Introduction
Up until 2017, Carillion was one of the largest contractors for U.K. government infrastructure projects, employing 43,000 people worldwide. But despite such impressive figures, the report found that Carillion’s business model was an “unsustainable dash for cash” and that it deliberately used aggressive accounting policies to present a rosier picture to the markets. Its cash flow, for example, relied on stringing suppliers along for months. A succession of directors maintained the image of a healthy and successful company by increasing dividend payments year-over-year, irrespective of company performance. In fact, more was paid out in dividends than the company generated in cash. For years, the board helped maintain a “deluded” sense of optimism even though the company was “crying out for help.”
At the time of its collapse, Carillion left a pension liability of around £2.6 billion (about $3.31 billion) and owed around £2 billion to its 30,000 suppliers, sub-contractors, and creditors. The company went into liquidation in January 2018 with liabilities of nearly £7 billion ($8.9 billion) and just £29 million ($37 million) in cash. The subsequent furor prompted the U.K.’s corporate governance regulator, the Financial Reporting Council, to request greater powers to investigate and prosecute all directors. Currently, it is limited to pursuing only those with an auditing, accounting, or actuarial background (meaning finance directors, for the most part).
Causes of Corporate failures
A sophisticated understanding of failure’s causes and contexts will help to avoid the blame game and institute an effective strategy for learning from failure. Although an infinite number of things can go wrong in organizations, mistakes fall into four broad categories.
1. Strategic Failures
When companies fail, blame is usually laid squarely on executives for making two common mistakes: First, they focused on the company’s historical performance and ignored what was happening in the wider market; and second, they were reluctant to dump a strategy that was not working until it was too late.
There are several other reasons that poor strategic direction is allowed to continue. In many cases, companies fail to learn from the experiences of others. “Organizations tend to have this bizarre belief that the same problems won’t hit them—especially if the company is in a different industry sector—or that they are capable of dealing with them differently and successfully,” said Mark Brown, vice president and senior risk practitioner at enterprise risk management software provider Sword Active Risk.
Executives also often fail to fully appreciate what risk management can actually do. “Most organizations say that they have an enterprise-wide risk management system in operation, but relatively few have full executive buy-in or an acceptance from boards that they are ultimately responsible for it,” Brown said. “As a result, there is a disconnect about what executives should be doing and a false view that the risk management function prevents all risks.”
Personality can also have a sizeable impact on the direction of a company. According to Val Jonas, CEO at software firm Risk Decisions, “executive ego” can play a major part in preventing risk management (and others) from challenging boardroom decision-making and the rationale underpinning corporate strategy. Jet Airways’ fall is a story of the fall of its founder. Few business failures are so inseparable from the failings of their promoters. Industry insiders often quote a line attributed to Goyal, “I am the person in Jet. When people look at Jet Airways, they look at me.” The garrulous founder of the airline, admired by some for his quicksilver wit, was once its biggest asset but today, he has proved to be its biggest liability.
“Some boards tend to believe in their own intuition rather than actual evidence,” she said. “Boardrooms are where key decisions are made and executives are in that room because they have made quick decisions in the past and they probably have had a good hit rate, or at least they did early on in their executive careers. As a result, executives feel that they have good instincts and they become less willing to listen to challenge, listen to bad news, or accept contrasting views from assurance functions that they think are meant to check the numbers and any legal issues, not set the agenda.”
Ego trips can often turn into nightmare corporate journeys. “Biases are often projected onto strategies and they become inextricably linked with directors’ egos,” said James Berkeley, managing director at strategic advisory firm Ellice Consulting. “Executives take the notion of strategy too personally and take offense when it is questioned. Boards can then dig in and become defensive about something that ordinarily they would not be so supportive over.”
2. Lack of Executive Accountability
Berkeley said that there are two ways to prevent boards from backing poor strategies, or from continuing to pursue them in the face of overwhelming evidence that they have gone wrong. The first—and most preferable—involves hiring people with the appropriate talent, experience and judgement into board roles from the start who can deliver the intended strategy, and who are prepared to adapt it—or scrap it—if circumstances change. The other is to make executives more accountable for the strategies they greenlight and steer by making pay and rewards much more contingent on actual performance—not just in terms of financial results, but also in securing the business’s long-term future by, for example, committing to improving and investing in recruitment, retention and training programs.
“Making sure that you have a strong leadership team from the start is crucial, but it is also important to know up front whether they have the nerve and good business sense to pull the plug on a failing strategy,” Berkeley said. “There need to be benchmarks in place to measure success and a recognition that, if these aren’t met, then the strategy needs to be changed or dumped. Linking executive pay and reward schemes to these benchmarks is also vital to ensure accountability and to measure the performance of both the strategy and the executive team.”
Independent Directors should also (in addition to the management) be held accountable for board decisions and audit-related compliance practices. The concept of CEO and Board chair separation is well accepted in Europe, and American companies are steadily moving in right direction. This would bring a better balance in the boardroom. Accountability and action against fraud/negligence are major concerns. Professionals (auditors) should be made accountable and consequences (punishment) should follow if there are any deficiencies and slip-ups.
Experts believe that better executive screening is necessary and recent corporate governance scandals may put executive appointments under greater scrutiny in future. This May, for example, a joint committee of members of the U.K. Parliament published its final report into what went wrong at collapsed construction giant Carillion.
3. Lack of Collective Responsibility
While the buck may stop with boards for pursuing a flawed strategy or for failing to implement a good one, others are also culpable. According to U.K.-based risk consultant Keith Blacker, there is increasing evidence that those who are supposed to provide independent assurance on risk and corporate governance are not doing their jobs properly. “Auditors, advisors, non-executives, risk managers, internal auditors, in-house legal, compliance and others are all meant to present a challenge to the board and act as a ‘critical friend,’” he said. “No area of discussion should be left unchallenged, including corporate strategy. But somehow, their contribution often falls short or they are not listened to. Boards may have ignored them, but there is also a case to say that these people did not shout loud enough.”
In the case of Carillion, the company’s non-executives were supposed to challenge boardroom strategy but were “unable to provide any remotely convincing evidence of their effective impact,” the MP report found. Professional services firms were also slammed for being unable to effectively identify to the board or persuade executives about the seriousness of the risks associated with their business practices. “The appearance of prominent advisors proves nothing other than the willingness of the board to throw money at a problem and the willingness of advisory firms to accept generous fees,” the report said.
4. Lack of Corporate Governance
From the analysis, it is found that distress is mostly caused as a result of poor corporate governance. To stem distress and its debilitating effect, there is a need for the adoption of new audit framework which stresses on time limit of audit tenure with a client, forensic audit, retrospective audit procedure, and auditor’s skepticism. This will ensure and yield effective corporate governance that can curve and detect potential failure. Satyam Computers is a good example of a big failure of corporate governance.
Remedies
Following remedies are few important steps to be taken in order to monitor and control the risks • Consistently rotating auditors is an excellent way to ensure independence from management influence and having an appropriate proportion of independent directors—both on the board and internal audit committees—will promote greater accountability and bring fresh, diverse perspectives,” said Kurt Rothmann,
• It is also important to have a whistleblowing policy in place empowering whistle blowers that creates a comfortable environment for employees to anonymously report any suspicious behavior.
• Risk managers also need to share some responsibility for corporate collapses. “People in the profession can be more intent on putting processes in place for people to follow than looking at whether the underlying business is actually at risk,” Brown said.
• Corporate organizations have been advised to establish research and development departments to continuously monitor their performance and to introduce effective ways by which they could satisfy their consumers and service their operating environments to effectively continue as going concerns. • Another most important stakeholder the Regulator plays a big brother role in smooth continuity of a corporate business. Improvement required in Law regulatory systems for a proper balance and checks.
• However, one must understand no matter how strong a regulatory system is, it cannot always prevent fraud. There are limits to legislations as a lot depends on the integrity and ethical values of various corporate players. The key lies in management decisions and its commitment to establish and follow rigorous systems.
Lessons
In short, exceptional organizations are those that go beyond detecting and analyzing failures and try to generate intelligent ones for the express purpose of learning and innovating. It’s not that managers in these organizations enjoy failure. But they recognize it as a necessary by-product of experimentation. They also realize that they don’t have to do dramatic experiments with large budgets. Often a small pilot, a dry run of a new technique, or a simulation will suffice. The courage to confront our own and others’ imperfections is crucial to solving the apparent contradiction of wanting neither to discourage the reporting of problems nor to create an environment in which anything goes. This means that managers must ask employees to be brave and speak up—and must not respond by expressing anger or strong disapproval of what may at first appear to be incompetence. More often than we realize, complex systems are at work behind organizational failures, and their lessons and improvement opportunities are lost when conversation is stifled. Savvy managers understand the risks of unbridled toughness. They know that their ability to find out about and help resolve problems depends on their ability to learn about them. But most managers I’ve encountered in my research, teaching, and consulting work are far more sensitive to a different risk—that an understanding response to failures will simply create a lax work environment in which mistakes multiply.
This common worry should be replaced by a new paradigm—one that recognizes the inevitability of failure in today’s complex work organizations. Those that catch, correct, and learn from failure before others do will succeed. Those that wallow in the blame game will not.
Conclusion
The wisdom of learning from failure is incontrovertible. Yet organizations that do it well are extraordinarily rare. This gap is not due to a lack of commitment to learning. Managers in most enterprises genuinely wanted to help their organizations learn from failures to improve future performance. In some cases, they and their teams had devoted many hours to after-action reviews, postmortems, and the like. But time after time we see that these painstaking efforts led to no real change. Building a Learning Culture: Only leaders can create and reinforce a culture that counteracts the blame game and makes people feel both comfortable with and responsible for surfacing and learning from failures. They should insist that their organizations develop a clear understanding of what happened—not of “who did it”—when things go wrong. This requires consistently reporting failures, small and large; systematically analyzing them; and proactively searching for opportunities to experiment. The reason: Those managers were thinking about failure the wrong way.
