Column: Business Revival

BUSINESS REVIVAL
Develop An Operative Strategy

The board will have to initiate change in the culture of the company to bring in transparency and honesty in its internal and external dealings.

By Pradip Chanda

Pradip Chanda, Turnaround Consultant

The turnaround of a sick company requires extensive management inputs. More often than not, the first task of the turnaround-team is to redefine the business, identify areas of new opportunity in the market, and develop the company's capabilities to respond to the needs of the new environment. In a study of 42 successful turnarounds across industries like automobiles, chemicals, computers, business machines, steel, textile, and transportation, it was found that all had adopted the strategy of diversification and product-line extension.

Sick companies have to further contend with limited resources and stretch the existing asset base to find a viable business-model. Such companies require new and effective managers at the top, who will develop an operating strategy, and ensure that the rest of the organisation buys-in. A change in the composition of the board is the first step of the turnaround process.

In our country, most sick companies are family-owned, with family members or trusted friends controlling the board, and at times occupying executive positions. The decision to induct a new empowered board in such an environment is never easy, and needs to be pushed by those who have substantial individual stakes in these companies such as FIs, banks, and regulatory bodies. Fortunately, SEBI has realised the need for strong boards in publicly-held companies, and has mandated a minimum number of non-executive directors.

It is necessary to go a step beyond and clearly define the purpose and responsibilities of the board, and profile the ideal director.

In turnarounds, the immediate task of the newly constituted board would be to select a CEO who will drive the company's day-to-day operations; prioritise its objectives; and lay down guidelines that enable the CEO and his team to formulate and implement viable strategies. Thereafter, the board should monitor the company's financial performance and carve out plans to ensure the success of its product- and service-strategy. It should also mobilise adequate resources to run the business. Finally, the board should provide support and advice to the CEO.

However, in the context of turnarounds in India, a newly formed board needs to supervise the transition to professional management, which places additional responsibilities on the members of the board. During a transition the board should also focus on its financial responsibility. It should conduct a careful scrutiny of all investment policies and the management of capital and reserve funds. This is necessary to prevent the siphoning of funds and the pursuit of unviable pet projects.

The board will also have to initiate a change in the culture of the company to bring in both transparency and honesty to its internal and external dealings, and accountability to the stakeholders. This would require a commitment from the members of the board to lead from the front and rebuild the image of the company.

It is obvious that given the complexities of a turnaround the board cannot be ornamental. To be effective the board should comprise a group of professionals who bring a breadth of skills and experience. Ideally, the members will have different backgrounds and complement each other. The selection of members also needs to take into account the personality traits. Having an open mind is an absolute prerequisite, as is the quality of having an orderly approach to decision-making. Finally, members of the board should have a reputation of being honest.

Given the magnitude of the need for restructuring boards of directors, it'll not be easy to create a pool of eligible board members. The CII has been preparing such a list for some time.

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