Reflect upon a scenario of turnaround means thinking about the skill of surviving of a company. Good practices of corporate governance and the CEO skills are drivers of success, when the mission is guaranteeing the survival of the company.
The reflexion is from Filipe Morais, Professor of Governance and Reputation at Henley Business School, in Reading, and the speaker at another out-of-the-box Masterclass promoted by Porto Business School on December 11.
Filipe Morais, PhD in Management and Professor at Henley Business School, the oldest in the UK and the second oldest in Europe, for over a decade. His vast experience in Corporate Governance, along with his knowledge and proximity to the industry, makes his research relevant, well-founded, and current.
In July 2020, Filipe Morais, in collaboration with Andrew Kakabadse and Gerry Brown, published the book “The Independent Director in Society”, which, for the first time, analyzes the crisis of governance across society, instead of focusing only on the business sector. For the authors, despite their singularities, all organizations share some behaviors and challenges.
During the masterclass Filipe Morais focused on the main responsibilities and expectations within the role of the CEO in a scenario of turnaround. The speaker invited the participants to think about the challenges, conflicts, and decisions of the CEO that are decisive in a context of turnaround and might question the survival of the Organization.
The causes that drive to a scenario of turnaround might be gradual or sudden; driven by the dissolution of the business or surrounding market or the unexpected collapse (similarly to what happened, for instance, in March/April 2020 with the aviation sector resulting of the measures adopted in view of the dissemination of the Covid-19 pandemic).
For Filipe Morais, the Board holds the responsibility to avoid a scenario of turnaround. Within this context the main cause that might lead to a scenario of turnaround if internal: an inadequate management, because “the Board and the management team have to ensure the company is resilient enough to face the shocks; agile enough to keep up with the subtle and gradual changes in the surrounding context.”
The company reaches a level of comfortable success alongside notoriety and sound reputation and the mistake is to remain at this “comfort level”, and forget the mission is not yet completed, as the world continues to change. And in this state of comfort, and inertia, “the company begins to sail adrift”.
In a turnaround scenario, the role of the CEO is crucial. The first thing is to gain time, that is, “reaching the creditors and negotiate an emergency fund for the company to stay afloat” and the second is to decide if you have the right team for the turnaround process. At this level, the Board must also decide if they trust the CEO for the turnaround process.
The role of the CEO in a process of turnaround covers four main areas: leadership and team; strategy; organizational structure; and communication:
1. Building & leading the top team:
The biggest challenge relies on deciding between continuity and change, that is, defining the areas of the company in need of continuity and the ones in need of change.
2. Strategy formulation:
The CEO has three main challenges: articulate the business purpose, determine the business's unique competencies and competitive advantage, and set the pace and scale of change.
In this context, it is essential to bear in mind temporal aggressiveness has a positive effect on the performance of the turnaround process, that is, the company is more likely to overcome it. Volume aggressiveness, that is, an avalanche of change, has a negative effect on performance.
3. Organisational structure design:
Reduction and recovery are contradictory approaches, yet complementary in a two-faceted turnaround model. Knowing how to dose the two approaches in an alternation or simultaneity methodology can determine the survival and overcoming of the company.
It is fundamental evaluate and reduce the ability, risks, and resources to explore more efficiently the existing assets. But it is also important, at the right time, to increase capacity, level of risk and resources to explore new markets and/or new products and services.
4. CEO Communication:
The CEO should take over this communication; talking directly to the team.
Sharing the necessary information with employees, so that they understand where they are and why, and the sacrifices that must be made to guarantee the company's survival.
Simple, focused messages to ensure everyone understands the urgency of change.
Leading, planning, renewing and communicating are four key CEO skills, becoming survival skills in a turnaround scenario.
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Tushman, M. L., Smith, W. K., and Binns, A. (2011), “The ambidextrous CEO”, Harvard Business Review, June Issue (adapted)
Barbero, J. L., Martinez, J. A. and Moreno, A. M. (2020), “Should declining firms be aggressive during the retrenchment”, Journal of Management
Arogyaswamy, K, Barker, V. L., Yasai-Ardekani, Masoud, (1995), “Firms turnarounds: an integrative two-stage model”, Journal of Management Studies, 32 (4), pp. 493-525