From the Institutional Investor's Journal of Private Equity, Special Turnaround Management Issue Spring 2006: Volume 9, Number 2, pp. 45-51.
Napoleon said: “Nothing is more difficult and therefore more precious than the ability to decide.” Individuals, nations and organizations make daily judgments with far-reaching consequences during both normal and extremely distressing circumstances. The media report troubling stories on financial reporting and accounting scandals, airline bankruptcies, massive corporate layoffs, and credit data security breaches. Even the most experienced, hardened executive managers and professional crisis managers are challenged to make effective decisions when facing urgent crisis conditions.
The examples of notable military leaders such as Napoleon, Alexander, Patton, Hannibal, and Lee provide tremendous insight into the process of effective crisis decision-making. Each possessed an innate ability to make effective decisions under extreme circumstances. What common traits do effective decision-makers have? What makes some decisions work where others falter?
Consider three well-known crisis situations.
A DECISION AT LITTLE ROUND TOP
On July 2, 1863, Colonel Joshua Chamberlain and the 20th Maine infantry regiment of the Union Army of the Potomac were positioned on a hill called Little Round Top located at the extreme left of the army’s battle line at the Battle of Gettysburg. If the vaunted Confederate Army of Northern Virginia, led by Robert E. Lee, could turn Chamberlain’s regiment line, they would outflank the entire Union Army and most likely win the pivotal Gettysburg battle – and perhaps the war. Two Southern brigades had already assailed Chamberlain’s regiment six times, and the sixth assault had been barely repulsed.
The exhausted soldiers of the 20th Maine were nearly out of ammunition and water. Casualties were high. Soldiers were weakened by extreme heat conditions. Following the battle, Chamberlain told his commanders that he realized his depleted, fatigued regiment, could not hold its position against the next Confederate attack given the dire circumstances and the determination of the Confederate soldiers to take the position at all costs.
Looking down the hill at Confederate soldiers winding their way through the trees for the seventh assault, Chamberlain made what was perhaps one of the boldest and most effective crisis decisions in military history. He ordered his regiment to fix bayonets and charge down the hill against the advancing enemy. The surprised Confederate infantry looked up at the charging Union soldiers and either surrendered or hastily retreated back down the hill. Chamberlain’s troops captured more than 400 Confederate soldiers. Lee attempted no more assaults against Little Round Top.
Many military historians consider Chamberlain’s decision to have saved the Union army from defeat at Gettysburg and, ultimately, the Civil War.
WHEN EGO MEET ICEBERGS
Whereas Chamberlain’s levelheaded decision at Little Round Top led to victory, those made by the owners and captain of the “unsinkable” RMS Titanic did not. The luxury liner set sail with 2,227 passengers and crew members destined for New York City. But during the late hours of April 14, 1912, the liner entered iceberg-charted waters. The decision to steam ahead at full-speed in spite of iceberg warnings occurred during relatively calm conditions, driven by the owner’s ego to set a new speed record for an Atlantic crossing. This decision resulted in a fatal collision that sank the liner and all but 705 of its passengers.
Decisions following the iceberg collision, when the actual crisis began, did little to minimize the resulting loss of life. A mere 20 lifeboats, not nearly enough to hold all ship travelers, were sent adrift partially full, according to historical accounts, because the ship’s captain did not control the situation during the ensuing panic.
A FALL FROM GRACE - ARTHUR ANDERSEN AND ENRON
The context surrounding the 2001 Enron scandal was different, but just as catastrophic to American business and Wall Street. Enron, once the seventh-largest company in America, had experienced a 57% five-year sales growth rate. In just one year, between 1999 and 2000, its reported sales more than doubled. Yet the company’s illegal and unethical business practices involving, among other things, spin-off partnerships and off-the-books energy deals led to the largest corporate bankruptcy in American history, billions of dollars of losses in shareholder value, the loss of thousands of jobs, and a most deleterious impact on the retirement and financial well-being of thousands of former employees and their families.
Most unfortunate, the Enron debacle brought about the demise of Arthur Andersen, Enron’s independent auditors, the renowned former “Big Five” accounting firm with an illustrious history of which it was justifiably proud. Could the demise of Arthur Andersen have been averted? Would different decisions have saved the firm? How well did the top decision-makers at Andersen react to the crisis? The firm's leading decision-makers were certainly intelligent, educated and business savvy people, and they had the benefit of hindsight into the failiure of similar critical decision-making situations (the Watergate situation, for example) to provide some guidance.
According to press accounts, Andersen was also in a fast growth mode for its lucrative consulting business when it faced a crisis decision situation involving high-risk exposure with a reasonable amount of reaction time. However, in their response to the crisis brought about by the firm's involvement with Enron, Andersen’s key decision-makers appear not to have viewed the situation from all angles or to have fully understood the landscape. Their full-speed corporate culture propelled a decision to shred Enron-related paper and electronic records, under the guise of a document retention program. This action, among others, ultimately led to the demise of the firm and an indictment for obstruction of justice. In the end, the "Big Five" become the "Big Four."
The decisions made in these situations certainly had different outcomes as a result of different causes. Chamberlain's decisions maintained control of the situation, and he had the presence of mind to act logically and rationally. The owner of the Titanic gave orders to steam at full speed on the basis of the faulty assumption that the ship was unsinkable and his desire to break the record for an Atlantic crossing. The ship's caption did not consider the possible outcome of the decision, nor did he have the presence of mind to control the actions that resulted in partially filling the lifeboats. Decision-makers at Andersen appear to have denied reality, to have lost control of the situation, and not to have learned from the mistakes of others in similar circumstances.
Although most of us fortunately never face such massive consequences from our decisions, we do meet crisis to some degree during our careers. This is particularly true for management and professional advisors working with distressed and troubled companies. Decisions made by CEOs, turnaround consultants, chief restructuring officers (CROs), auditors, investment bankers, equity investors, and other professionals influence the national and local economy, as well as the lives and livelihood of thousands of people.
ANATOMY OF ORGANIZATIONAL CRISIS
“Almost every crisis contains within itself the seeds of success as well as the roots of failure.”
- Norman R. Augustine
In the Harvard Business Review on Crisis Management, Norman R. Augustine states:
“In business as in life, crises come in as many strains as the common cold. The spectrum is so wide that it is impossible to list each type. Product-related crises alone range from sudden outright failures (the collapsed walkways in the newly built Hyatt hotel in Kansas City, Missouri, in 1981) to unanticipated side effects (lung diseases associated with asbestos) to gradual obsolescence (gas lamps, slide rules, citizens band radios, mimeographs, and buggy whips).”
No business is immune to crisis, and no manager, regardless of forethought or exhaustive planning, can be fully prepared when it happens. Unlike normal circumstances, a crisis situation involves urgency. A crisis decision occurs when the decision-maker is forced to act quickly or risk failure. This process involves rapid strategic, operational and tactical assessments and identification of numerous options, often based on incomplete data.
Appropriate crisis reactions demand specialized skills, confidence, experience, foresight and broad thinking. As with all decision-making, multiple courses of action and probable outcomes should be assessed before reacting. But faced with heightened pressure during a time-sensitive crisis, the decision-maker must immediately discern and assess all angles of the situation, initiating and executing the most ethical, fair, honest and appropriate response, sometimes within mere minutes.
Peterson & Clair (1998) define a crisis as “a low probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly.” In business context, a crisis usually arises as a result one of two situations:
1. The eventual outcome of ineffective business management, faulty strategy, obsolete technology, a high cost structure or a weak business model or
2. A sudden and usually unanticipated event that threatens a company’s economic market position, financial stability, profitability or viability, such as the sudden loss of a key customer, new technology, adverse litigation or natural catastrophe.
Crisis management involves proactive and reactive strategies that help companies minimize damage and recover from distressing situations.
Business leaders face organizational crisis in varying degrees with varying consequences. Simplified, three levels of crisis can be identified, each with similar reaction tactics.
1. The first crisis level involves high-risk exposure and immediate response. The battle at Little Round Top is an example of a level-one crisis.
2. The second level of crisis involves high-risk exposure with limited reaction time, or situations that offer a few days to a week before damaging consequences unfold.
3. Finally, the third level of involves high-risk exposure with reasonable reaction time, or situations offering longer than one week’s response time. The Arthur Andersen crisis resulting from the Enron debacle is just one example of a level-three crisis.
A business in extreme organizational crisis operates with minimal cash resources. It often has lost and continues to lose key employees and is forced to respond to vendor or lender payment demands. It must clearly justify funding needs and continue operations, albeit with routine supply shortages. Its management team will feel some degree of paralysis when making any decision, let alone an effective one, faced with elevated risks and consequences. Restructuring professionals can assist operations and salvage what can be saved to maximize business continuity and profitability. The choices they make during this period have little room for error.
CRISIS DECISION-MAKING - A MILITARY PARLLEL
“Be willing to make decisions. That's the most important quality in a good leader.”
- General George S. Patton
Turnaround management for distressed businesses can be likened to leading a military campaign. The military classic The Art of War, written in the fourth century BC by Sun-Tzu, proved popular among thousands of business executives seeking to hone their corporate decision-making skills. In his book On War, Carl von Clausewitz states:
“Rather than comparing [war] to art we could more accurately compare it to commerce, which is also a conflict of human interests and activities; and it is still closer to politics, which in turn may be considered as a kind of commerce on a larger scale."
War and business management both represent competition among human organizations, and history’s most notable military figures demonstrate the same qualities as today’s most well-respected business executives. All are superior tacticians, strategists, organizational developers, and decision-makers. In the fog of war, one’s ability to comprehend the crisis landscape fully is hindered, as is the ability to make effective decisions in business, especially when management is not accustomed to working at this elevated pace.
EFFECTIVE DECISION MAKING
“Whenever you see a successful business, someone once made a courageous decision.”
- Peter F. Drucker
Napoleon was right: decision-making is a difficult task. This is true in all situations. George L. Shaw, senior research scientist at the George Washington University Institute for Crisis, Disaster, and Risk Management, states:
“All organizations, be they private sector, public sector or not-for-profit … share the possibility of disruptive events that have impacts ranging from mere inconvenience and short-lived disruption of operations to the very failure of their ability to deliver their products and/or services.”
Whereas some people seem to have the innate ability to make effective crisis decisions, others, equally qualified, fail. In fact, while education, intelligence and experience all assist in the development of an effective decision-maker, these traits in themselves are no guarantee that effective will be made.
The thought process that enables great leaders to make effective decisions in a crisis situation might be beyond the ability of most people. However, there are at least 10 consistent decision-making traits that successful leaders demonstrate during crisis situations.
1. Ego-Neutrality. Possibly the most important effective decision-making trait is ego-neutrality. The most successful decisions are made by those who do not allow their egos to impede their judgment. Poor decision makers are typically controlled by their ego and make myopic choices to improve their self-worth, not the situation’s outcome.
2. Presence of Mind. Good decision makers, especially when faced with crisis, demonstrate logical, rational thinking and controlled emotions. Weak decision makers act illogically, irrationally, and emotionally. Most crisis situations can be addressed with disciplined, logical thought processes. They ask themselves, what is the situation? What outcome do I want to achieve? What are the logical choices?
3. Elevated Perspective. Good decision-makers consider the big picture and context, as well as all potentially far-reaching consequences. When making a difficult decision, view the situation like an assistant football coach, watching the game unfold from the highest stadium position. Although much can be said for having your hand on the pulse of your business, step back for moment and look at the situation as if you were a disinterested party.
4. Outcome Focus. Decisions should be made with a clear focus on the desired overall objective and outcome, not on narrowly focused short-term gain. If the main goal is saving a company’s prosperity, don’t worry about matters that don’t affect this outcome.
5. Realism. Effective decision makers recognize that if you don’t face the existing realities of the situation, little can or will alter the outcome. Though it may be unpleasant, accept the reality of the situation and act accordingly. Don’t be deluded by wishful thinking.
6. Forward Thinking. Effective decision-makers focus on the situation as it is today and not as it was yesterday. They continually adjust their strategies, tactics, and decisions based on the existing circumstances and, as in a battle in progress or a game of chess, they plan several moves ahead.
7. Action Orientation. Good decision-makers formulate a timely resolution. They never let situations fester, avoiding paralysis and taking action even with incomplete information.
8. Willingness to Not Act. Decisions and corresponding actions should be suppressed when they are unnecessary. Effective decision-makers know when it’s best to let the situation unfold naturally and don’t make rash decisions when no decision might be necessary.
9. Drive Based on Sound Assumptions. In a distressed or crisis situation, the circumstances and landscape continually unfold. A good assumption yesterday or hours ago may not be accurate at this moment. Let the past go as soon as new information is available. Make sure your platform assumptions are sound.
10. Willingness to Learn From Your Past Mistakes. An old proverb says that experience is a great teacher because it teaches us to identify the same mistakes when we make them again. Effective decision-makers learn from their mistakes and try to avoid making the same ones again. One of Dwight Eisenhower’s notable traits was his ability to examine the results of his decisions, even the successful ones, and determine what he could have done better. He took a dramatically different approach than do many business executives, who vigorously defend an obviously poor decision to the very end and make the same mistakes in attempt to prove that they are ultimately right.
REAL EXAMPLES FROM TODAY’S TRENCHES
Two examples follow ineffective decision-making in recent business situations in which my firm was either involved or subsequently retained as CRO. The third example is a situation where the decision to take no action in what was perceived as a crisis turned out to be the best decision.
A Lesson in the Disaster That Could Happen When Emotions Drive Your Decision
A large, profitable, and growing consumer goods manufacturer, founded and managed by two brothers upon their return from World War II, enjoyed an industry-leading market share and wide respect for the leadership of the business. The elder of the two brothers was considered by many to be the icon of the industry as he deftly led the company successfully through years of industry consolidation to where only four major competitors remained. A principal of our firm was retained to assist the company in developing a long-term business strategy to continue to operate successfully in the changing industry landscape brought about by the rise of the “big box" retailers and home improvement centers.
Our client’s major customer (25% of annual volume) was a major home improvement chain known for its low prices and heavy-handed treatment of its suppliers. At the time, the chain’s demand for this product was split evenly between our client and a competitor.
The home improvement chain invited both existing companies plus a third to bid competitively on all of its business. Our CEO reportedly connived with the existing competitor’s CEO to bid only on half the chain’s business to maintain the status quo. They assumed the third competitor did not have the large product needs of this home improvement leader.
The bidding process occurred at the chain's corporate office, with all three companies involved in what was called a “shoot-out.” During this event, chain executives went from room to room negotiating separately with each company for lower pricing, better terms, and longer service warranties. Shoot outs are notoriously stressful, demanding, and intense. You need to keep a cool head.
Our CEO was convinced that the third company would not aggressively court this business, and that they would focus their attention on another major chain contract up for renewal later in the year. Our firm and key employees advised that this was not a sound strategy and could result in the loss of all the business. When the meeting went downhill, our CEO lost his temper and, after harsh words, stormed out of the meeting altogether. With the field abandoned, the other remaining competitor did not have sufficient capacity; all of the chain’s growing business went to the competitor who previously did not have any share of it.
The CEO of our client, notwithstanding our advice and the advice of others in the company made two crucial mistakes: 1) he let emotions overpower his drive toward the desired outcome, and 2) he based his strategy and actions on the faulty assumption that the third competitor was not serious about the business because of a lack of capacity. What he thought he knew as a fact was based on an assumption and wishful thinking and was, in fact, not true.
These mistakes drove the company from the number one to the number three position in the industry. As volume plummeted, the company suffered massive losses. Not knowing how to deal with the situation his actions had created, the CEO retired, and a principal of our firm was retained as the CRO. After he instituted a large reduction in workforce and other immediate cost-reduction measures, the company was sold to yet another industry competitor. The competitor who won the chain’s business became and continues to be the dominant industry competitor.
An Argument for Ego Control
Nothing hurts effective decision-making more than allowing ego or insecurity to drive a crisis decision. Repeatedly, intelligent, experienced executives let their egos factor into their decisions and support or enforce decisions that lead to failure.
On the Titanic, management’s decision under pressure proved highly ineffective, influenced as it was by ego and illogical thinking. Similar in nature, though less catastrophic, were the circumstances surrounding a recent restructuring engagement our firm was hired to manage. In this situation, our client’s CEO had achieved considerable success at his previous employer, a consumer products company selling air conditioners in a good economy with warm summers. Despite the favorable circumstances affecting product demand and, hence, profits, he attributed success to his decision to retain a consulting firm which implemented lean manufacturing techniques.
After the air conditioning company was sold, he landed a CEO position with a similar company selling heating-related products. Both companies were seasonal in demand and manufacture. In his new role, expecting to achieve the same success, he immediately hired the same consulting firm, which initiated extremely lean manufacturing techniques throughout the company. The largest initial cost savings was realized through a dramatic reduction of on-hand raw materials, furnished goods, and supplies. Although this process, generally referred to as demand-pull manufacturing, works well in certain situations, modifications must be made if adapted within different circumstances.
Despite two warm winters and the national economic downturn in 2001 and 2002 that reduced demand for heating-related products, the company soon found itself unable to meet modest customer demand as a result of the lean manufacturing process. Plant operations lengthened to seven-day work weeks. Additional labor was hired. Necessary machine maintenance was deferred, resulting in frequent breakdowns. Component parts previously manufactured in-house were outsourced to high-cost suppliers.
Under these crisis conditions, profits turned into severe losses. Cash availability dried up and vendors began demanding cash-in-advance terms. Regardless, the CEO refused to admit his mistake or change his management technique, blaming business failure on employees and on its customers’ inability to recognize the value of demand-pull production and lean manufacturing. He continued along the same path regardless of the obvious strategy fault, never reassessing the circumstances or considering worst-case consequences.
This executive’s stubborn stance led to the multibank lending group requiring a CRO for continued forbearance of their rights granted in the financing facilities, a Chapter 11 filing, and sale of the business. All shareholder value was lost. Although he was intelligent and experienced, the CEO did not keep his ego under control and ultimately sank the business.
No Decision Can Be a Good Decision
Whereas the previous situation demanded action, other distressing situations are best addressed with no action at all. An effective decision-maker or crisis manager knows when events should be left to unfold naturally. Lack of action is typically the best approach when action of any kind could escalate a negative impact and further detract from intended goals.
A leading corporation where my firm was providing assistance with debt replacement learned of a competitor’s new product launch touting new technology and lower cost. Most of the key employees felt a crisis was developing that would undermine the company’s leading industry position and profitability in a highly competitive, low margin business dependent on adequate volume to cover high fixed costs.
Core decision-makers wanted to launch an immediate plan to compete by developing a similar product. But the CEO assessed the situation and put forward a completely different response. Evaluating the other company’s technical capabilities, market position, and other relevant factors, he determined that although the new technology had surface appeal, the launch could not logically elevate the competitor’s market position. His decision was to take no action, saving funds across the board, from research and development to advertising.
Following the initial buzz from the competitor’s product launch, no real market penetration was made. Our client continued pushing its core product line, improving features and processes. The company continues to sustain its top industry position and improved profits by not reacting. To take no decision can be a decision, and in this situation and others where action can detract from your ultimate objective, the best action is to take is none at all.
THE ROLE OF THE CRO
One of the most notable recent developments in the restructuring profession is the advent of the CRO. In most instances, the CRO is not an employee, but instead is forced into the company by other stakeholders as a quid pro quo for granting accommodations to the distressed business in the form of continuation of financing facilities or other means of cooperation.
The CRO typically brings significantly less company, industry, cultural, customer, and product experience to the table than did incumbent management. In fact, for these reasons, incumbent management often argues against the CRO’s integration into the crisis situation.
Although the CRO doesn’t necessarily offer greater intelligence or general business skills than incumbent management, he or she is usually able to break the status quo and renew employee and stakeholder expectations with fresh, formulated processes for addressing the ills of a distressed business. The CRO also brings elevated skills in managing crisis situations and offers an unbiased reality check on the business’s current situation and outlook.
While not immune to human traits or ego, an experienced CRO, in most instances, will not fall victim to ego gratifying decision-making. He or she typically faces and acts logically upon the reality of the situation, comfortable with and accustomed to stringent timeframes. An experienced CRO brings a great deal of insight into distressing corporate situations, offering invaluable turnaround and crisis management skills.
CONCLUSION
“An expert is someone who has succeeded in making decisions and judgments simpler through knowing what to pay attention to and what to ignore.”
- Edward de Bono
At times, all decision makers face situations that require action in the face of extreme ambiguity and emotional fervor. Perhaps powerful and discordant influences push for a decision and action in diametrically opposed ways. In these circumstances, your first choice is that which is legal. When legality is not an issue, do what is morally correct. If neither legality nor morality predominate as issues, make a decision based on your first instinct and decide with commitment and certainty. Don’t let counter-thinking dilute your decision or action.
Over the course of my career, I’ve made my share of suboptimal decisions. I’ve also had the opportunity to watch and learn from effective decision-makers and observe the mistakes of senior executives both at client firms where I acted in the role of turnaround advisor or CRO and at large Fortune 500 companies where I was employed early in my professional career. In looking back on subpar decisions I’ve made or observed, I readily see that each mistake could have been avoided had the thought, judgment, and decision-making process mimicked that of our great leaders.
In times of crisis, it’s far too easy to give in to our emotions, react without thinking ahead, and ignore the overall objective, thus making decisions and taking actions that are bound for failure. Turnaround/crisis managers and other insolvency professionals are not immune to such behavior. Someone who recognizes the tendency of most to exhibit negative decision-making traits is significantly more likely to make effective decisions.
The nature of a crisis is defined by the potential risks and reaction time. High risk and time constraints go hand in hand when increasing the gravity of the crisis. At Little Round Top, Chamberlain had only a few moments to determine his course of action. He understood the desired outcome, which was to hold his position. Chamberlain made the only logical and rational choice with single-minded purpose.
In difficult business crisis situations, professionals face critical decision-making scenarios that demand split-second action. A practiced crisis decision-maker reads, analyzes, and assesses the overall condition, then makes the appropriate determination within that context, aimed toward the most desired outcome. When you practice and adhere to the effective decision-making lessons learned from great crisis leaders within your day-to-day activities, you gain a powerful advantage that helps you intuitively and instinctively react to distressing or crisis scenarios. Learn them, practice them and continually reassess them to achieve exceptional decision-making results.
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Ken Naglewski is a Managing Director at Focus Management Group and located in the firm’s Nashville, TN office. Naglewski has over 20 years experience advising distressed businesses in a wide array of economic sectors both in the U.S. and abroad. He has played an active leadership role in Chapter 11 bankruptcies, financial restructurings, operational turnarounds and distressed business sales. Recently he has specialized in providing advisory services and expert testimony on behalf of lenders and debtors in a large number of Chapter 11 cases. Naglewski is a CPA as well as a CTP and Certified Insolvency and Restructuring advisor. He can be reached at k.naglewski@focusmg.com.