velocity would more than make up for the project’s cost and vague margins. Being a visionary, he spent most of his time meeting the heads of sales and design divisions while the financial position of the company was showing signs of deterioration. He would always insist he was the only person who can come up with aesthetically pleasing concepts. To keep their jobs, in-house designers simply kowtowed to his wishes. Nobody dared disagree with his ideas.

On top of the group’s disregard for NPVs (net present value) and IRRs (internal rate of return), the business and product development teams created concepts that appealed to practically everybody meaning “all things to all people.” There was no segmentation of any sort and therefore the marketing campaign was always geared towards a “shotgun approach.”

In short, Co A didn’t care about what the market wanted because the founder relied heavily on his past successes and whim. His cowed management team were mere followers concurring to everything he dished out. At the height of the global financial crisis, Co A showed signs it was already struggling without any direction.

Incompetent COO

When we made a sweep of executive competency, we discovered that the professional team were either copycats, plain incompetent or both. There were several instances wherein unqualified executives were promoted to senior level positions because they performed well in one functional area.

One of the most glaring decisions that proved costly to Co A was when the founder promoted his vice president for sales to chief operating officer (COO) as a reward for outstanding performance in sales.

For two years, the COO was, in reality, a glorified salesman. He knew little about other functional areas of real estate operations such as finance, accounting, construction, inventory, risk and administration. To be fair to the COO, he made efforts to broaden his knowledge in the first six months of his appointment, but mounting pressures to perform eventually took a toll on his ability to manage the organization. Since he was completely overwhelmed, the COO ended up choosing his comfort zone and concentrated on motivating his sales division but neglecting more important operating responsibilities. He ended up delegating these functions to his subordinates.

His limited skill set kept him from making critical decisions and there were many instances wherein the founder overturned or bypassed his authority. With the void he created, department heads began engaging in constant power struggles. This tumultuous two-year period further compromised bottom lines. What made it worse was that it was largely ignored.

To quote one of my colleagues who penned the report, “It all boils down to the founder’s poor judgment in elevating his VP Sales to a position of high executive responsibility. To begin with, the COO was incompetent. In good times, the wrong appointment would not have mattered but in bad times, it was clear that management was incapable of dealing with negative and hostile factors.”

(To be continued)