Denial

There is a tendency to ignore signals when times are good and then to panic when things have turned a little sour. However, at any point of time in the life a business, there are certain disciplines that will help determine not only where you are at that moment in time but where you are heading.

Management often tends to ignore basic signals when times are good and the world is never going to come to an end, or many don’t look at the right signals or they misinterpret them. However, when things aren’t so good, these signals are still there waiting to be read and interpreted.

For some it might be too late and for others, it might just mean the difference between salvation and ruin. However, those who survive should learn an enormous amount out of the process and be able to position the business for ongoing sustainable success provided the lessons of the past are learnt and their mistakes not repeated.

To begin this process it is necessary to have a clear and deep commitment to facing reality.

In an interview with the CEO of a major retail chain, the question was put to him that his company had not performed as well as his immediate competitor in the same economic circumstances. His answer indicated that it was nothing to do with the way the company was managed but due to external factors out of his control.

That is plain denial.

Survival depends upon ruthless honesty and facing reality rather than putting a spin on the facts. The shortest way to the grave is to step out onto a busy freeway in front of fast moving oncoming traffic in the belief you are fire proof and that all of the warnings of the stupidity of such an act are simply rubbish.

Red lights, boom gates, ringing warning bells are signals that we ignore at our peril. However, despite the repeated knowledge that people who ignore these signals get killed, you still see people running the lights, ignoring boom gates and racing across railway lines in the belief that all of this stuff doesn’t apply to them.

This is denial and it is rampant in businesses and a major cause of business failure.

There are warning signs in the best of times just as they are there in the worst of times. It is much better to look at them and react to them when things are going well than when things are going pear shaped.

At a point when the economy was in great shape (or so we thought) I was called into a company that was having “cashflow” problems. In many ways the company was incredibly well run and had a growth trajectory for which many would kill. It had some wonderful customers and a very high reputation in its industry.

Sometime earlier, it had called in a firm of accountants. They had done some studies and made some suggestions and calculations that eased the concern of management and of the firm’s creditors. 

As a result, the business took on more debt. However, the cashflow pressure intensified and that was when I got the call. The problem with the company was staring it in the face. It was like the warning bells and boom gates at a railway crossing. The company was trading in insolvency.

Why hadn’t the accountants or management picked it up? The veneer of success had blinded them to the possibility of failure. They were looking at facts through rose tinted glasses and interpreting everything in the light of the apparent success of the company. It was impossible to believe that the company could be in strife. They were in denial.

Had everyone looked at the facts realistically when the accountants were called in, it may have been possible to save the company.

By the time I came along and looked at the same data, albeit with six months further deterioration, there was only one step to avoid an accusation of trading in insolvency and it was to put the business in the hands of the receiver.

Strangely enough, when I sat down with management and explained the problem (which was to do with a fault in their costing process) management saw the problem immediately and didn’t hesitate to take that fatal step towards bankruptcy.

One of the more infamous episodes of denial in corporate history occurred in this century. In 1998 the shares of Enron were selling at $48 and going up. The price climbed to $80.

What is interesting is that in 1998 some second year business students at Cornell University undertook a six week project of studying Enron and running its numbers (those that were disclosed) across a series of mathematical analysis. After six weeks, they decided that the figures were being manipulated and that if they were putting recommendation on the stock it would be to sell.

They are not the only ones to identify the problems with Enron before the collapse of the entity. Another study in 2000 which was in fact published in a New York newspaper also indicated that things weren’t quite right in that so called great company.

 In the second half of 2001 when scares were running through the market, an employee of Enron wrote a letter to the CEO, Kenneth Lay, telling him of her concerns about manipulation of figures. She later had a meeting with Lay and reaffirmed her concerns.

Despite the constant news from external people and the concerns of employees that Enron was in trouble, Kenneth Lay, the CEO, maintained publicly that Enron was in a good position and would bounce back. Despite information that the CFO of the company had been running a large number of irregular transactions to prop Enron’s share price, Lay publicly defended his CFO (who ultimately did a deal with the Prosecutor and gave evidence against Lay at his trial).

Lay who had been with Enron on its rise to fame and had become a confident of the United States President (at that stage a guy called George Bush) was completely unable to look the facts in the face and accept that the company was bankrupt.

Within months of him maintaining to his employees and the public that the shares in Enron were undervalued, the company was forced into bankruptcy. It is not clear whether, if the people in Enron had done the same analysis as the students at Cornell, they would have come up with the same conclusion.

The chances are that people in the company had done the numbers but still believed that this wonderful company that defied logic could not possibly collapse. Everyone was in denial. If they had faced the music earlier and looked carefully at the warning signs and interpreted them independently without a misguided belief that Enron was fire proof, the company may have been saved and the Federal Penitentiary would have less white collar occupants.

More importantly, thousands of investors and employees might have lost some money but not the lot. Denial can be so destructive and yet it is part of our human psyche. We find it difficult to accept bad news.

In good times and bad, the signs are there waiting to be seen and understood. The more we get used to looking at them and responding to them, the greater the chance of survival irrespective of the economic weather.

Small businesses tend to think (as do business schools) that their problems are different to those of big companies. In fact, as we will see, the problems are identical and we can learn a lot from looking at the problems of big companies and seeing how they have coped with their crisis.

In fact, the bigger the company gets, the more likely it is for management to be in denial. In a small business, management may not be looking at the warning signs but they will feel them quicker than in bigger companies and have the opportunity to respond to them more quickly.

Having said all that, there are many great companies both big and small and management is consistently looking at warning signs and even anticipating events so that trouble doesn’t hit the fan; thus ensuring continued success.

As we will see, these companies have learnt the lesson of the problems of denial and of the necessity to be aware of the constantly changing environment so that fair weather or foul, they are positioned to keep going.

It doesn’t matter where we are in the so called “business cycle”, survival is the challenge of management. Companies can go belly up in the best of times just as easily as in the worst of times.

So, it doesn’t matter where we are in the economic environment, it is essential that we look ruthlessly and objectively at the warning signs so that if they aren’t pointing in the right direction we can adjust our course so that we can stay the distance.

The starting point is to get out of our comfort zone where we are not tempted to be in a state of denial.

Some standard indications of denial are:

·         Blaming the government for the problems;

·         Blaming the economy for the problems;

·         Blaming El Nino (this used to be a favourite) for the problems;

·         Blaming the inability to recruit good people;

·         Blaming changing purchasing patterns by customers;

·         Blaming customers for not appreciating the value of the companies offering and defecting to competitors;

·         Blaming competitors for cut throat pricing which forces a price war that destroys profitability;

·         Blaming cheap Chinese imports;

Well, perhaps that is enough for the time being.

If these are the perceived reasons for the business difficulties, then the high likelihood is that management is in denial.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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