7 management nightmares that will keep you awake at night

30 October 2018 -

HalloweenHalloween special: these are the flaws that spooked well-known businesses

CMI Insights

There are many causes of company failure. Sometimes it’s changing markets. Often it’s greed. Sometimes it’s just bad luck.

Much of the time, it’s management failure. According to CMI research in 2015, incompetence and bad management are responsible for 56% of business failures. That includes leaders stubbornly clinging to their way of doing things, rejecting other perspectives, refusing to acknowledge others’ capabilities and wandering blindly towards the precipice.

We need to talk about company failure right now. Why? Because the underlying number of insolvencies in England and Wales rose to a four-year high in the first quarter of 2018. Personal insolvencies are also rising sharply.

Against a backdrop of industry disruption, political uncertainty, rising interest rates and fragile regional economies, we must learn to see the signals of management failure more quickly, and build a business culture that’s more deeply rooted in management discipline and good practice.

So here’s our roll call of the mismanagement behaviours you’ll witness when organisations get into trouble. Spot these in your organisation’s own leadership, and it may be time to escalate your concerns. And, if you find yourself doing any of them, it’s definitely time to change.

Monster behaviour

Carillion is a masterclass in modern mismanagement. The building services company went on a 20-year orgy of debt-fuelled acquisitions and expansion into new markets. Throughout, directors rewarded themselves and other shareholders, despite a growing pension deficit. Juicy annual dividend payments kept up the illusion of confidence – along with some extremely aggressive accounting.

In January 2018, the edifice collapsed.

The Work and Pensions Committee’s report into Carillion’s collapse is a long and painful but instructive read about the appalling management failings that took place there. Incoherent strategy. Reckless pursuit of growth. Short-term gains over long-term sustainability...

More than anything, perhaps, Carillion shows what happens when leaders stop listening to views that differ from their own. Even when the company was clearly in trouble, investors were given the cold shoulder when they questioned the company’s strategy. Some outside consultants did give unwelcome advice, but “Carillion simply marginalised them and sought a second opinion”, according to the MPs’ report. Non-executives had minimal impact, even though their job was to scrutinise executive management. As the committee’s chairman, Frank Field, put it: “There was a lot of challenging but nothing changed.” When action was finally taken to appoint new outside leadership, it was too late.

As for Carillion CEO Richard Howson, the MPs were lethal: “His misguided self-assurance obscured an apparent lack of interest in, or understanding of, essential detail, or any recognition that Carillion was a business crying out for challenge and reform.”

Back in the 2000s, the management of RBS showed a similar arrogance in their acquisition strategy, leading to catastrophe. As David Cartwright, turnaround expert and founder of OBD Academy, observes: “Acquisition is a quick way to grow; it generates excitement in the acquirer organisation. But, as history has proven, it’s easier to start a war than to clear up the mess afterwards.”

A postscript to the Carillion story: having spent three years in Carillion’s Canadian business, Emma Mercer became CFO just a few months before the firm collapsed. She told the committee that, when she returned to the UK in 2017, she observed a “slightly more aggressive trading of the contracts than I had previously experienced” and she made her misgivings known. MPs said she was the one person to emerge from the carnage with any credit: “She demonstrated a willingness to speak the truth and challenge the status quo, fundamental qualities in a director that were not evident in any of her colleagues.”

The financial vampire

Power corrupts. And there’s medical evidence to that effect. In 2009, the politician Lord Owen published a paper in the journal Brain, looking at 14 clinical defects associated with holding power, including recklessness, contempt for others, a loose grip on reality and lack of empathy. These appear to be real, measurable, physical symptoms, some of which resemble brain damage. When managers start to brag of “destroying” the competition and “dominating” the market, alarm bells should start ringing.

Entrepreneur Shazan Izziq Qureshi is a good example. He called himself an “Alphapreneur” on his business cards, was an ambassador for Enterprise UK, and in 2006 was named in the ‘Top 42 Under 42’ by North West Business Insider magazine. The status clearly got to him. He turned his company, Rejuvenate Your Business, into a personal piggybank to buy and renovate properties. When the cash fell short, he raided clients’ accounts. He enticed a naive investor to hand over monies on false pretences. An Insolvency Service investigation cited multiple deceits, breaches of trust and illicit withdrawals, leading to a 13-year directorship ban.

Is there a cure or vaccine for such behaviour? Lord Owen suggested humour and cynicism are valuable. “But nothing can replace the need for self-control, the preservation of modesty while in power, the ability to be laughed at, and the ability to listen to those who are in a position to advise.”

The ghost manager

Students of mismanagement will find a number of clear, repeated tropes. A prime example is a pig-headed refusal to engage with reality when things go wrong. Take the destruction of a magazine company owned by Bernie Ecclestone, the long-time boss of Formula One. In a rare misstep, Ecclestone appointed an interim CEO who responded to every issue with a telling catchphrase.

A former senior employee recalls: “He’d say: ‘Leave it with me.’ No matter what the issue was: ‘Leave it with me, lads.’ The mantra was a deflection tactic, as he just wanted to be left in peace.”

Issues piled up, says the employee. “I remember a board meeting towards the end. We listed the problems. Our chief designer was out of contract. Freelancers hadn’t been paid for four months, because of cash-flow problems and bad accounting. We had sales guys who were alcoholics, drifting along on payroll. We’d lost a distribution contract with Lufthansa airline, crippling our circulation. It was mayhem. But every time this guy would say: ‘Leave it with me’. And then he did nothing. We could have set his trousers on fire, and he’d have muttered ‘Leave it with me’ as he turned to ash.”

Eventually Ecclestone lost patience and shuttered the enterprise.

March of the zombies

Throughout business history, fads have warped the behaviour of managers. “Most students are taught that investors are rational and markets are efficient,” says Sebastien Canderle, author of The Debt Trap. “The reality is that anyone who invests money is emotional, and driven by fear and greed.”

Perverse incentives will usually trigger errant behaviours. “Contractually, private equity fund managers have five years to invest their capital. If they don’t, they lose access to the uninvested portion. Thereafter, they earn fees only on what is invested. So they are incentivised to put money to work,” notes Canderle.

It’s such circumstances that lead to ‘market madness’. As legendary investor Charlie Munger has observed: “Big-shot businessmen get into these waves of social proof. Do you remember some years ago when one oil company bought a fertiliser company, and every other major oil company practically ran out and bought a fertiliser company? And there was no more damned reason for all these oil companies to buy fertiliser companies… it was a total disaster.”

Canderle includes lessons about cognitive biases and perverse incentives in the course he teaches at Imperial College London. One of the most instructive texts is Munger’s The Psychology of Human Misjudgment. “His awareness of human folly is part of the reason he’s so rich,” smiles Canderle.

Health and safety devils

“The guy had burns to his face. He suffered psychologically, split up with his girlfriend, left his job, tried to cut his wrists and ended up back at his parents.” The story of Faltec Europe is instructive for any managers who are skimping on health and safety. Graham Stamp, until recently health-and-safety manager at the car parts manufacturer in South Tyneside, reels off story after story of violations.

Faltec also had an outbreak of legionnaires’ disease. “Five people seriously ill. One in a coma.” In 2013 a worker lost an eye when a hose hit him in the face. And in 2006 a worker burned to death. “A tin of paint thinner fell on him. They’d been using light bulbs to dry paint, and one broke, lighting the thinner.”

In May this year, a judge fined Faltec Europe £1.6m for multiple breaches of health-and-safety law.

So what went wrong? “Managers did not see health and safety as a priority,” says Stamp. It seems they even failed to listen to the HSE inspector, and there was a lack of real experience. “Some senior managers had been with Faltec since day one, so had never seen how it was supposed to be done.” Stamp was brought in to overhaul health and safety, as part of a major revamp. The firm says it has spent £4m and now has ‘world-class’ standards.

Stamp points to various management failings. A lack of appropriate qualifications. A lack of training for the risk factors of the job. An excessive focus on short-term profits, leading to underinvestment in maintenance. Key roles were amalgamated, often in a person unsuited to their new remit – a classic example of the damage done by ‘accidental managers’. Processes were poor, errors not learned from and problems not fixed on schedule.

Above all, Stamp warns against a ‘this isn’t my fault or responsibility’ culture. Health and safety is critical, he insists, and “it shouldn’t take multiple injuries to staff to hammer that home”.

Money spiders

All companies should focus on cash, but not thinking about anything else can be a bright red flag. Too much cash addled the minds of management at Powa Technologies, once valued at £1.7bn.

Powa offered a simple product – an app, PowaTag, to let consumers buy products by scanning a QR code or ad, or via sound waves. The boss, serial entrepreneur Dan Wagner, believed it was “the greatest technology company of all time”.

Investors, alas, believed him. Wagner raised tens of millions of pounds from Wellington Management, well before proving his product worked. He then embarked on an M&A binge, snapping up companies as far afield as Hong Kong. He did deals with 200 companies, and opened offices all over the world. Further investment rolled in. Headcount shot up. One employee interviewed by Business Insider recalled: “You’d go to the Christmas party and be talking to someone who was vice-president of PowaTag in Spain or Greece or whatever. All these people with these titles. It was insane. All these people were on the payroll.” Annual salaries hit £24.8m by 2015. Office space in the Heron skyscraper in London cost £2m a year. Sales never passed £5m.

The parties were preposterous. One Christmas, topless dancers in paddling pools poured liquid over themselves. Others danced in neon body paint.

A product manager said: “The whole thing was about image. It was about raising the maximum amount of money so Wagner could flog or float the business as soon as possible for the most money.” Marketing managers took to announcing clients before they signed, on the grounds that few would issue a formal denial.

The cash binge ended in February 2016. Powa folded with £250,000 in the bank and debts of £16m. Wagner remained oblivious to the last, telling the BBC: “It’s the business equivalent of walking across the street and being hit by a car. It’s one of those things that is completely random.”

Eternal sleep

Erratic administration and rash decisions are often symptoms of a deeper malaise. A former director at a large private equity-backed company has a telling story: “The company is in a death spiral. Decision-making is all over the place. One sales director left the office on Friday and came in on Monday to find a new sales director had been appointed over him. He’d known nothing about it. He left soon after.”

As Cartwright of OBD Academy notes: “People need to feel their contribution is valued and valuable, or they’re unlikely to give their best. The more they’re kept in the dark, the more likely they’ll feel marginalised. If you don’t feel valued, you won’t add value.”

The CMI Management Manifesto explains how to avoid your own leadership nightmares this Halloween

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