In this CFO series post we use the analogy of a CFO as the canary in a coal mine at a distressed company. And, the flight path to consider to get the executive team heading in the right direction.
Canary in a Coal Mine to Chicken Little of Your Company
Do you seem to be the only corporate officer that sees the train wreck unfolding in front of you in slow motion? It does not mean you are wrong by a long shot. You should be aware that denial among your colleagues is a very common reaction to financial distress. And the messenger (i.e., you) is sometimes shot, or at least treated like Chicken Little.
Perhaps the other officers and directors are expecting (or at least hoping for) a turnaround in operations or fortunes. For example, if business improved, then the stock price may soar, and the stock market could bail the company out of its over leveraged woes. But what if that doesn’t happen? How do you get others to join you in finding a solution to the problem? To use our canary in the coal mine analogy, you need others in your company to acknowledge there’s a problem.
Acknowledge That You Are in Financial Trouble
First, you should get others to agree that there is (or at least may be) a problem. Our preferred way to illustrate this type of problem is to develop a detailed weekly or monthly forecast that highlights when problems with liquidity or with covenant compliance may occur. And if you are not the CFO, you probably need to enlist the support of someone in finance to be able to generate this data. Getting the finance department’s buy-in to the recognition of the problem is probably an essential first step, even if they only consider it to be “contingency” planning.
Look for A Willing Senior Level Executive or Committee Member to Hear the Problem
Clearing the finance department is only one of many steps in what could be a long journey. You can try to elevate the conversation to include the CEO or other leaders. But over the years, we have seen many cases where the CEO is entrenched in his or her belief that things will work out, and refuses to listen to contrary views. Whether this is due to intransigence, fear of admitting failure or other factors may not matter. What does matter is the political problems such an environment can create for the “canary”. You could always try to go over the CEO’s head to the Board or the Audit Committee, but that can obviously create real career problems for the concerned employee.
You May Be Better Off Talking to An Outside Adviser
We believe that this is where an outside adviser can help both the company and the “canary” greatly. Perhaps such professionals can be initially engaged to examine capital raising possibilities or to help management deal with increasing bank concerns or trade vendor pressures. Once so engaged, the relationship could expand to a role to counsel senior management and the Board about the pitfalls that may lie ahead. It is far better that a company and its Board are prepared for the potential downsides, rather than ignore them and hope they go away.
But be wary of the advice you may get back. Far too many investment bankers see distress as a fee opportunity, rather than as a threat to value preservation for the company’s constituencies. For example, if the knee-jerk advice is to sell assets to repay debt, the banker may be simply angling for an M&A fee – even as he or she eviscerates the equity holders.