Stakeholder consensus needed to rescue businesses

THE PRECARIOUS economic situation, plus several high-profile companies being forced into administration, have thrust the whole area of business turnaround into the spotlight.

Too often we hear stories of fundamentally good businesses failing unnecessarily. This, at a time when the UK needs to find ways to stimulate growth and keep jobs. Unfortunately, in many situations, this is happening largely because stakeholders are not finding ways to work together quickly enough to save the companies in time.

To help prevent this from being a continuing trend a new turnaround culture needs to be embraced. It is critical that a greater consensus is achieved among all key stakeholders quickly in order to stop further sound businesses from being allowed to fail.

Over the past five years, nearly 100,000 businesses have found themselves in insolvency in England and Wales alone. How many more good companies will become insolvent over the next five years? What is providing a barrier to saving these companies before it is too late?

Commonly, there is a real lack of skill within the stakeholder communication process and a fundamental lack of understanding of what is needed to execute a successful turnaround. It’s not simply a restructuring of the balance sheet, but a change of the working practises.

Accountants can be just as culpable. There seems to be a tendency to look for the ‘easy way out’ and revert to the insolvency practitioner as a first point of call –sidestepping the rest of the stakeholder group.

There is a better way; more appropriate in today’s world and one in which the accountancy profession can assist, would be to gather all key stakeholders around the table – recognition that solutions other than insolvency exist.

It is incumbent on all those associated with turnarounds to encourage discussions, which can produce new and innovative ways to save good businesses that will go on to form part of an eventual economic revival in the UK. A lot of people are not aware that there is the availability of new money to support a cogent turnaround plan which would avoid an insolvency.

Every stakeholder group has a role to play in the turnaround process (not just the banks, but also credit insurers, asset-based lenders, lawyers, suppliers, customers and even unions). Shutting out other stakeholders from the process at the first sign of trouble can be disastrous. For example, employees of a business are often the ones who will execute change – they must be seen as part of the solution rather than the problem. It is the employees, more than any other group of stakeholders, who will successfully implement a corporate turnaround.

And it would be erroneous to baulk at the idea of engaging the unions. I can recall one high-profile case where the employees’ union recommended that its members took a pay cut in order to keep the company afloat. That would never have occurred if the union had not been engaged in the process form the outset.

Another factor to the turnaround process is speed of communication. Just because you are bringing more parties to the table, it does not mean the process takes longer.

Of course, the faster a consensus can be reached the better. The government can also make a contribution to this new turnaround culture, although its proposed reforms regarding a three-day notice period for pre-packs is a backward step and has the negative impact of slowing down the process. This notice period is the wrong solution – it is not about practitioners protecting their turf, but, for the most part, this is about parties losing the ability to move fast to save good companies and jobs. If this change is made, why bother with pre-packs at all?

Without speed, distressed businesses can disintegrate very quickly. The risk in the future will be that, too often, management will decide to put a business straight into an insolvency process. This problem can be solved, while still retaining the speed which gives the pre-pack its effectiveness, by making such deals accountable to the court. They should introduce either a sanction process at the time of a sale by the courts, or a 14-day period retrospective sanction following the pre-pack, during which all stakeholders can make any objections they might have heard.

At the end of this period the court can retrospectively confirm or void the sale. This would incur extra cost, but would provide legal certainty to the process. Indeed, lessons can be learned from jurisdictions in the United States, France and Germany where the courts exert greater control over insolvency procedures. In France, there is a pre-insolvency process whereby the courts can impose a confidentially obligation on parties, to enable talks between stakeholders and stop them making it public.

Breaking down the barriers between every stakeholder in a restructuring is a real challenge.

Simply sidestepping stakeholders in a turnaround and not fully engaging all key parties could have the detrimental effect of bringing down a business with a perfectly sound business model – one that could have potentially been saved if all stakeholders had bought into the process.

An enlightened approach to stakeholder engagement, which embraces a new turnaround culture will go a long way to preventing this from happening at a time when kick-starting growth and combating the negative effects of austerity is at its most crucial.

Bryan Green is president of TMA UK