Vulture Investments and the Effects of Change in Corporate Culture - Essay Example

SUCCESFUL TURNAROUND Neither profit nor loss is bestowed; they are procured at the cost of labour, knowledge and prudence. In business, to recoup theloss a company must have to pay a heavy price including change of management in its highest level and middle level too. This is the bitter medicine that must invariably be swallowed during the treatment of turnaround. Every problem has a solution. It is the distance between the two in time, which transforms the problems into crisis. Turnaround measure is the timely tool for crisis to be cut. Changing the organisation culture or cultural renewal is the very important part of the turnaround endeavour, since culture is the base of the entire realm of a business. CHAPTER III Research questions: taking failure as a phenomenon in everyday life that ought to be crossed either by winning or not we are left with the questions about the ways to win the debacle. In a business firm that faces distress, the big boss must get himself equipped with the capabilities to retrieve answers to questions on the cause and depth of the crisis and then questions regarding the salvation process are to be evolved. The purpose of the research that I conduct is to elucidate answers for these questions about the cause and depth of the distress simultaneously finding the way in which organisation culture has to be reformed or remodelled to get the favourable results in the turnaround process. Changing the organisation culture or cultural renewal is the vital part of the turnaround process, since culture is the base of the entire realm of a business. The methodology of turnaround comprises mainly of grass root changes. Turnaround decisions are hard to conceive, although everybody in a crisis torn company is eagerly waiting for a fresh mechanism to thrive. I have collected feedback data from many companies worldwide that underwent crisis management and companies that foresaw the crisis and adopted prudent approaches to circumvent the crisis. The research papers and journals on the subject of crisis management were of highly helpful in my research. Throughout the search I found that a strategic change was a must in the turnaround endeavour. A company shows symptoms of distress in six ways. They are: 1. Dividend reduction 2. Plant closing. 3. Losses. 4. Lay offs. 5. CEO resignations. 6. Plummeting stock prices. Operating losses of a company results in the reduction of its capital leading the firm towards bankruptcy. In Kenya, companies such as Barclays Bank, Standard Chartered and National Oil Corp are laying off their staff. Many a companies are left with options to take turnaround steps in the following ways only. 1. Disposing of real property. 2. Merging with other firms. 3. Reducing capital spending on R & D. 4. Issuing new shares. 5. Negotiating with creditors. 6. Liquidation. 7. Lay offs. Of these a successful negotiation with the creditors to extend the duration of debt servicing, interest and paying period fetches a good result of saving the company from liquidation. (Jonah Aiyabei, 2000). 1.1 CAUSE OF THE CRISIS Corporate misconduct is the root cause of crisis to creep in a company. The direction of movement of corporate behaviour is normally from top to the bottom. Integrity must permeate a company from the level of chief executive who are supposed to blend ethical values to their traits of integrity. The survey results of the Investor Responsibility Research Center, Washington D.C., survey of board practices and pay, 2004 delineates that an internal campaign organised by the CEOs emphasises the company was taking the reforms seriously and provide an opportunity for discussion among the employees. Responses received from many of the respondents revealed an inability and impossibility to legislate morality and ethics and at the same time greed was felt at the core of many of the past problems. A grade point average (GPA) of 2.6 in the field of accounting management encompassed the view of the respondents that CEOs should meet with department heads and create a direct communication channel for anyone who becomes uncomfortable with the company's accounting or disclosure policies. The high level executives interviewed were of the opinion that the job of CFOs had evolved from just being purely fiscal to being focused on strategies. Many respondents realised and acknowledged the under utilization of internal audit group. They gave a vent that although the questionnaires on which most of the internal auditors rely on to assess their internal controls provide useful info, independent performance and objective analyses to substantiate department's self-assessments must be inculcated among the internal audit group. ( Tina D Carpenter, 2004). Mismanagement of IP also causes significant problems in many companies 1.2 DEPTH OF THE CRISIS The depth of the crisis in a company usually is measured in terms of its tendency towards bankruptcy. Any company that is under distress is primarily in need of funds to manage the running situation. Hedge fund is a boon at this stage. The new administration taking the turnaround measures utilises the fund to execute specific trading techniques and strategies. Hedge fund occupies a central position in the crisis torn company. Successful turnaround fetches good profit on it and if turnaround fails the hedge fund significantly provides for the restructuring of the company. Hedge funds pursue three stages of strategies. They are: -- 1) Pre-bankruptcy strategy. 2) Bankruptcy strategy and 3) Post-reorganisation strategy. The Hedge fund is dispersed in various modalities throughout the turnaround measure. Techniques adopted during pre-bankruptcy strategy are: Private Investments in Public Securities. Second-lien Financing. Consolidated Collateral Loans. Balance Sheet arbitrage. Credit default swaps. Involuntary Chapter 11 filings. Early Discussions with Potential Buyers. During bankruptcy the restructuring process are heavily complicated and involve many strategies including Pension Plan Termination and Debtors In Position (DIP) Financing. During the post-reorganising ,Hedge funds are crossing some strategies including Engineering and Financing Mergers. (Steven R Storm, 2005,) Dr. James F.Smith identifies a healthy atmosphere in President Bush's tax proposals repealing the federal income tax and replacing it with a flat tax on spending as it would improve economic efficiency. (Dr. James F Smith ) The ability of the hedge fund to finance to the debtors is much used in advantage of the Chapter 11 techniques. The financing strategies in this bankruptcy atmosphere are relatively complex including DIP financing, gaining a blocking position by acquiring 1/3 of the claims in a given class. A main strategy in Chapter 11 designed is to convert ownership in debtors to the creditors. 2. TURNAROUND TECHNIQUES Immediate change of top-level management is usually the first step, taking place in a turnaround process. The new administration while plunging into action collects data for the set back suffered and identifies and locates the problematic areas went through by the previous administration. This follows the decision-making session of the administration-a crucial part of its job-for which the entire company had so far been waiting. Data are collected for identifying the snags in various methods. Organisation culture is the key tone to be remembered in all the steps to be carried out. 2.1 COLLECTION OF DATA OF PREVIOS ADMINISTRATION'S STUMBLES 2.1.1 Observation method: -- Observation is one of the mostly used techniques to collect data. Here the observer or researcher is at his/her free will either to allow the subjects to be aware of the observation or not. Likewise he can choose to be the part of the situation or not. CEOs generally employ external agencies for non-participant observation except in stray situations. Even when the subjects under study are allowed to be aware of the observation, the researcher may desire that the subjects need not detect some part of observation and resort to the usage of hidden microphones and cameras. This is termed unobtrusive observation. Observation conducted in natural settings takes its own time to record the findings as the events are taking place in its own pace whereas observation in the contrived settings are speeded up to elicit the responses from the respondents. If the situations warrant the researcher to conceal his/her identity to the subjects, then disguised observation is followed. Observation conducted under the guidelines or instructions is known as structured observation. Recording of specific words used in the conversation of this type of observation is facilitated by the guidelines. In unearthing the irregularities of daily routine, direct observation is considered apt while the facts of past irregularities are brought out through indirect observation. The advantage of observation technique is that actual behaviour of the subjects is recorded unlike the survey method wherein the recordings are mainly based on the response given by the respondents. The responses in survey method may be contrary to the traits of the subjects due to social obligation and pressure. The disadvantages of this observation technique to collect data are: -- 1. The motivation behind the behaviour expressed by the subjects cannot be ascertained by this technique. Of course this cannot be viewed as the inefficiency of the techniques as the limits of the techniques are restricted. 2. Application of unobtrusive and disguised techniques of observation-that is, using hidden cameras and concealing the identity of the observer-amounts to invasion of privacy of the subjects under study, leading to ethical issues that are to be resolved separately. 2.1.2 Survey method: -- In Survey technique, the respondents are required to fill in the questionnaire forms by themselves. The forms distributed through mail, fax, Internet and magazines are subjected to 'sample bias', as some set of the subjects cannot be reached by means other than the conventional direct contact. The merit of this self-administered survey is the anonymity of the respondents leading to more valid responses. Although the interviewer bias is not there in this method due to the absence of an interviewer, the respondents biasing their responses cannot be ruled out, as there is no control over the modality of the response by the subjects. However, the response rate can considerably be enhanced by --- 1. A personalised, well-written covering letter. A personalised approach will naturally make the subjects realise that they are part of a big family or institution or unit in which their contribution however mite it may be is very important. 2. Inclusion of topics of interest to the respondents in the survey. This will make them stay tuned to the survey till all the fields are completed and submitted. 3. Ensuring confidentiality. By doing this a researcher or sponsor occupies a place in the minds of the respondents that they would help them if responded. 4. Allowing the respondent to verify the legitimacy of the survey by giving them the contact number of the lead researcher. Pseudo-supremacy in the subjects is nurtured by this way making them freely advertise the content and intent of the survey among his mates. 5. Fixing a reasonable deadline with a simple reminder. 6. Follow-up with non-respondents. Non-respondents can be dragged into the orbit of survey by simply contacting them and making them feel that no pressure is laid on them even if they do not participate in the survey. This is a 'yes by no' method, which need considerable amount of endurance to achieve the results. 7. Taking away the burden of postage for reply from the subjects. 8. Appealingly designed questionnaire. 9. A finely developed and worded questionnaire beginning with questions of very much interest to the respondents. 10. An eye-catching envelope. 11. An advance notification of the survey and its motive. This would certainly raise the self-importance of the respondents in their mind making them feel highly recognised. 2.1.3 In-Person Interview Survey: -- One of the most effective processes of data collection is the personal interview method. This can be carried out in both qualitative and quantitative modes. The interviewer can get clarified answers by placing auxiliary questions. He/she can record personal findings and observations that support or underpin the views of the respondents, such as the gender, time, place or the situation of the environment. However interviewer error/bias is most likely in this type of interview survey. The appearance, tone, voice and the gender of the interviewer have their own impacts on the response by the subjects. Well-trained self-controlled interviewers are best in doing this job. This is one of the costliest survey methods. As far as the intercept interview-survey is concerned, the response rate is relatively less than that in the in-depth personal interview. Other qualitative research techniques include Focus group, Case study and Pilot study while quantitative research results can be arrived by telephonic interview also. 2.2 DECISION MAKING Having collected the relevant data, an administrator now has to land on the pivotal area of decision-making. The traits of leaders are of much importance in decision-making. Leadership means bearing responsibility for the doings of his subordinates; responsibility of the doings of a leader is inbuilt in his out comings. Thus a leader has to shoulder dual responsibility. Since interaction between a management and its employee's plays crucial role in the development of a company, the leadership should meticulously use the technological innovation and mechanisations. Mechanisations tend to reduce such interactions and a balance has necessarily to be maintained. Because, the cause of a decline can be forecast only through the feedback obtained from the employees and not the machines or computers. The inanimate machines and computers may either strike or blink or display a set of feedback already recorded in anticipation. Charles F.Knight of Emerson Electric1 stipulates certain traits of effective leaders. Of those some seven are noteworthy. They are: -- 1. Energetic involvement combined with perseverance. Knight feels this as the nucleus of the commitment to success. 2. Planning that sets priorities and resets priorities. Emerson Electric, he says convenes re planning sessions every year, since such resetting of priorities adaptable to circumstantial changes gives them discipline to ask more questions about development. 3. Being tough but fair. By the term tough he does not mean caprice. He feels people must be given allowance to fail and learn from such failure. Only when the failures fail to give lessons, a leader should think of a change. 4. Refraining from accepting half-baked info. To land on a good decision getting ample information that too in detail is a must. Shortcuts for getting basic information lead only to peril. The leadership must regard time consumption and hard work in connection with such data collection. 5. Motivating people of the organisation to be creative and think boldly. To achieve this creativity among the people of its company, Emerson encourages experimental and risky programmes like Strategic Investment Programme. SIP funds projects that their divisional managers think too risky or fear their internal budget going red. 6. Autonomy-cum-concentration. Knight suggests that skill must be aligned with most important aspects. While delegating responsibility to others, leaders are keen in vesting the same along with considerably allowable freedom to their workforce. 7. And possessing Fun. Knight's view of Fun and his experiences are really astonishing. Involvement in variable-speed motors funded by SIP had several turn's and technical hurdles. The company had many failures and had spent around $100 million at one point. But still he enjoys the Fun of it, which evinces a philosophically huge image of him. Culture of indecision must be conquered only through free and fair dialogue system. Rigidity shown by the CEO's is helpless. Tensions may come up during decisive dialogues but they are subsequently resolved if they are allowed to be aired among every relevant viewpoint. Instead of convening periodical performance 'review', some strange mechanisms as adopted by General Electric would give sufficient strength for meeting the challenge of turnaround and get the crisis alleviated. Jack Welch, the CEO of General Electric is known for his integrity in the development of the company. The Corporative Executive Council meeting is convened every four months. The other two important meetings are annual leadership and organisational reviews termed C and annual strategy reviews that are named S-1 and S -2 respectively. The development and progress achieved by the unit heads are reflected in S-1 meeting, which is convened two months after C session. The CEO and the Chief finance Officer of the Company individually and personally meet the unit heads and discuss the strategy for the ensuing three years. Mr. Welch then subjects the evolved strategies to heavy debate and scrutiny. The informal and decisive dialogues in the sessions some times resemble verbal combat. But as the CEO uses this opportunity to coach his people in the field of both trade and human resources, everybody while coming out of the hall are aware of each individual's responsibility and are enlightened the way in which they ought to wend with. The S-2 meetings held in November deal with operational priorities and resource allocations. All the three meetings in their entirety fasten the goals and performance of each unit. The able CEO thus shapes the entire organisational culture in the required form. (Ram Charan, 2001). However, since the change of organisation culture and the culture renewal are time consuming and dialectical in nature, the new administration has to take immediate and hard steps to get the organisation cope with the changes imposed. In ABC Consulting, Australia, the powers of operational and functional decision-making are vested with the project teams. The toiling of the teams in going through a brainstorming session to come up with best solution is best regarded and are empowered to exercise initiatives and imaginations. (Ronald W. Edwards, Pooja Kumar and Ruby Ranjan, 2002) Project Manager Inc., Charloutte qualifies the failure of a project mainly by Missed deadlines, Missed deliverables and Cost overruns. Karen Mclsaac,PMP ( 2006 ) devised a set of six step procedure to better turnaround. This firm does not consider the change of top-level management and removal or replacement of middle level management. As they themselves render turnaround services for their clients, they execute the job of turnaround with their team of people and create a rejuvenated atmosphere among the employees of the firm. The first step IDENTIFY locates the nucleus of the crisis. Mostly politics, process and people are the main three areas where the fault falls. Imaginary expectations by the proprietors, disagreement over the cost and length of the project among themselves and lack of governance fall under the category of politics. Improper documentation, missed milestones, closing of the projects before completion of the delivery and deferring deliverables to further project phases fall under the class of process. Vague expectations of the stakeholders and unfocussed struggling by the project team that gets itself entrapped in unwanted trivial issues come under the group of people. The second step ASSESS reaches the actual failure points. While looking for both the surface failure points and hidden failure points the entire cross functional areas of the project are accounted for. The assessment team immediately indulges in individual dialogues with the stakeholders to bring out the hidden point of failure. The third step RESTRUCTURE evolves a restructuring strategy to move forward. Almost in all failures the blame is laid on technicalities, which are just symptoms and not the causes. Since generally failure is identified in the middle of the project a best restructuring strategy encompasses the removal of redundant and unwanted practices hitherto followed. In this phase of restructuring the Project Manager Inc, team is keen in imparting the knowledge base to the executives that the best of every attempt can be obtained from their own team member and not from outside. This, they believe that their clients become self-reliant and not dependent on any agency including Project Manager Inc. The fourth step RESTART plunges into the action plan envisaged in the restructuring phase. Misaligned cross-functional agendas of the owners of the company are carefully realigned in right path accommodating them in the process. The fifth step EXECUTE presses the project manager who has so far been employed in the previous phases to implement the restructuring strategies and restarting function. The sixth and last step OPTIMIZE is usually carried out by the Project Manager Inc. itself. The firm prepares a complete analysis report wherein the potential risks and financial impacts are identified. These recommendations are purported to take precautious measures by the management in its future activities. 2.3 PARTICIPATION OF EMPLOYEES IN THE TURNAROUND Employees often know how to improve performance and reduce costs more intelligently than their bosses do. This is because they are encountering the day-to-day obstacles for which they are finding immediate solutions to get them moved away from their way making their routine smooth. Yet they are rarely given a chance to do anything in this direction. No one asks for his or her ideas. Ego of cadre and status blocks the bosses to think in this. Invariably the employees had penetrating insight into the issues that their companies faced and good ideas about how to address them. Many a managers failed to use these free and willing resources. Alan Robinson asked how Japanese companies managed higher productivity. Through professional contacts and some other viable means, he found that some 20 companies, which he was able to reach, put a great deal of importance and emphasis on tapping ideas, however small it may be, from their employees of all levels periodically in quick succession. This he found was a practice virtually overlooked by the western companies in most cases. Everyday common sense ideas to improve the customer experiences got from the employees helped much in saving a little time or money. Accumulated ideas of this category directed towards achieving sometimes the greatest goal. The Japan Management Consulting2 Services emphasises on the building of a business vision to bring the strategy to all the company employees in an appealing manner. The consultancy is of the view that many turnaround endeavours are facing failure only because of the neglect in this part of strategy phase. Suppression of the ideas from the employees in a company rather than promoting them to excite better ideas makes the firm sick. The result of squandering the employees' ideas is avoidable poor performance making the employees lose interest in their jobs and dropping trust off their management. On the part of the managers, they are loaded with responsibilities to produce more with less resources and dejected workers. This makes them to extract work from the employees only by intimidation worsening the scene further. They do not have time to think of improving the organisation's capabilities, which are well placed before their blind eyes in the shape of employees' ideas. Centralised power flow system makes the manager machine-like and work hard simply on the instructions, rules and guidelines placed for them to carry out. Although they are also capable of smelling some derailment in the course of the company's activities, they do not resort to report the danger to their bosses due to the resistance in the beurocratic red tape. This being the plight of the managers, the middle and lower level workers are placed in a position to produce only on the already laid track and are made dumb even though they virtually foresee some derailment. Employees' ideas look like a few coins found on the wayside for many top brasses. They do not realise the value of it. Although some big bosses are flabbergasted to see that accumulated ideas from their own employees can work out to achieve even wonders, many of them vacillate to make use of them in an imaginary fear of loosing their dignity and respect. Ray Winter, the then president of BIC corporation observed, " this system has taught my managers real respect for their employees. My managers have learned that their employees can make them look awfully good, if only let them." Ideas are free has invented many breakthrough in harnessing the employees ideas. A few instances in their course of service and research are note worthy. When accounting for the oil purchase at the Deutch Post, the German Post office, a staff found that the drivers were filling oil at the roadside service stations for the trucks at a cost of around $8.5 per litre. After some research he found that if the Deutch Post could procure bulk purchase the cost would drastically be reduced to th of the retail purchases done by the drivers. On implementation of this idea, several diesel trucks were on the road infusing more enthusiasm in the diesel vendors who were ready to install the bulk tanks for free. At Good Shepherd Services, a not-for-profit health care nursing home, a group of employees found that the dementia patients often see areas of black flooring as holes and avoid them. Idea that immediately flared up in their mind was to simply paint the floor black in front of the doorways in the place of using alarm bracelets or restraints to keep from wandering to unsafe areas. This idea has considerably reduced the patients stress and saved time for the staff to respond to alarms that were brought to near nil. At Massachusetts Department of Correction facility, a guard proposed the use of digital cameras to take pictures of the new inmates. This saved $56,000 in the first year in film alone, which was the previous mode of taking photographs. The ingenuity of employees brings great changes in many places. Just by changing or realigning the pattern of working style they lead towards much savings. A worker in Florida branch of a national temporary placement firm realised that 70% of the applicants recommended by the private vendors, who conducted preliminary literacy, numeric capability and computer skill tests on the applicants, failed in drug test and criminal background check up carried out subsequently. Her idea of just reversing the test processes saved huge on the expenditure towards payment to the private vendors for preliminary literacy tests that were hitherto done for merely for thronging batch of ineligible candidates. Companies that are in glorious position throughout the world that keep crisis and distress away are enjoying the benefits of good idea system especially from the employees' idea bank. A view of the simple statistics of the following companies makes it clear. 1. Boardroom Inc., a Connecticut publisher received 104 ideas per employee in 2002 to boost its sales seven times greater than an ordinary publisher. 2. Richer Sounds of U.K , many time listed in Guinness Book of World Records gets 20 ideas per employee in a year and occupies a niche of the highest sales per square foot of any retailer in the world. 3. Milliken, a global fabric and speciality chemicals company averaged a 110 ideas per employee in 2002 and won both Malcom Balridge National Quality Award ( MBNQA ) and European Quality Award. 4. Dubal, a major aluminium company in U.A.E, received more than nine ideas per employee in a year to occupy the position of one of the lowest-cost producers of aluminium in the entire world. 5. U.S divisions of the two companies of Dana Corporation, a global company have won MBNQA by harnessing two ideas per employee per month and exceeding four in special circumstances. 3. RECENT CHANGES IN CORPORATE CULTURE Restructurings of distressed companies in Germany using private equity have gained little attention thus far, due to asymmetric information between (potential) equity holders and the management of companies, as well as an increasing influence of debt holders in severe company crises. This also explains the low portion of turnaround financings of 1.1% (26.4 mn [euro]) in 2003, as estimated by the German Private Equity and Venture Capital Association (BVK), despite growing insolvencies and company distress (2002: 2.9%). However, in the recent past there has been a noticeable trend of traditional buyout funds buying distressed companies. (Kucher, Andreas , 2004) Professor Stuart Gilson provides a market survey of distressed investing, exploring such nuances as pre-packaged bankruptcy, "bond mail" (gaining control of a class of debt to block approval of a reorganization plan), exit strategies, tax issues, and disqualification of votes on a bankruptcy reorganization plan. ( Stuart Gilson, 2001) Vulture investments are the effects of change in corporate culture. Bargain at the right price was the convention in the previous decades. Late Max Heine, made his grubstake by investing in railroad bonds during the Great Depression and however was riding the wave of prosperity in World War II . But Harvard Business School has now approved of vulture investment as a way of making money. According to data from the Altman New York University Salomon Center, outstanding distressed debt at year-end 2002 was approximately $900 billion. Ronald O'Hanley, vice chairman and president of its institutional asset management group, said Pittsburgh-based Mellon "sees growing opportunities in this area because the overall size of the distressed debt market has tripled in the last three years." The erosion of public trust and tumbling stock prices have resulted in the loss of millions in retirement funds, pension plans, and shareholder value. However, indications are that the corporate world may be taking a fresh look at the business value of integrity and a return to professionalism. ( Peter L Tourtellot) CONCLUSION A company in crisis that looks forward for restructuring has to manage numerous issues successfully of which labour and employment law are the big monsters in the murk. If these issues are not addressed in time and in proper manner, serious long-term eventualities are to be met with. Implementation of at least the primary level ' employees idea bank' will reduce the hardship. In addition to management changes, financial disciplines and reorganisation plans the new administration has to focus more on giving manager incentives since they are the bridge between the final grade workers and the executives. Since bringing changes in an organisation is not a job to be accomplished overnight, shaping a culture in the required form has necessarily to be carried out in any firm irrespective of its development or distress so that distress or crisis that erupt in a company can be left to be reckoned purely fiscal and not cultural. * * * Reference lists--- Dr. James F Smith, "The Economic Environment for Successful Turnarounds for the Next Two Years" in Journal Turnaround Management edited by James E Schrager Jonah Aiyabei, 2000, "Financial distress: Theory, Measurement &Consequence" A Seminar Paper Presented at Catholic University of Eastern Africa, department of Commerce, The Eastern Africa journal of Humanities & Sciences, Vol I, No. 1,2002 Kucher, Andreas B , Meitner Matthias, 2004, " Private equities for distressed companies in Germany" in Journal of Private Equity Peter L Tourtellot, " The Crisis in Corporate Governance: Call for a Return to Professionalism" in Turnaround Management: A Guide to Corporate Restructuring, edited by James E Schrager (http://www.iijournals.com/JPE/DEFAULT.ASPPage=52&job=Tableofcontents&ProductID=2345&sourceCode=2340&Return=51) Ram Charan, 2001, " What the CEO Wants You to Know: How Your Company Really Works", Crown Business Steven R Storm, 2005, " Hedge Funds Plays in the Distressed Arena" (http://www.turnaround.org/print/articles.aspobjectID=5436) Stuart Gilson, 2001, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups", John Wiley & Sons, Inc. Tina D Carpenter, M.G.Fennema, Philip Z, Fretwell and William ahillison, 2004, "A changing Corporate culture" ( http://www.aicpa.org ) Read More