Editor's Eye on Baltimore: Managing Denial: A Conversation with Joe Foss, Managing Director, SC&H Transition Advisors

Posted May 19, 2011

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Joe Foss

Can you accept that you are a large part of the problem? Can you listen? Can you acknowledge that your perspective is flawed? Can you change your team to address your blind spots? In short, can you manage your denial? I recently sat down with Joe Foss of SC&H Transition Advisors to explore how certain leadership flaws get in the way of fixing an organization's problems.

The Skinny. SC&H Transition Advisors helps organizations face crisis/turnaround challenges by effectively managing risk and enhancing and preserving enterprise value. Transition Advisors provides this assistance through strategic development, interim management and operational oversight with a cross disciplinary team of c-suite level executives, CPAs and consulting professionals.

Bad Scripts. Using a medical construct, Joe never knows whether he will find a distressed company in triage or already under the knife. "The challenge is by the time we arrive, the patient may be beyond saving." A simple cause underlies the severity of the situation. Joe finds that "most principals are in denial of reality." They are running scripts from the past. "I have been through this before; I know the business better." And from Joe's perspective, "nothing could be further from the truth." In many ways my conversation with Joe served as a foil to my recent one with Len Ostroff. Where Len spoke of leading a distressed organization through transparency and alignment, Joe focused on how fatal a CEO's denial can be to turning a company around.

Blame Game. When we explored whether there were common themes, Joe found that when initially meeting with CEOs, he usually discovers that most energy is directed toward finding something else to blame for their current predicament, "the economy, competitors' aggressive pricing, or loss of a key employee or customer." While there are often external factors that materially affect a company's operations, what Joe sees in an entrepreneur's effort to blame such externalities for current challenges is really "demonstration of [that entrepreneur's] inability to adjust."

Financially Illiterate. The initial issue for Joe isn't necessarily what caused the downturn for a business, but whether the leadership is capable of adjusting. Joe provided as an example a $20M revenue company with sufficient cash flow to service $10M of debt and working capital to continue to grow. For whatever reason (pick what to blame), revenues drop to $14M and the debt can no longer be serviced. Regrettably, what Joe usually finds is an organization which ignored managing expenses or restructuring the debt when the company had capacity to do so. "Most organizations fear that adjusting expenses will affect future revenues and are simply unwilling to compromise upside revenues." They simply ignored the signs and waited for yesterday to return.

Invincible. Joe reminded me that this interplay between expense and revenue is not only at issue when revenues are in decline but "can occur with fast growing companies as well." Growth doesn't equate to invincibility. "Yet as a company scales," Joe warns, "the size of the organization doesn't enable the CEO to know all that is going on." The most common issue the Joe sees when working with rapidly growing companies which have stumbled "is an unwillingness to establish a management team." The surrogate for such leadership is the use of "B grade team functionaries to execute," sort of the corporate version of socially promoting past one's skills and experience.

Credibility Gap. Meanwhile, either behavior - a company in denial of adversity or of unfettered growth - results in "losing credibility with investors and lenders." What these stakeholders perceive "is an entrepreneur surrounded by enablers" that, Joe says, "tell the entrepreneur only what he wants to hear." "The same team that got them where they are is usually not the team that can get them out of the problem." And they tend to repeat the same story line to these stakeholders, long past the time when they are remotely plausible.

Stable Financials. The focus is initially and ultimately on cash flow. To regain credibility with investors and lenders, one has to "financially stabilize the business". If Joe and advisors like him are introduced into a company, there remains some residual faith by these stakeholders that the company can weather the storm. So, Joe advises that "the key is to start and end with this financial discussion." And from his experience, "the level of reluctance to have this discussion" is a predictor of the chances for success. Remember the scripts such an entrepreneur is running, "it's very hard for him to be objective." In the end, the numbers do matter and how a CEO handles them will make the difference in his regaining credibility.

My Bad. So as we finished our conversation, I asked Joe how he knows when any given engagement will turn from strategic to forensic, how does he know when he is dealing with the corporate version of a carcass. "Whether the CEO says 'I made a mistake.'" Ironically, "it's not necessary that the CEO fully understand the nature or scope of his mistake." If a CEO can move from denial to recognizing his own limitations and their effect on the company, then there is a strong chance the company can be reset. "Those who realize what they don't know are comfortable with handling contrary advice and debate, realizing that it will result in a better decision." As a corollary, when it comes to changing a company's leadership, those CEOs most capable of managing through adversity "will begin to hire people who can offset their limitations."

The Take Away. It is sobering to hear the commonality of financial illiteracy with struggling CEOs. What seems lost to such CEOs is the fundamental interplay in financial statements between trends in expenses and revenues, and failure to understand that dramatic shifts are essentially dislocations in the financial "ecosystem" of a company, that upset an otherwise predictable equilibrium. Shift happens, but from my conversation with Joe, the realization of how to respond does not. The increased volatility that comes from such disequilibrium is ignored, denied and rationalized, all with the effect of further damage. When I asked Joe whether he found that lousy accounting systems fed the problem, his answer surprised me. "The systems in place are not in themselves failing, but they often serve as a surrogate, as a reflection of the CEO's biases, reinforcing behavior not informing it." When there is denial, it runs deep as do the efforts to rationalize it.

Joe can be reached at: jfoss@scandh.com

Learn more about SCH Transition Advisors at: www.scandh.com/transition/

For comments about this article or thoughts on future conversations, let me know at: nfowler@rosenbergmartin.com

With more than 25 years experience in law and business, Newt Fowler advises many of the Greater Baltimore region's entrepreneurs and technology companies, guiding them through all aspects of business planning, technology commercialization, and M&A and financing transactions.