Bar Bulletin

Bar Bulletin

The Mind of a Troubled Company CEO: Why Denial Is Not a River in Egypt

April 2022 Bar Bulletin

By Bill Lawrence

Not a day goes by it seems that we aren’t reading headlines that highlight companies in trouble or in some form of distress. Their challenges can include multiple layoffs, significant financial losses, or filing bankruptcy for the first — and, sometimes, even a second time.

Experienced business attorneys know that companies can encounter issues that are unexpected or happen so quickly that the CEO cannot react quickly enough to correct the problem. However, in many cases, the problems or circumstances that arise could have been anticipated or could have been corrected before the company suffered significant operational or financial damage. So, the key question that most people will ask, usually after the fact, is how the company could have proactively mitigated the issues to minimize the impact and consequences to others. The answer frequently lies in understanding the mindset of the CEO.

In our practice, we have encountered many situations where a CEO either did not anticipate an operational problem that had devastating consequences on the health of the business, or literally did not have the capability to foresee the problem and/or develop a plan to mitigate it. We find that chief executives of troubled companies typically share one or more traits that prevent them from proactively addressing the problem.

One common theme is Paralysis by Analysis, where the business continues to crunch numbers for extended periods of time, hoping to find a different answer to their problems. The CEO will ask for detailed analyses they hope will lead them to a solution. If they don’t find an answer immediately, they continue to ask for more analysis until it’s too late to change strategy or tactics necessary to overcome their challenges. This type of CEO is typically data-
driven and fails to dig into the operational issues to find the source of the problem that resulted in the company’s decline.

We also have encountered founder or inventor CEO types that have started a business with a great idea and managed it through its early stages. They often experience early success in growing the business. However, there is a point where the size, complexity and rate of growth exceeds their level of experience or competence to cope with the challenges that are encountered.

Instead of acknowledging their own limitations, the CEO continues to attempt to manage the company the same way they have done in the past, or, worse, hide in the office behind a closed door as the business continues to decline. The inability to foresee the factors that produced these challenges and bring in experienced executives to help navigate them — which could include a new, highly experienced CEO — typically results in disastrous outcomes.

Confidence is usually a good trait. However, when that level of confidence results in the leader only believing in their own thought processes and not being open to the opinions or thoughts of others, businesses often incur significant operating problems.

This type of behavior may not be prevalent at the beginning. As the CEO gains more experience in the job, however, they come to believe they don’t need to listen to subordinates, or worse, do not need to listen to advice of the board or counsel. The consequence of this behavior sets up a scenario where the CEO is operating in a world of their own and will likely not see the warning signs that the business may be on a downward spiral and act to make the changes required to turn it around.

There are also CEOs we like to characterize as “putting it off for a rainy day.” This type of behavior is typically driven by lack of experience or confidence to manage the business proactively. When an operating problem occurs, such as a decline in revenue or an excessive increase in expense, they take the attitude that the problem will correct itself and get better without making significant changes. Often the problem goes on for many months; however, the CEO feels that by waiting one more month the business will improve. Improvements usually do not happen without some type of intervention and as a result the company suffers, or worse, completely fails. As we often say, “Hope is not a Strategy!”

Many businesses have checks and balances to monitor CEO performance and are able to recommend alternative tactics or strategies when these types of behaviors are identified. The first line of defense is the company’s board of directors, and it’s important for them to identify this type of behavior early in the cycle.

Lenders can also be an important check on a CEO’s actions. Making sure they closely monitor the overall performance of companies in their portfolio on a quarterly basis is an important step. Having regular conversations with the CEO about the business and its underlying drivers, as well as how the company is performing against projections, can be important in understanding if the CEO can adequately explain the financial variances and has a plan to get the business back on track.

Many of the traits that have been described above can be rectified by coaching the CEO or replacing them outright if the operating problems are not effectively addressed. It is also important to ask for advice from an advisor with experience in dealing with this type of personality. Our advice: Get a second opinion, before it’s too late. 

Bill Lawrence is a Principal at Seattle-based restructuring and corporate advisory firm Revitalization Partners. He and his partners write regularly about the operational and financial challenges companies face in successfully restructuring companies. Learn more in the firm’s blog as well as its e-book, “Insights to Grow, Build or Save Your Business!”

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