Pride and Lack of Governance: A Founder’s Deadly Combination Part 2

By Prof. Enrique Soriano

Depending on the kind of business environment, a boom covers many sins, and a bust uncovers many weaknesses. This second article will highlight the visible symptoms of internal wrongdoing, mismanagement, and failed leadership by a very controlling founder, armed with a conviction bias (a mindset where he believes in an idea so strongly that he disregards other ideas) and hubris (excessive pride) that he alone has the ability to create the organizational vision, formulate policies and implement them. As illustrated in last week’s column, the founder’s actions led to the company’s spectacular downfall and insolvency.

In broad strokes, the failure of the company to break free from the mess was caused by two major events happening all at the same time– an external economic crisis triggered by the C-19 pandemic and an internal damaging event due to management’s failure to recognize the red flags when issues were starting to emerge even before C-19 struck.

In a series of simultaneous interventions (HR, audit, operations), we discovered that company A was highly leveraged, and its debt-to-equity (D/E) ratio was more than twice the industry average. For our non-finance readers, a high D/E ratio is associated with high risk to lenders and investors. It means that a company has financed a larger amount of its growth through borrowing. As we initiated our intervention, my team started to uncover many symptoms of gross mismanagement.

The real source of this blatant disregard for controls was pointed to the founder’s failed leadership, the misalignment between ownership (stockholders) and management (professionals), the shallow executive bench, and the blurry vision, mission and values of the company. All these elements proved to be the deathblow for company A as they spiraled deeper into the red.

The Internal and Predictable Risks 

For our readers’ reference and key takeaways, I am sharing the primary reasons that brought this troubled organization to its knees. Issues that may have been quite impossible to detect if you are an outsider looking in.

• Founder-centric decision-making/one-man rule
• Passive board comprising indifferent family members
• Ineffective Management team as they acted as order takers
• Departmental “kingdoms” resulting to power struggles
• Weak financial controls and audit system
• Compromised ratios from current, debt to equity, cash to debt, etc
• Poor construction quality/ineffective customer service group
• Zero cost accounting/wrong pricing policy
• Demotivated workforce/high employee turnover rate
• No accountability

These are some of the red flags that investors, creditors and regulators must learn from and be wary of, especially now as we are once again expecting a disruptive crisis in the form of a post-pandemic world that is due to make a hard landing early next year. Inflationary pressures are starting to dampen consumer confidence.

Founder and CEO as a One-Man Army 

Our research discovered that the founder’s go-to mindset was primarily grounded on top lines (sales) and nothing else. No doubt, he was a visionary, but his narrow outlook alienated him from other critical areas of corporate management. As we dug deeper in the course of our investigation, we uncovered written memos and urgent requests made by his finance manager to engage the services of a cost management team that will provide oversight on projects being planned for construction, which the founder simply set aside and ignored.

In the founder’s mind, the scale and velocity would more than make up for the project’s cost and vague margins. Being a visionary, he spent most of his time meeting the heads of sales and design divisions while the company’s financial position was showing signs of deteriorating. He would always insist that he was the only person who could come up with great ideas to fuel sales. To keep their jobs, executives simply kowtowed to his wishes. Nobody dared disagree with his ideas.

To be continued…