Hire character. Train skill.
– Peter Schutz
As I imagine how to wax philosophical on this statement, I realize how perfectly it was said. Let’s do ourselves a favor and just read it a second time:
Hire character. Train skill.
Is there a quote that inspires you in your business? Please share it in the comments below.
All organizations have politics. If there’s more than one person involved – or one person with split personalities – you will have politics. Whether a 50,000-person enterprise, a non-profit, a school, a small business or a club, there will be politics.
The question is: How do you minimize politics?
Remember that everyone has an agenda. Even keeping one’s head down and doing a job for the paycheck is an agenda. As you can imagine, so is sucking up to your boss for a promotion. But those are ordinary personal-level agendas. If this is the culture of the company the aggregate of these individual low level politics could be crippling, but these are not the politics that concern me.
I’m concerned about the kind of senior-level destructive politics that slows down the operations of a company. At this senior level key decisions are made, so when people jockey for their political interests, they are making – or more likely breaking – their companies.
At one large company I turned around, there were some old directors who wanted to continue in the manufacturing business, while other directors preferred to morph into a licensing company. As a result, valuable time was lost, resulting in a 6-month delay – and a ton of monetary losses – before the company pulled together on the project that would save them.
Now, a disagreement amongst board members is a healthy way of fleshing out the best ideas – and a normal process – but problems arise when a board member or senior manager tries to undermine the process of normal negotiations and discussions within the board by currying the favor of senior management or board members who skew assumptions and therefore strategies towards their desired outcome.
I’ve seen numerous companies fail for these reasons.
As a board member, manager or director, it’s your job to minimize the politics around you – and to recognize when you’re a culprit in creating those politics.
I don’t know that you can stop politics, but you can mitigate it. If you, as a manager, see politics going on, you need to nip it in the bud by speaking directly to people about their actions and emphasizing that by working as a team, you are all working towards the same goal: the success of your company.
The bigger a company becomes, the more layers of management are created and the more political the team gets – and the less “team” things become. No matter how big your company gets, try to keep your business from being too political. Life is too short for politics.
When internal politics heavily influences people’s behaviors, leaders don’t get the right answers quickly enough. When a business is in trouble, this results in a slower turnaround; even when a company is healthy, internal politics creates unnecessary barriers to honest communication and collaboration.
What kinds of politics does your company face? How do you handle them?
If there is such a thing as good leadership, it is to give a good example.
– Ingvar Kamprad
If you know me or you’ve been reading my blog, you know how much I value this concept.
I’ve seen a poor example be the bad leadership to bring down many a company.
If you take a little extra cash out of the register, your employees will feel okay doing so, too. If you speak negatively about your customers, your employees will do the same. Are you a gossip? Expect your employees to become gossips as well.
It doesn’t matter how many inspiring speeches you give about doing the right thing and the amazingness of your company. Your word means nothing if your actions – which are all examples – are poor.
We all lead by example. Make sure yours is a good one.
Click HERE for another post on leadership.
Do you lead by a good example? How so?
In some cases that I’ve worked, the officers or owners are working against me – and their creditors – by self-dealing.
What is Self-Dealing?
For the record, self-dealing is not necessarily stealing but it is fraudulent. For example, self-dealing can be when an officer of a company tries to gain an unfair tactical advantage on the creditors or bank, so that he can do something like buy the assets at a reduced cost or own the company some other way.
When trying to understand self-dealing, it is important to know that when a company is in “the zone” of insolvency the fiduciary responsibilities of the officers and directors of that company shift from a duty to the shareholders to a duty to the creditors. Though “the zone” of insolvency can be difficult to prove, presumably when I’m brought in to a company, insolvency is already roosting or on the horizon. Thus, if any officer is creating value for himself or the shareholders instead of the creditors, he is automatically self-dealing even though it might not have been considered thus had the company been solvent at the time of his actions.
I could devise a strategy for a client because I believe he is in the “zone of” insolvency, but he could say that his definition of insolvency is different and that he is going to continue acting in the interest of himself and his shareholders. Obviously, there are a lot of interpretations of insolvency which makes this legal concept very difficult to understand or litigate.
Self-Dealing or Not
In one huge turnaround case, I was blind-sided by an officer of the company who was trying to buy the assets of the business through a shell company. He obviously wasn’t acting in the best interests of the creditors because he was trying to drive down the price of assets to purchase them himself.
With proper disclosure to the creditors and without other credible purchasers in the game, self-dealing could possibly be approved by the creditors, but it’s a very fine line that requires a lot of honesty. By creating a process that inserts a turnaround person in the company, self-dealing will not occur.
Though I’d had an early gut-feeling that someone was self-dealing, I wasn’t able to uncover what was happening before I had to speak with the creditors. Therefore, despite my promising the creditors that there was no self-dealing, as I’ve already said, this officer was doing exactly that.
This undermined my credibility with the creditors and created a conflict between me and the officer, which delayed the resolution of the case. Though I regained my credibility, these actions behind my back created unnecessary hurdles for the company and case.
Trust Your Gut
When I have to give expert testimony, like in this case, I have to know the truth, and I pride myself on my ability to find the truth when I’m working a case.
I had a valuable lesson emphasized for me during this case: trust my gut.
If you don’t trust someone, keep an eye on him. Ask lots of questions. Don’t feel bad about mistrust; if that person does nothing wrong then you will find nothing wrong and be pleasantly surprised.
Have you ever seen a case of self-dealing? Tell us about it.
A few years ago, GGG was engaged in the restructuring of a multi-billion dollar company that had relationships with numerous and varied businesses and firms throughout the country. While focused on the client’s interest, I took this opportunity to make some excellent connections and solidify existing ones with professionals in a multitude of industries – even though we were most often on opposite sides of the table. I worked with many bankruptcy attorneys, private equity professionals and business leaders, developing excellent working relationships towards the restructuring of this company.
It’s important to recognize current business as opportunities for new business. Not only does this prepare you for the future but it motivates you to work harder on the current case.
Regardless of your profession or industry, look at each meeting, conference and project as a marketing opportunity. After all, you are good at what you do, and you want others to know this.
It’s not often in my profession that I get new business from existing or past clients because of the nature of the turnaround industry. However, more than half my future business comes from those with whom I’ve worked during a case, whose interests at the time are not those of my client. That is, many times I am hired for future situations by those who sat on the other side of the negotiations table. Even though we were on opposite sides of the situation, those who ultimately hire me one day appreciated the professionalism with which I carried myself, the thought process I used to resolve the case and the outcome I achieved for my side.
Subsequent to the case at hand, they have other clients who they want me to represent. Next time they see me in the courtroom or at the negotiations table, they want me to sit on their side. That is why I always stay fair to the other side in a business case and communicate clearly. Make it your duty to do the same. People appreciate knowledge, professional conduct and sound business ethics, and they like solving problems quickly and efficiently.
Mutual respect is the goal for long-term marketing in business. Always be honest and forthcoming – you don’t have to be the nice guy in a tough business deal, but having professional respect for your negotiating partners and gaining their respect is the recipe for growing your referral sources.
Some of my long term, twenty-year referral sources come from these situations in which I gave oppositional professionals’ clients a hair cut, but who later wanted to work with me.
Remember, you’re always marketing.
What are your primary sources of referrals? How do you cultivate those?
As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our Partner, Vic Taglia.
My 93-year-old mother-in-law fell and broke her hip six weeks ago. Her surgery was successful, and she avoided most complications; now she is undergoing physical therapy in a rehab center in Atlanta. Until the accident my mother-in-law was mostly self-sufficient and protected her privacy, but this accident has forced my wife to get involved in my mother-in-law’s affairs.
We are now familiar with Medicare, supplemental Medicare, rehab time limits, rehab centers, assisted living facilities, skilled versus unskilled nursing homes, Veterans benefits, etc. We have discovered that my mother-in-law has 21 bank accounts at five different banks and doesn’t trust direct deposit for her Social Security check. We located what seems to be an operative will – from 1982.
Her family has had several changes in the past three decades (whose hasn’t?), and the old will doesn’t match what she has described as her current desires for at least the last decade. Fortunately, my mother-in-law has time to fix this: we have an appointment with an estate attorney next Thursday in the rehab center. Yes, I found an attorney who makes house calls.
So what does this mean for you?
Obviously, you should review your estate plan periodically: every five years is a good idea and more frequently if your life situation changes. In business, however, you have many other plans that need periodic review.
When was the last time you tested your off site computer backups? Not just to see if the data is backed up, but have you tried to use the back up data to see if it really works? I bet there are some businesses in the northeast that wish they had tested the water resistance of their backups before hurricane Irene. Really, who in Vermont would think that a hurricane would cause them a problem – and that is exactly the point.
You need to think about the unthinkable.
When did you last review your succession plan? Who could take over for you if you broke your hip and couldn’t go to your business for a month or more? What is your plan if your VP of Operations is hit by a bus? (In my It’s always the president’s fault blog, I described how this led to the firing of a company president.)
What about your financing plans? How stable is your bank? Can you rely on it for continuing financing in these tumultuous times? Will you find out one day that your bank has all the real estate/manufacturing/service business they need and they would love to see you take your business elsewhere? Nothing bad about you – they just want to move in a different direction.
What about your professional advisors? Have you met your lawyer’s partners? Your CPA’s? Your financial advisor’s? Are you comfortable with them? Do you have confidence in them? I have seen several cases in which the unexpected death of a lawyer or CPA caused significant disruptions in a client’s business.
So think about the what ifs and prepare a plan to counter the unexpected. You may not be as fortunate as my mother-in-law.
My last white paper was about the faux pas of CEOs in crisis, but in writing that paper I started thinking about some of the biggest mistakes CEOs, presidents and business owners make that result in crises. Since you may not be facing a crisis right now – and I hope you never are – I wanted to share these blunders with you so that you could either avoid them or start rectifying them.
1. Growing a Business Without Proper Equity or the Right Financial Structure
It’s never wise to try to grow your business without enough money. I once carved an injected molding company in Toledo, OH like a Thanksgiving turkey because the president sunk $2.5 million into his pet project: making the perfect bottle-cap. He effectively leveraged the entire company by borrowing against it to pursue this dream. Not only did he bet the ranch, but he tried to grow and evolve his business without sufficient funding to keep it running. Let that be the first lesson: make sure you have enough capital before making any big moves.
2. Growing a Business Without a Sufficient or Competent Management Team
The corollary to having enough capital to grow your business is having the right management team to do so as well. I’ve run Ocean Pacific twice. The first time was because they were expanding overseas without the proper personnel who understood sourcing and distribution in international markets. Though they lost a ton of money before we arrived, we were able to scale back to domestic manufacturing and refocus the company on design and licensing.
Many years later we were brought back in for a similar reason. Not only had the company lost control of its brand, entered into poor licensing arrangements and become embroiled in trademark issues, but they had accumulated a ton of debt. Once again, the management team couldn’t handle its responsibilities. The company was restructured through bankruptcy, selling its licenses to a private equity firm. Learn from Ocean Pacific and don’t embark on new strategies for growth without acquiring the right management team first.
3. They Allow Idiot Family Members to Run Key Divisions of the Business
Putting family members in key positions of your business can be dangerous without written expectations and a timeline for control, advancement and responsibilities. It takes a unique father and CEO to balance the intersection of a family and a business. Problems arise in many places, but particularly as it comes to entitlements, compensation and selling the business.
I had a mechanical engineering company in New York that was in the middle of a restructure that included a large union shop. The father had died and put his wife in charge as CEO. The son, resentful of his diminutive role due to a lack of delineated expectations and a board-approved succession plan, and, in his eyes, inadequate compensation, was stealing a lot of money. When we confronted good ol’ Charlie, he took a kitchen knife to his mother. Fortunately, she lived, got a restraining order, and kicked him out of the company.
Mixing business and family is not easy. Be careful and have the sense to know when someone is incapable of doing the job he feels entitled to do, family or not. Always manage expectations by putting everything in writing.
4. They Skew the Facts to Boards, Creditors and Constituents to “Sell the Deal”
As I’ve discussed before, honesty really is the best policy. The CEO of a hard drive manufacturer in California desperately wanted a line of credit from his bank for $60 million, so he stuffed the channel in order to make his company appear worthy.
Stuffing the channel is when a manufacturer oversells product to put sales on the books, despite knowing that much of the merchandise will come back unsold; this inflates the books by overstating the top line, thereby improving the bottom line. This strategy led to the loan, but when the company repurchased the inventory on the channel within 60 days, it became out of compliance on the line of credit. Once the bank defaulted the company I was brought in to salvage what I could and to hopefully restructure the company. The company survived thanks to some hedge fund loans, but the CEO lost his job because he skewed the facts.
Not bending the facts is so important that it deserves a second story. Before the technology was so ubiquitous, lazer-tag equipment had a very high value, and a Texas-based company seeking a large loan claimed it had more inventory on its books than it did; the company added the inventory in its Ireland-based location to the US books. The US auditors never verified the inventory and granted the company a far larger loan than it could handle. When the company filed for Chapter 11, I was brought in as CEO; within weeks of my new position I discovered we were $75 million short in inventory. I immediately went to the judge to convert the case to a Chapter 7 rather than try to bring the company through the bankruptcy and be embarrassed by the fraud. The creditors ultimately sued the accounting firm and made millions of dollars from faulty accounting, once again highlighting the blunder of skewing facts.
5. The President/CEO/Owner Can’t Keep It in His Pants
I have more examples for this one than any other lesson I know, but I’ll highlight this case with two basic stories to indicate how easy it is to get caught and how ruinous it always is. The president of an apparel manufacturer had other interests: he wanted to design the perfect yacht. He certainly succeeded in making a great one, such that he ended up in a prestigious yachting magazine. However, when he and his innovative yacht were photographed for the cover shoot, he failed to ask his girlfriend to get off the yacht or at least cover up her delightfully revealing bikini. When his wife saw the cover of the magazine, she filed for divorce and he lost control of the company.
In another case I was brought in to resolve as president, the CEO and Chairman of the Board of a retail establishment was caught with his kids’ babysitter while his company was going through a Chapter 11 restructuring. Once the matter became public, he lost focus on the business and the employees and the creditors lost faith in him. Ultimately, the business was sold off in pieces.
Gentlemen: keep it in your pants. Not doing so can be very expensive. For the record, I have similar stories about the other gender, but I’ll save them for another time.
As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our Partner, Vic Taglia.
One important job of managers is examining their business’s risks to determine which risks they can absorb and which they should pay someone else to bear. Insurance premiums represent just one part of your company’s cost of mitigating risk, and a key element of risk evaluation is the selection of deductibles in a property policy. Another is workers’ compensation.
Some companies try to minimize the cash flow impact of workers’ compensation premiums by selecting more aggressive loss retention or self-funding policies, generally with some stop-loss provisions. The insurance company acts as the claims administrator, charging a percentage of incurred claims for administrative costs, and a premium for the stop-loss coverage. This provides an immediate cash flow benefit because there are very few claims processed in the first several months of any new policy.
But beware: these self-funding or large deductible plans are suitable only for companies that have the ability and discipline to reduce the first risk of loss; i.e., they have to avoid accidents and losses in the first place and on their own. Workers comp claims can take a long time to develop and close, and as a manager you want to avoid learning about loss development factors, paid versus incurred claims, collateral pledges and releases and actuarial reserves.
Limiting Workers Comp Claims
Most of the larger workers’ comp carriers have experienced loss prevention departments that love to visit their clients to help avoid accidents. They will encourage you to prepare and adhere to a corporate safety program, and establish a safety committee with regular meetings and some power to enforce safety discipline.
Your safety program will probably include a drug-free workplace policy and an effective back to work/limited duty process. You will get annual MVRs for all employees driving on company business. You will hold periodic safety meetings, provide bonuses for eliminating workers comp claims and enforce safe operations throughout the company. This approach isn’t just good for your wallet but for your employees.
A good insurance advisor will also help you identify and examine other risks to your business. Here in Florida, wind and flood coverage is difficult to acquire or very expensive. Maybe you can live without the property coverage, but maybe you need business interruption insurance or difference in conditions coverage.
A Fruitful Insurance Relationship
Insurance folks talk about relationships all the time. I used to be skeptical, but no longer. Insurers want to deal with insureds on a long-term basis – not with someone who will leave to save pennies. And I encourage you not to leave for pennies. With the right carrier, you will get those pennies back over the long term, if not in paid out claims then in time saved dealing with claims and consistent productivity due to reduced accidents and claims.
As a point of full disclosure, I have changed carriers, brokers, agents and consultants many times, but only after I determined that the incumbent either did not or could not offer the coverage, terms and service I wanted.
Many years ago, I put my company’s insurance program out to bid to two national brokers. The incumbent returned with lower premiums, better coverage and an overall more attractive program with some new carriers. The competitor offered a three-year program that combined workers comp, property and general liability in one policy. This had the potential for significantly lower overall costs if we had no losses.
I told my boss that we had plenty of other risks in our business (patent litigation, limited profitability, approaching down cycle in our industry, etc.) and that if we could find someone to take some of our risk, we should. He agreed, and we continued with the incumbent.
So my advice is to identify what risks you have, what risks you can afford and how much you can spend (time and money) in minimizing your potential losses. Allow that information to guide you when selecting an insurance provider for your business – not just lower premiums.
What are your experiences with business insurance? Do you have questions about the risks you’re facing and how to mitigate them? Ask in the comments below.
Are you personally guaranteed on anything?
I bet you are. Do you have an American Express business card? Do you have a loan from a bank for your business? What agreements have you made for your business?
One thing I’ve noticed is that the older a business is, the more likely it is that the owner (who is also often the CEO or president) has personal guarantees that he’s forgotten about.
And now’s as good a time as any to review all of your paperwork, find out where you’re personally guaranteed and take steps to extricate yourself from those guarantees.
If your business is successful and profitable, not in debt and established enough to no longer need the personal guarantee of your assets, home and your wife’s car, then try to get out of it.
Why Get Out of Personal Guarantees
Personal guarantees are pretty much what they sound like. They say that if something goes south with your business, you will stake your personal assets on making sure those invested can recover their losses.
So, if you have a business that one day goes belly up – even though in my experience these aren’t “one day” situations but long periods of strong indicators that you need to turn things around – the bank or whomever you have a personal guarantee with, has a legal right to try to recover its losses by going after your personal assets. Depending on the personal guarantee that means your money, your home or whatever else you have or staked could be up for debate and taking.
And that stinks.
If your business goes under, you don’t want to lose everything you have in the meantime. I can’t tell you how many dozens of times I’ve had clients tell me that they aren’t personally guaranteed or that there’s nothing to worry about on that front. Inevitably, when we sit down with all of their paperwork and start going back to the beginning, we find personal guarantees they didn’t know they had or that they didn’t think were still in force. But they were wrong. And they were at risk.
You don’t want to be at risk personally, and that’s why you want to try to get out of your personal guarantees – and not sign them in the first place if you can help it.
In All Kinds of Places
Personal guarantees appear in all kinds of places – and in some that seem relatively innocuous. I recently had a client tell me that when he was setting up credit card processing for his business, the merchant bank wanted him to sign a personal guarantee that if he didn’t pay his bill monthly – a simple, low, regular, monthly bill, mind you – then he would personally guarantee them the recovery of what they believed was due them. And at that, the structure of the arrangement was one that already allowed the merchant bank to withdraw money at its leisure from my client’s bank account.
We’re not talking about being out a lot of money here, but if this contract had a personal guarantee then imagine what other contracts you’ve signed have them.
Personal guarantees do serve a purpose – if your business has no credit or history and is a total risk then it makes sense that someone loaning you large sums of money wants you to be responsible for that money somehow. But if your business has been around a while or we’re talking about a monthly bill or something to that effect, then you need to think long and hard before signing any personal guarantees and about getting out of ones you’re currently in.
Just imagine over the course of 25 years how many personal guarantees you could actually have signed if you weren’t paying attention or didn’t know what to look for.
Have questions about how to get out of personal guarantees? Ask me in the comments section below.
It’s a fool’s errand to grow a business without a competent or sufficient management team. I’ve seen it tried a thousand times and fail just as many.
The most common example of this is the entrepreneur who’s been successful to a point but grows a business past his capacity to manage. Growing a business that large is a wonderful accomplishment, don’t get me wrong, but it’s every good entrepreneur’s job to know when he needs to bring in professional management to oversee key aspects of his business.
My case in point for this rule of thumb is Ocean Pacific.
I’m sure many of you recall OP. It was a pretty popular brand back in the day, and it still has a name for itself. Yet Ocean Pacific’s desires repeatedly seemed to outshine the capabilities and strengths of its management team. This is demonstrated by the fact that I’ve had to run Ocean Pacific twice.
The first time I was brought in to change the company because it was in the manufacturing business and expanding overseas without the proper personnel who understood sourcing and distribution in international markets. Though they lost a lot of money before we could reign in the problem, we ultimately got them refocused and left them to it. Had they had the kind of management team in place that understood the nuances of international expansion and management, I don’t think I ever would have gotten involved.
The second time I was brought into Ocean Pacific it was to convert them from a manufacturer to a licensing only company. They had a fantastic design department, but that was about it. They did not have the kinds of managers who could oversee manufacturing, and even though the international issue had been more or less overcome, manufacturing was ultimately not a sustainable model.
But again, the problem was that they lacked the right folks, in this case to manage the brand quality of the licensee’s goods. They just couldn’t deal with worldwide licensing. Once again, this transition sent millions of dollars down the tube, so we were brought back in to properly restructure them and carry out their plan.
So what did we learn. Well, plans are great, but plans only work until you start implementing them. At that point, reality gets in the way. One way to make plans work a bit longer – or at least come out the other side – is to have the right management team in place. You cannot grow or morph a business without a sufficient management team.
Have you ever tried to carry out a large scale plan without the right people in place to help you do it? What were the results?
The Turnaround Authority 