The recent spate of well-known company business rescues serves as a stark reminder of the critical role boards play in safeguarding corporate health. Economic uncertainty amplifies the need for proactive board governance.
The “Deloitte Restructuring Survey 2024" highlights weak governance as a primary cause of distress, emphasising the need for boards to anticipate risks and make informed decisions. By understanding subtle indicators of potential trouble, boards can steer their organisations towards sustainable success.
Pick n Pay has provided a compelling case study of effective board leadership over the past 12-18 months. Despite a strong market position, the retailer faced significant challenges, including intense competition, the crippling impact of load-shedding and some strategic missteps.
However, a proactive board, recognising the underlying issues, initiated a series of strategic changes. This included a leadership shake-up and a comprehensive restructuring of the balance sheet and operations. While the retailer's journey to recovery is ongoing, management and the board remain firmly in control.
Conversely, a number of JSE-listed and private entities in the consumer sector have been forced to file for business rescue due to a lack of proactive leadership. These companies failed to identify and address underlying issues until it was too late, highlighting the importance of timely decision-making and strategic foresight.
Early detection is crucial for effective intervention. Directors must be attuned to subtle indicators that often take on the guise of temporary challenges. A decline in profitability, while concerning, might initially be attributed to cyclical market fluctuations. However, a persistent downward trend coupled with increasing debt levels and deteriorating market conditions could signal deep-rooted issues.
Regular and rigorous financial reviews, including stress-testing, benchmarking and scenario planning, provide a structured approach to identifying potential vulnerabilities. Moreover, a culture of open communication between the board, executive management and key stakeholders is crucial.
By fostering a climate of trust and transparency, directors can encourage the timely sharing of information, enabling early identification of emerging risks. This proactive approach allows for timely intervention and course correction, mitigating the risk of a more severe crisis.
In the “Deloitte Restructuring Survey 2023" respondents identified and ranked the following key financial indicators to detect signals of potential distress:
- Operating/free cash flow;
- Working capital;
- Ebitda/operating margin
- Revenue; and
- Gross profit margin
On a practical level, several tangible indicators signal potential challenges for a well-established company:
- Stretched creditor terms may signify liquidity constraints or deteriorating creditworthiness.
- Impending debt maturities without adequate refinancing plans can expose a company to refinancing risk.
- Loss of key customers or suppliers can disrupt revenue streams and supply chains.
- Impaired cash flow generating assets indicates declining asset productivity or efficiency.
- Breaches of financial covenants signal a deterioration in financial performance and increased lender scrutiny.
- Insufficient cash flow can hinder operations, investment and debt servicing.
- Delayed financial results might mask underlying issues or indicate governance lapses.
- Finally, key staff turnover can disrupt operational continuity and signal potential strategic shifts or internal challenges.
When distress becomes more pronounced, the signs are typically more visible: liquidity crises, breaches of covenants, significant drops in share prices and loss of key customers or suppliers. At this stage, swift action is imperative to prevent further decline.
By fostering a culture of open inquiry and constructive challenge, directors can create an environment where executive management feels empowered to share both successes and challenges
Directors must facilitate prompt and decisive measures, which may include renegotiating debt agreements, divesting non-core assets, or even considering mergers and acquisitions to strengthen the company's position.
Experience is an invaluable asset in navigating corporate distress. Boards should include non-executive directors with backgrounds in handling distressed situations. They bring insights and practical knowledge that can be pivotal in crisis management. Additionally, engaging advisers specialising in distress can provide the expertise required to devise and implement effective recovery strategies.
Advisers bring an external perspective, free from internal biases and blind spots. Their objective assessments and strategic recommendations can help in making tough decisions, such as asset sales, operational reorganisation, or, as a last resort, workforce reductions that are essential for recovery.
In an increasingly complex business landscape, boards must evolve from mere overseers to strategic partners. By fostering a culture of open inquiry and constructive challenge, directors can create an environment where executive management feels empowered to share both successes and challenges. To achieve this, directors should:
- Be tenacious and sceptical without being accusatory: seek clarity on strategic objectives, financial performance metrics, risk assessment methodologies and contingency plans.
- Probe for deeper insights: delve into operational challenges, competitive pressures and industry trends.
- Ask incisive questions and demand robust evidence: boards can enhance their ability to identify potential risks and capitalise on emerging opportunities.
Remember, a strong board-executive management relationship is built on trust and mutual respect. By adopting a proactive and supportive approach, directors can drive sustainable value creation for the organisation.
• Kader is senior manager: restructuring & turnaround, Deloitte Africa
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.