- The Washington Times - Saturday, August 23, 2003

Are the leaders of American business being blamed for crimes — civil and criminal — they never committed? Or has a smoking gun been found?

You can’t pick up a newspaper these days without reading at least once a week that accounting acrobatics or acts of God or just plain force majeure have brought another bastion of capitalism to its corporate knees.

The cold truth is that in almost all cases of corporate failure, it’s management that has struck the fatal or debilitating blow. In short, almost always it’s an inside job.

Some 1,900 executives were recently surveyed by Seton Hall University’s business school in concert with the firm I lead. We found that 87 percent of the respondents said businesses fail primarily because of excessive debt, bad planning and failure to act in time to prevent further damage in areas that are trouble spots. More than 88 percent of those surveyed said the impact of September 11 and subsequent terrorist acts will have little impact on business failures over the next five years. They also conceded that accounting shenanigans were like a mosquito bite in affecting the health of a company and its future growth.

Internal factors are solely management decisions. Management must stay on top of the amount of debt that accrues, the strategic direction of the company and zealously conduct due diligence to keep accounting and other control systems honed. In an era of sweat-breaking scrutiny aimed at management, the board of directors and corporate governance issues, our findings show that the board is ultimately responsible if it permits the same management to oversee a continuing decline in profitability and cash flow.

Warnings signs appear one to three years before a business fails, and paying close attention to management strategies, business plans, controls and monthly financial results gives the board information to act quickly before the corporate house collapses.

In other major findings, Karen Boroff, dean of Seton Hall’s Stillman School of Business, says an increase in business failures over the next five years was predicted by 77 percent of the respondents. More than 80 percent believed that recent loan losses by banks will tighten credit markets and increase business failures over the next five years. Seventy-six percent said foreign competition will also contribute to business failures over the same period.

The survey showed that almost all business failures were also caused by inadequate accounting and management information systems, weak or non-existent internal controls and irrational expansion. External factors that management could not control were technological and social changes and government constraints, but their impact on business failures was viewed as miniscule compared with poor management.

Although there was unprecedented economic expansion in the l990s, in the past 20 years alone more than a million U.S companies have failed. But from 1960 to 1980, only 204,000 businesses failed in the United States. Ironically, business failures have increased five-fold in a period of unprecedented economic expansion. These data should light a fire under top management and tell them in a very loud voice that the ball has always been in their court.

Some 17,000 questionnaires were mailed to investment bankers, venture capitalists, executives from investment firms, academics, workout professionals and Fortune 1000 CEOs. About 1,900 of the 17,000 approached provided a sample size of 11 percent. Of those surveyed, 15 percent were turnaround managers, 22 percent were lenders or those who had money at risk, 45 percent were lawyers and 5 percent were chief executive officers.

Many of the CEOs whose companies floundered and eventually collapsed failed to become engaged in managing their company. They either did not bother with details, delegated responsibility that they themselves should have accepted in whole or in part, or ignored warning signs from lower-echelon management. And there were those who did not have the ability to set priorities.

Troubled companies almost always have these in common: poor information systems; managers not trained or undertrained to handle a crisis; abandoning a core business that they knew best (the battlefield is littered with corpses who wandered onto so-called greener pastures); overexpansion; excessive concentration on one supplier that goes bankrupt, raises prices unreasonably or goes on strike; slack controls and nebulous accounting.

One final irony that surfaced from our survey: When a consultant is summoned to rescue or resuscitate a company, in virtually all cases it is middle management that rises to the occasion and saves a sinking ship. Where are top managers when they are most needed? They have either bailed out or been thrown out.

Gerald P. Buccino is CEO and chairman of Buccino & Associates Inc., a national professional firm specializing in corporate revitalization headquartered in New York.


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