5 Reasons CEOS Wait Too Long to Address Problems

The worst cases in my career in the turnaround industry are when I work with businesses that could have been saved. If only we had been called in earlier. Those are the ones that really bother me, because these business failures didn’t have to happen. Had we been brought in earlier, we could have determined where the problems were and had many more options to fix them.

But often we are like firefighters who are called in after a home is in ashes, rather than at the first sign of smoke. Then all we can do is sift through the ashes.

Sometimes the best we can do is to get the most for a business in bankruptcy or through a fire sale, pun intended. And I always think, “If only they had called us earlier.”

The saying we have is “If the alligators are snapping, it’s too late to drain the swamp.” You have to pay attention when things are going wrong and fix them early on, before they become larger problems later, possibly even insurmountable.

If you catch a problem early, you have options. You can drain the swamp. But if you wait too late and the alligators have moved in, well, now you have to face them head on. Those alligators aren’t going to just relocate and find food elsewhere.

So why do CEOs and business owners wait until it’s too late to ask for help? Here are five reasons:

  1. Hoping the situation will change

Your sales manager isn’t meeting his quota and he is experiencing a lot of turnover in his department. He keeps promising he’ll hire more sales reps and “we’ll exceed our quota next month!” But he doesn’t and the competition is taking over your accounts. He should have been fired or refocused and now your competition is taking your accounts.

  1. Thinking you can fix it yourself

When I get time, I can focus on the problems in our accounting system, you think. It’s not working correctly and you aren’t getting the financial information you need to make the best decisions for your company. If you could only take a day to focus on where the problem is and what you need to do to solve it. Every day comes and goes, each with its own set of priorities, and you never do get around to focusing on the issues with accounting. And your business is suffering.

  1. Not wanting to admit mistakes

Sometimes with big jobs comes big egos. And an unwillingness to admit that you’ve made a mistake. Larry, the CEO of seminar company, hated change and would not admit to mistakes. He firmly believed that people were more likely to respond to the hundreds of thousands of mailings he sent if they were posted from their home states. So he had trucks driving hundreds of miles so mailings would carry a local postmark, to the cost of around $400,000 a year.

Fortunately, I was called into this company in time, and despite the fact their EBITDA was -$4 million, I was able to pull off a successful turnaround.

  1. Reluctance to ask for help

Some people see it as a sign of weakness to ask for help. As reported in the article “Why is Asking for Help So Difficult” in the New York Time, “There is a tendency to act as if it’s a deficiency,” said Garret Keizer, author of ‘Help: The Original Human Dilemma.’ “That is exacerbated if a business environment is highly competitive within as well as without. There is an understandable fear that if you let your guard down, you’ll get hurt, or that this information you don’t know how to do will be used against you.”

  1. Denial of the problems

It’s the head-in-the-sand tendency. “Calvin and Hobbes” creator Bill Watterson said, “It’s not denial. I’m just selective about the reality I accept.”

The sooner you accept your reality, the quicker you can get help. You don’t want to come face to face with those alligators.

Want People to Work for You? Make Them Feel Heard

They have 14,000 employees. And more clamoring to come on board.

Under Armour was recently included on LinkedIn’s U.S. list of Top Attractors, the top 40 companies at attracting and keeping the best employees. In an article referencing the inclusion, “To Thrive at Under Armour, You Have to Answer Kevin Plank’s Three Questions,” I found out one of the reasons why more people want to join the ranks at the sports clothing and accessories company with close to $4 billion in revenue.

The three questions management is encouraged to ask after every meeting or conversation are:

  • This is what I heard
  • This is what I think
  • This is what we are going to do

The goal of the questions, Kevin said, is to make sure you heard and understood what people said. With this method you don’t waste time on miscommunication, you facilitate buy-in and people feel their ideas have been heard, a huge factor in employee morale and retention.

My favorite method for clear communication is the whiteboard. I’m a huge fan of the whiteboard, even writing a whole chapter on its use in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”

For more reasons I love the whiteboard, please read my post “The Value of the Low-Tech Whiteboard in a High-Tech World.” Good luck with your new and improved communication.

 

My Moves Like Jagger

They must be getting some kind of satisfaction. The last three tours of The Rolling Stones grossed $401 million. Fifty-four years after childhood friends Mick Jagger and Keith Richards first formed what has been called the World’s Greatest Band, the band is still performing and drawing record crowds.

So I was interested in an article written by Rich Cohen in the Wall Street Journal recently called “The Rolling Stone’s Guide to Business Success.” This band  has been “among the most dynamic, profitable and durable corporations in the world,” he writes. They must have learned a thing or two along the way.

I agreed with many of the five lessons he targets from the long and successful career of the band. I’d like to focus on one in particular.

Cut the anchor before it drags you down

 Blues guitar player Brian Jones formed The Rolling Stones with Mick, Keith and pianist Ian Stewart, joined soon by bassist Bill Wyman and drummer Charlie Watts joined. They played their first gig at the Marquee Club in London in July 1962.

A rebellious middle-class young man, Brian could reportedly master an instrument in a single day. He was leader of the band and also served as its manager.

But he soon adopted too much of the rock star persona, doing drugs and not showing up for sessions. As Keith Richards said in an interview in the Rolling Stone magazine, “I enjoyed his company, and I tried incredibly hard, in 1966, to pull him back into the group. He was flying off. But my attempts to bring Brian back into focus were a total failure.”

Mick, Keith and Charlie felt they had no choice but to fire him. A month later he was found dead on the bottom of his swimming pool at the age of 27. A sad story but the guys did the right thing for the band. They had to cut the anchor before it dragged them down.

As Principal of GlassRatner in our restructuring and bankruptcy practice, I have to cut a lot of anchors at companies we’ve worked with as clients. It’s necessary for a variety of reasons. Ineffective managers may have been promoted beyond their ability and incapable of performing their jobs. Employees have gotten lazy and are more concerned with getting a paycheck than doing much to earn it.  Or the company may just be bloated and need to be streamlined to crawl back to health.

I’ve had to fire employees at client companies for embezzlement or incompetence. And as I wrote in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” I once had to fire the CEO’s 83-year-old grandmother as her main contribution to the company was knitting him socks.

Sometimes I have to get rid of people because they have become troublemakers, hurting the morale of the other employees, spreading false rumors or stirring up drama in the workplace. As I heard a speaker say one time, “If you spend your whole day putting out fires, it’s time to fire the arsonist.”

It’s not a pleasant task. But efforts to save previously valuable and now-floundering employees rarely works. Like the efforts The Rolling Stones made with Brian Jones, they generally fail and are just a waste of time.

While I may not have Mick Jagger’s net worth, estimated at around $360 million, I do share some of his moves. Cutting anchors is one of them. It’s one of the keys to the success of any company and helped in the unparalleled career of The Rolling Stones. As pointed out in the article, “Why have the Stones lasted while all others faded? Whenever I asked an old-timer, I got the same answer. It’s Mick—his clearheadedness, his lack of sentimentality.”

Lessons from a Winning Masters Caddie

I think our couch is older than Jordan Spieth. But what a thrill to see this poised and talented 21-year-old win The Masters Sunday. Then I liked him even more when I read a Wall Street Journal article about his caddie, “Why Masters Champion Jordan Spieth Hired a Former Schoolteacher as His Caddie.”

Not long ago his caddy, Michael Greller, was teaching square roots to pre-teens as a 6th-grade math teacher. He had done a little caddying on the side and liked being able to use real-world examples of math for his students. He and Jordan met when Jordan needed a caddie for the 2011 U.S. Junior Amateur. Michael knew the course and was recommended to Jordan by a friend.

When Jordan turned pro in late 2012, there was no shortage of more experience caddies who wanted to work with him. But he wanted a caddie who could travel with him all year, no matter how well he was doing. So Michael left the classroom for good and became Jordan’s caddie. Just a little over two years later, Jordan put on the famous green jacket as the winner of the 2015 Masters.

What struck me about the article was this observation from the author, Brian Costa. “When Spieth double-bogeyed the 17th hole Saturday, Greller didn’t say much as they walked to the 18th tee box. He mostly just listened.”

As Michael said, “You don’t want to overanalyze or make it harder than it is. I just try to be a calming influence on him.”

I thought about that in the context of my work as the Turnaround Authority. I deal with a lot of people who are under a great deal of stress. When a financial institution or a company hires me, the situation is a dire one. People may be on the verge of losing large sums of money, defaulting on their loans or ever losing their entire business.

A lot of what I do in the beginning is listen. And listen some more. I need to gain a clear understanding of what is really happening in the company and how it got to where it is.

And I definitely don’t want to make it harder than it is, as Michael said. A large part of my job is to break down extremely complicated situations so they are manageable and can be dealt with in an efficient and productive way.

Michael understands that part of his function is to be a calming influence. That’s one of the things my clients have often said about me, and actually, I believe to be a crucial part of my job. I need to calm people down because nothing is going to be accomplished when people are in a highly emotional state.

With his quote, he cited two of the most critical skills involved in being a successful turnaround guy. To paraphrase the famous phrase with variations being found everywhere, “Keep Calm and Listen.”

5 Tips for Siblings Working Together in the Family Business

This is the second in a two-part series on siblings in family businesses. Part one covered some successful sibling partnerships, while part two give tips for success for siblings who are in business together.

Even though you may have fought over whose turn it was to use the bathroom and who sat where in the car as children, that doesn’t mean you can’t own and run a successful business with your sibling.

There are unique challenges to it, of course. You may not have chosen your sister as a business partner. You can’t easily quit and go to another business when you’re frustrated. And it can be uncomfortable to attend Sunday supper with the family if you’ve just had a disagreement over an issue at work.

Here are some tips for you and your sibling to work together successfully.

  1. Have separate roles based on skill, not family hierarchy

Just because he started with the company first doesn’t mean that sibling should become the CEO. He may not be best suited for the job and would rather use his background, education and natural skill with numbers to serve as CFO. Perhaps another sister or brother is best suited to the role, and just needs a bit more training to take over the lead position, while a different sibling might have the perfects skills and personality to run the sales department.

  1. Understand, trust and respect each other’s contributions

I imagine Walt Disney got frustrated with Roy sometimes when he didn’t immediately jump on his latest vision for their company, being concerned with how they would finance it. And Roy was equally frustrated by Walt’s tendency to continually start new facets of the company without considering available resources.

But they were smart enough to realize they each played a crucial role in the company and that it took both of them to make it successful. They needed, respected and trusted each other.

  1. Communicate frequently and put it into writing

Any business needs open channels of communication on all levels. With family businesses, making sure decisions are communicated in writing is critical, as there tends to be more verbal communication among family members.

If you’re at a family picnic and make a decision about something crucial to the business, follow it up with an email to ensure you both understood the decision you made.

Hold regular, formal meetings with your siblings to discuss the business. Make sure every partner feels heard during the discussions and that notes are taken during the meeting and distributed afterwards.

  1. Establish, tweak your mission and goals together

Maybe you and your sibling started the company with one mission, but as you took your goods or products into the marketplace, you saw that a correction to that mission is necessary and your goals may shift. Or you’ve decided you should shut down one subsidiary in favor of focusing on another.

Discuss any changes or direction with your sibling partner. Don’t assume he or she has come to the same conclusion.

  1. Establish boundaries between work and family

If you and your siblings enjoy socializing outside of the office, that’s great. But if you’re forced to more than you’d like, maybe from pressure from dear old mom and dad, seek to minimize that time together, or just request it be a no-work-talk social event.

It won’t always be easy to be a partner with your sibling. When times are tough, remind yourself that you do love each other and you will always be family. Ultimately, you share the same goals of maintaining family harmony and growing a successful business.

 

 

Famous Sibling Partnerships that Worked

This is the first in a two-part series on siblings in family businesses. Part one will cover some successful sibling partnerships, while part two will discuss lessons for siblings who are in business together.

Running a family business is never easy, and can be particularly hard when siblings run it together. Ever since the days of Cain and Abel, siblings have fought and competed and vied for their parents’ attention. To make it worse, they often didn’t choose to be partners, but were forced into the situation by a parent.

But these partnerships can and do work. Siblings can run a successful business together. Here’s a look at three famous sibling partnerships.

The Wright Brothers, whose successful partnership led to the first functional flying machine.

The Wright Brothers, whose successful partnership led to the first functional flying machine.

The Wright Brothers

Although they weren’t the first to build a flying machine, Orville and Wilbur Wright invented aircraft controls that let a pilot steer an aircraft. They took lessons from their work repairing bicycles to figure out how to control an airplane.

Their first business was a printing shop, with Orville serving as publisher while Wilbur was the editor, when Wilbur was 22 and Orville was just 18. That business was short-lived, followed by the bicycle repair shop. Their interest in flying eventually led to the first successful airplane flights in Kitty Hawk, North Caroline in 1903.

While Wilbur supplied the research skills, Orville was the more adventurous and ambitious one. Their skills complemented each other, with Orville able to overcome any doubts Wilbur had. Wilbur said, “I confess that in 1901 I said to my brother that man would not fly for fifty years.”

Their partnership was a successful one for these brothers known as the fathers of aviation. Despite what the former president and chairman of American Airlines Robert Crandall said, “If the Wright Brothers were alive today, Orville would have to lay off Wilbur.”

The McDonalds

Brothers Maurice and Richard McDonald planned to make their millions in the movie business after a move to southern California from their native New Hampshire. When that didn’t work out, they sold barbeque and hot dogs.

In 1948, they revamped McDonald’s Famous BBQ by downsizing the menu, getting rid of car hops and streamlining production in the kitchen. They wanted a symbol for their restaurants, creating the famous Golden Arches, much to the distress of their architect. They also began franchising their concept, which caught the eye of Ray Kroc, a milkshake machine salesman.

Ray bought the national franchise rights in 1955, purchasing the company outright in 1961 for $2.7 million. Now the fast food giant takes in more than $27 billion a year.

The brother’s partnership worked well and Richard expressed no regret at selling the company. “I would have wound up in some skyscraper somewhere with about four ulcers and eight tax attorneys trying to figure out how to pay all my income tax,” he said.

The Disneys

We all know who Walt Disney is. Less famous is his older brother Roy, who was his co-founder of Walt Disney Productions. Walt was the visionary; Roy was the finance guy, generally a less flashy role.

“Walt had this idea [for Walt Disney World]. My job all along was to help Walt do the things he wanted to do. He did the dreaming. I did the building,” he once told reporters.

They started working together at a young age, delivering newspapers after their dad bought a route. Roy was a banker in Los Angeles when Walt moved there and they founded Disney Brothers Studio in 1923 to produce short live action, animated films. In 2014, the company reported revenue of more than $48 billion.

Despite any lingering childhood issues, siblings can form successful partnerships. Come back next week for tips on how to run a business with your brother or sister.

 

 

 

 

4 Reasons Family Businesses Have Survived

Forbes 2015 list of The World’s Billionaires recently came out and I was interested to see how many of the world’s richest people got there through affiliations with family businesses.

(#4) founded Inditex, the parent company of fashion retailers Zara, Massimo Dutti and Bershka, with his recently departed ex-wife Rosalia. They were both shop assistants and decided to try their hands at making baby clothes. They switched to nightgowns, and opened the first Zara shop in 1975 in Spain. The Inditex empire now has more than 6,000 outlets.

Charles and David Koch, tied for #6, are two of the four sons of Fred Koch who co-founded Koch Industries in 1940, which has more than $100 billion revenue annually. They bought their two brothers out in 1983 and own 43 percent of the company.

Christy (#8) and Jim Walton (#10) are also members of the Lucky Sperm Club. Christy was married to the late John Walton, one of Sam Walton’s sons. He, of course, founded WalMart, the world’s largest family firm. Jim is her brother-in-law, Sam’s youngest son.

Liliane Bettencourt (#10) also inherited her wealth from her father, Eugene Schueller, who founded the beauty company L’Oreal in 1907. In 2014, the company had sales in excess of 22 billion euros.

Family businesses are a major economic force in the world, making up 19 percent of the companies in the Fortune Global 500, up from 15 percent in 2005, according to an article in TheEconomist.com, “Business in the Blood.”

The article points to four reasons why huge companies have managed to stay under family control.

  1. Family firms were founded by a talented entrepreneur, like Sam Walton. If heirs continue to follow a successful formula and the founders’ principles, they can keep the business running.
  1. Family firms take a longer-term perspective. Businesses are often pressured to meet short-term goals to keep investors happy. Companies within the control of family members often look to the bigger, long-term picture, which can lead to greater profits.
  1. Family firms are less likely to take on debt. While this reluctance may limit growth sometimes, it can also make these businesses more resilient when the business is not going as well.
  1. Family businesses generally have better labor relations. It could be because workers are treated better or have more trust in the owners when they are part of a family and not members of a huge conglomerate who come and go.

I’ve worked with many family businesses in my decades as the Turnaround Authority, and I’ve seen the good, the bad and the very, very ugly. When a family business is well run, it can have amazing staying power, produce billionaires and become a major player in the world economy.

Excuses for Fraud: Now We’ve Heard It All

Call it the lighter side of fraud, if there is one. As a follow-up to my columns on fraud prevention, I thought I’d share some of the more entertaining excuses people have given for why they committed some type of fraud.

One guy from Glasgow tried to use the soap opera defense. He claimed the investigators were really seeking his “evil twin brother” who lived in Pakistan about the identity and benefit fraud he was accused of. Wait, it gets better. He had two Pakistani passports with the same children listed on them. Seems his evil twin had children born on the exact same days with the exact same names. Wow, what are the odds?

This one could be called the “50 Shades of Grey” excuse. One man was collecting housing benefit money in Great Britain while working but hadn’t informed authorities. He claimed he owed money to his landlady. Her efforts to collect included wearing high heels, brandishing a prop similar to those in the movie and chasing him down for “payment in kind.”

How about the “I never got that raise” excuse? A bookkeeper was once denied a monthly raise of $100. He was angry and decided to help himself to the company till, stealing exactly $100 a month. For 20 years, until he retired.

Then there’s the CFO of a bank in Tennessee who tried the “It’s the tractors fault” excuse. The case study was reported by the Journal of Accountancy of the CFO who invested a lot of money in a local tractor dealership. He borrowed from his own employer to increase his investment and when the investment soured, didn’t want to admit to his employer that he was no good with his own money. So he began stealing from the bank, and by the end of the year had helped himself to $150,000.

He became so enamored of stealing money that when a customer accidentally paid a note twice, this guy just signed his own name on it and put it into his checking account. That was his downfall. He was caught when the customer noticed the duplicate payment and they tracked it to his account. He spent three years in prison.

And finally, the “My ego was too big to admit failure” excuse. That’s what Russell Wasendorf Sr., who was the owner and CEO of Peregrine Financial Group, said when he admitted he had embezzled an estimated $215 million with forged bank statements over a period of close to 20 years.

Wasendorf received all bank statements from US Bank and was able to make counterfeit statements and deliver those to the accounting department. He also made forgeries of nearly every document that came from US Bank and established a PO box to intercept paperwork sent by regulators.

In a signed statement, he said he began stealing when his business was on the verge of failing if it didn’t receive additional capital. “I was forced into a difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated.”

In 2013, Wasendorf was sentenced to 50 years in prison and was ordered to pay $215.5 million in restitution.

Don’t set yourself up to hear any of these excuses. Make sure you have adequate fraud prevention policies and measures in place. Check my previous columns on the topic and the chapter in my book, How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes. These excuses may be comical, but fraud is not.

7 Fraud Prevention Tips for Small Businesses

Last week’s post, More Red Flags of Fraud, discussed how management should be trained to always be on the lookout for behavioral changes in employees that may be red flags for fraud. As the column pointed out, 92 percent of the people who committed fraud exhibited certain behavioral traits. Recognizing those can be the key to detecting and preventing fraud.

Being aware of and dealing with fraud is crucial for any size business, but particularly for small businesses for three reasons:

  • They are disproportionately victimized by fraud
  • They are less likely to have fraud protection measures in place
  • There tends to be a greater level of trust in small offices

That’s according to the Association of Certified Fraud Examiners (AFCE). Small businesses, defined as those with fewer than 100 employees, suffered 28.8 percent of all fraud cases, with an average median loss of $154,000.

The average median loss was higher for the largest entities, defined as more than 10,000 employees, at $160,000. But obviously that is a much smaller fraction of overall revenue than for smaller companies.

So you’re a small business and can’t afford the most expensive fraud detection systems. But there are plenty of measures you can enact to cut down potential for fraud in your company. Here are a few suggestions.

  • Select the right employees. Always check references and criminal records. You may want to conduct credit checks to make sure your potential employee is not in dire financial straits, which can set the stage for him to consider committing fraud.
  • Separate accounting duties. Many small businesses delegate all the financial dealings to one person, who opens the mail, writes checks, reconciles the accounts and generates invoices. This makes a business vulnerable. If you don’t have the staff to completely separate duties, then have some of the responsibility rotate around the office if possible.
  • Always prosecute theft and fraud. Make it clear that you have a no-tolerance policy towards any type of theft or fraud and you will prosecute any and all people involved. This is easy to include in an employee manual. “If you steal, you will be prosecuted to the fullest extent of the law.” If the policy is equally applied to all employees, no one, even in a small office, should feel mistrusted.
  • Conduct surprise audits. Ask to see the books and review invoices and accounts payable. Call a few of the businesses to make sure they are legit and that your company is doing business with them. Or call your CPA in for an unannounced mini audit to uncover any problems.
  • Have your controller, bookkeeper or CFO take off two consecutive weeks each year. I recommend this measure to all my clients as a way to prevent and detect fraud. In their absence, do their jobs. Open the mail, review deposits, correspond with vendors.
  • Purchase the ACFE’s Small Business Fraud Prevention Manual. At $59, it’s money well spent. The manual goes into detail on how employees steal. It also gives prevention tips and how to deal with dishonest employees.

And as long as you are buying books, add my book to the list. How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes contains a chapter called “Stop Fraud Before It Starts” and includes ways to create an office fraud as well as tips on preventing fraud in all size companies.

You’ve worked hard to create revenue for your business. Don’t let anyone steal any of it from you.

More Red Flags of Fraud

In a previous post, Red Flags of Fraud, I wrote about 5 red flags you should be on the lookout for in your employees’ behavior to prevent fraud in your company.

These are:

  1. An employee refuses to take vacation and rarely takes personal or sick days
  2. An employee gets annoyed at reasonable questions or offers unreasonable explanations
  3. An employee wants to remain in his or her current position
  4. An employee exhibits behavioral changes, undergoes a sudden change in lifestyle or has financial difficulties
  5. An employee has unusually close relationships with vendors

The 2014 Global Fraud Study done by the Association of Certified Fraud Examiners found of all cases they analyzed, 92 percent of the people who committed fraud exhibited certain behavioral traits, all of which are listed above.

fraudchartThe top two traits the study found are Living Beyond Means (43.8 percent) and Financial Difficulties (33 percent), as listed in #4. I’d like to expand on these two behaviors, as they may be harder to detect than the others above and on the chart you see here.

If an employee begins to talk about financial difficulties, too much credit card debt or high medical bills, that’s the time to pay a bit more attention to him. Pressure from financial problems due to things such as overspending, a divorce or health problems can set the stage for an employee to consider fraud as a way out of his difficulties.

Another behavioral change to note is when an employee who may have previously complained about being overworked, underpaid or passed over for a promotion no longer talks about workplace issues and seems more content although nothing has changed.

If she is committing fraud, she may feel that she is evening the score and taking what she considers is due to her. She now feels happier in the workplace.

Changes in lifestyle can be a bit trickier to determine. An employee may start driving an expensive new car, talk about a new second home or take high-end vacations. She may chat about moving to a new home in an upscale neighborhood or bring in photos of a new boat.

It can be tricky to question someone about these purchases and where the money came from. And they could be explained by claiming to have gotten an unexpected inheritance, or a spouse with a new high-paying job.

Or, as often happens, the money is spent somewhere the employee would not be eager to share at his workplace. Michael Dennehy embezzled over $1.7 million from Bexar Waste in San Antonio by forging company checks for more than six years. He admitted that he spent it on escort services and gambling. As a married father of five, he probably wasn’t sharing those stories in the break room.

Make observing behavioral changes part of your fraud prevention program and share this information with your management team, so they can be vigilant about these behaviors.

Fraud prevention is vital for any business. The median loss caused by fraud in the ACFE study was $145,000, with 22 percent of the cases costing a company more than $1 million.

Come back next time when I’ll discuss why small businesses are disproportionately affected by fraud and what small business owners can do to protect themselves.