The Art of Communication in Leading a Turnaround 10 Rules for Influencing Key Constituencies

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1 The Art of Communication in Leading a Turnaround 10 Rules for Influencing Key Constituencies by Bob Schleizer Jan 23, 2009 (TMA HQ Chicago) Developing an effective turnaround plan is not an easy task. That said, influencing key constituencies to support a plan may be even more difficult than developing a plan in the first place. Convincing key constituencies or stakeholders to approve and participate in a turnaround plan requires employing a multitude of tactics. The art of influencing stakeholders with their disparate interests to support a common plan puts the turnaround practitioner in the realms of psychology and politics, an often uncomfortable and frustrating place to be. Ideally, a turnaround leader is brought in by the board or the bank with a mandate and the authority to take whatever action is necessary to fix a company s problems. The less authority a turnaround expert has, the more effort is required to obtain buy-in from key constituencies. A turnaround practitioner s skills of persuasion will likely be tested by a skeptical board trying to protect the interests of shareholders that may no longer have an equity stake, or by a CEO who must be prodded to take actions that could adversely affect loyal employees, suppliers, and customers. Though persuasion can occur using various tactics, it s almost always an art form whose effectiveness depends on more than what may appear to

2 be an obvious logical choice to the turnaround professional. To effectively influence key constituencies, it s important to keep the following rules in mind. 1. Focus early on building consensus and support within the company. Consensus creates greater efficiency and speed in developing and orchestrating a turnaround strategy. There is significant benefit from having agreement among the board, management, and the turnaround expert regarding not only the severity of problems, but also the plan for addressing them. Early, frequent, and consistent communication with employees can make a big difference in setting the right tone. Many seasoned turnaround professionals make a standard practice of holding town hall meetings to discuss the turnaround effort and the challenges facing the company. Eliminating uncertainty caused by a lack of communication can improve morale and help focus efforts on the turnaround. 2. Identify and involve key employees. Implementing the plan can be expedited by identifying influential employees to communicate the plan initiatives to the rest of the company and to suppliers, customers, and other stakeholders. Rallying others to support the effort and delegating key components of the plan helps identify plan supporters, as well as detractors. Eliminating or reassigning unsupportive employees is a difficult but necessary part of a turnaround professional s role. 3. Be visible interact with employees. Simple actions can have profound effects on employee morale and, subsequently, on contributions to the effort. A team of seasoned turnaround executives leading the recent resuscitation of a failing

3 hospital made it a point to eat lunch regularly in the hospital cafeteria, talk to employees, and solicit ideas. The employees remarked that they had never had positive interactions with management, and they became excited about helping define and achieve significant goals for improvement. 4.Understand the motivation of key stakeholders before trying to sell the plan. Whether building consensus within the company or persuading outside parties to participate in the turnaround plan, it s important to understand motives. Doing so allows the strategy to address stakeholders interests and helps the organization avoid having to fight battles on multiple fronts with the limited resources at its disposal. A critical part of this step involves educating disparate parties about the interests and rights of other key stakeholders and explaining why the plan s components are vital to the overall success of the restructuring initiative. For example, turnaround professionals frequently approach commercial loan officers differently than they do loan officers from banks special assets groups. A commercial loan officer is more likely to provide relief if the turnaround professional can demonstrate that the proposed plan does not increase the lender s risk. Once a loan has been classified as a troubled asset, however, the motivation to restructure is often less, since the lender has acknowledged and reserved for potential losses and is seeking a way out of the credit. A turnaround professional therefore focuses more on convincing a special assets officer to cooperate by demonstrating that the company has an exit strategy that will maximize the lender s returns. 5. Play the roles of educator, counselor, and motivator. To effectively influence numerous parties with competing interests, a turnaround professional plays many different roles simultaneously. For

4 those who have limited or no exposure to the turnaround process, the turnaround professional must first act as an educator. One potential impediment to the turnaround process can be a lack of appreciation among board members and management for the factors limiting a company s short-term options. The current economic climate heightens this risk it s much more difficult to sell the company, obtain a loan, or find an investor than it was even a few months ago. Management and the board may not appreciate the degree to which the lack of liquidity in the market has constricted their company s options. The turnaround expert should be well versed in this area and be prepared to provide examples and supporting evidence to educate the board. The turnaround leader s roles as counselor and motivator are as important as that of educator. During financial crisis, overwhelming pressure from dissatisfied creditors, employees, and shareholders often causes organizations to become paralyzed. A turnaround professional must counsel employees to understand the importance of moving forward while listening to and acknowledging their fears and concerns of potential job eliminations, plant closings, or sales of business units. Layoffs often leave remaining employees wondering if they are next and worrying about making poor decisions. While not all ideas can be used, having the opportunity to be heard and contribute leads employees to be more willing to take direction. Encouraging and rewarding employees who are willing to take aggressive actions can motivate others to join the effort that will drive the turnaround plan. 6. Initiate conversation and be up-front never stop communicating. As a rule of thumb, it s almost impossible to over-communicate during a distressed situation (or in most business situations, for that matter). The person leading the turnaround effort must stay in regular contact

5 with the board, executive management, lenders, key suppliers and customers, employees, advisors everyone affected by the restructuring. This essential communication takes significant time, particularly when managing daily crises and the inevitable surprises that occur. Turnaround leaders shouldn t wait for others to raise concerns and should initiate conversation particularly when news is bad so others don t think information is being withheld. As much as possible, surprises to lenders and creditors should be eliminated by advising them early of problems encountered and plans to address them. Taking the initiative builds trust and goodwill, while providing opportunities to frame the conversation rather than being on the defensive. 7. Act swiftly and decisively but not hastily. Actions speak louder than words. Taking action swiftly and decisively is a sign of leadership, and it engenders confidence that something positive is happening. It also establishes a track record for the affected parties whose support is needed throughout the turnaround. Effective actions come from making informed decisions. While swift and decisive action is critical to a turnaround, the decisions upon which it s based must be sound to achieve favorable results. Turnaround experts rarely have time to consider all facts before making a decision. However, there s generally time to gather sufficient information for well-thoughtout decisions. One should use key personnel as a sounding board, and solicit their input before acting, while keeping the turnaround team involved in the process and encouraging continued contributions. By acting swiftly and decisively, a turnaround practitioner breaks the organizational paralysis and builds forward momentum. For example, if layoffs must occur and they usually do it s important to cut deeply, but only once, and to communicate that no additional cuts are being considered. It s much easier to hire new employees than to manage staff

6 members who are in constant fear of losing their jobs. In all cases, speed and decisiveness are critical. As the complexity of ownership and financing structures increases, successfully executing a turnaround strategy becomes more contingent on establishing a process for rapid decision-making. This helps a company avoid missed opportunities and the risk of failure as disputing stakeholders jockey for control. In dire situations, obtaining authority to act is critical to avoid a meltdown when a company s alternatives are limited. 8. Manage and meet expectations. Managing and meeting expectations involves defining realistic and achievable targets, communicating them to constituencies, and then meeting those goals is a form of communication that builds trust and goodwill. For example, if the company can t pay a vendor on time, it should determine through credible forecasting measures a date by which payment will occur, communicate that date to the vendor, and then do everything possible to meet the commitment. Probably the most important area for managing and meeting expectations pertains to the forecasting of operating results and cash flow. One of the most frequent catalysts for engaging a turnaround professional is the company s history of missing forecasts and breaking loan covenants. Missing forecasts destroys credibility and eliminates a company s ability to influence results in its own favor. It s imperative that a turnaround expert develop a track record of meeting forecasts early on. Being able to predict cash flow and financing needs is a primary objective in the initial stage of a turnaround. Company personnel typically are overly optimistic in forecasting sales, which leads to an inability to meet cash-flow projections. Therefore, significant effort should go into creating a forecast that s reasonable and achievable with a high degree of certainty, including identifying potential shortfalls and other risks. Forecasting is such an important

7 process that the turnaround practitioner should insist on having as much control over it as necessary to make sure it s performed correctly. 9. Leverage key constituencies to influence others. Leveraging one constituency to influence another can be a useful technique for obtaining consensus on critical issues. Recently, as the CFO for a distressed company, a turnaround professional advocated some painful restructuring moves that clearly needed to be made to give the company the time and money it needed to reorganize. However, authority to act rested with the CEO and the board of directors, neither of whom could bring themselves to proceed. By effectively managing and meeting expectations, the CFO had developed a strong relationship with the company s lender. He leveraged that relationship by alerting the bank that without their applying pressure, the necessary actions were unlikely to be taken. In doing so, he used the bank to ratchet up pressure without sinking the company, thereby working to preserve enterprise value. 10. Be willing to walk away before or after taking the job. Perhaps the most effective means of communication is the willingness to walk away from an engagement. A turnaround leader should not accept or continue an existing engagement if his integrity must be compromised or if the character of those involved is dubious. Furthermore, the turnaround practitioner should not risk his reputation by continuing with a company that is unwilling to take the actions necessary for a successful turnaround. The willingness to walk away from these situations communicating that willingness effectively can be a very powerful form of leverage. Critical to Success A turnaround is never performed in a vacuum. Communicating openly with stakeholders on a frequent, consistent basis is critical to success. Whether communicating to lenders, suppliers, shareholders, employees,

8 or management, the turnaround professional must frequently persuade someone to take action that appears to directly contradict their own interests. In fact, influencing stakeholders often requires convincing them that the proposed action is the least bad alternative. Effectively communicating the value of the proposed course of action is critical to moving forward with speed and conviction. Bob Schleizer CIRA Partner Tatum LLC Schleizer leads the Restructuring Practice for his firm s Texas Region. He has more than 25 years of experience assisting distressed companies in industries that include retail, manufacturing, transportation, distribution, construction, and real estate. He can be contacted at (214)