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The warning signs that a company may be headed for trouble

May 16, 2011 Business Daily, Strategy

A REFUSAL TO BELIEVE BAD NEWS. Firms in denial about difficulties tend to fail.
SWITCHING AUDITORS. An abrupt change of auditors for no apparent reason should set off alarm bells – often this means the incumbents would not sign off dubious accounting policies.
BAD NUMBERS ALWAYS TAKE LONGER Whether it is monthly management accounts or the year-end figures – if they are persistently late, then it spells looming problems. I can recall one business where the monthly information pack would be deliberately delivered just hours before the board meeting, so as a non-executive director you had no time to study it.
AN UNHEALTHY FOCUS ON THE HQ. Organisations should direct their energies outwards, towards customers, rather than hiding in a bunker indulging in office politics. The best CEOs spend much of their time on the road, with frontline workers.
TOO MANY BANKS, AND TOO MANY BANK CHARGES. Companies that rush around borrowing from everywhere are clearly desperate – while high financing costs are evidence of banks needing greater compensation for more dangerous loans

LUKE JOHNSON Financial Times (8 March 2011)

Luke Johnson, seasoned entrepreneur and director, writes an entertaining column in the FT. He recently pointed out some the tell-tale signs that reveal all may not be well in a particular company. I have excerpted some of them here.

All organizations periodically run into difficulties – it’s the nature of the game. What is important is that they demonstrate the resilience to come out of them. Some don’t, however, and that can be calamitous for employees, customers, shareholders and suppliers. So it is worth knowing what early warning signals are available to us. Remember, trouble doesn’t always show up in the numbers until it’s too late – most publicly available financial reports are retrospective.

What Johnson is providing, based on his experience, are the soft signals that should cause you to question what is really going on in a company. The ones I have showcased are particularly pertinent to us here in Kenya.

We have all noticed that companies that are floundering are constantly questioning their bankers and their auditors – and switching them. Do check that out when you are examining a company. Too many changes usually reveal a company that wants their bank and auditor to play their game – rather than follow the rules. However, note that a stable banking/auditing relationship is also no guarantee – high-profile scandals like Enron and Satyam had the same service providers for long periods – but still ran into extreme trouble.

Also look out for CEOs who are consistently denying anything is wrong, and deploying heavy-duty PR firms to put positive spin on bad news. Nokia was doing that for years, and it took a fresh CEO to come in a state that there was indeed a serious problem – and that he had a plan to deal with it.

Johnson’s point about the ‘HQ focus’ is very apt around these parts. Many of our business giants of the 1970s and 1980s had a distinguishing feature: huge, distinctive corporate headquarters. These would be expansive; would hire hundreds or even thousands of staff whose duties were a mystery; would contain flags and fountains and football teams. Well, most of those entities ran into serious difficulties and had fatal or near-death experiences.

Watch that one even today. If you see a corporate giant developing a magnificent head office at the expense of its operating units, it may be a sign that its bosses are getting carried away with their success and want to display it. A great company always keeps investing in two battlefronts: motivating its customer-facing staff; and staying very, very close to its customers. And that is where its best people are found.

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