Mediating Out of Financial Crisis: Negation with an "Open Book" Policy Can Mean the Difference Between Financial Stability and Bankruptcy

We�ve all experienced conflict in our lives, from schoolyard spats to the power play with the ambitious coworker. But when a company experiences a financial crisis, the conflicts that erupt can mean corporate extinction.

According to Dan Dooley, partner with corporate turnaround consultancy Morris Anderson and Associates, negotiation between all business parties is especially important when a company is in financial crisis. �Fundamentally, he says, �a workout is a multi-layered negotiation, because you�ve got multiple stakeholders, including senior debt, meaning the bank; the people who own the company, often many layers of equity owners; the people who manage the company, and on top of that usually unsecured or trade creditors.

�What often happens during crisis is the CFO or other C-level manager is trying to contain the news that the company�s in distress,� he says. �But the funny thing is that the vendors, creditors, employees and bankers already sense the distress.Hiding the trouble is the wrong thing to do�it only damages management�s credibility.�

So what�s the first step Dr. Beverly Potter, author of From Conflict to Cooperation: How to Mediate a Dispute, recommends that the mediation process begin with information gathering. All parties involved need to openly discuss the issues one at a time. For management at a financially distressed company, this means looking beyond the numbers to the consequences.

Fellow Morris Anderson and Associates Partner Jim Ross explains it. �Bad news is ok if you understand the facts and have a realistic plan to fix things. By the time a company is considered distressed, lenders are usually frustrated by the lack of information�credible information�dribbling out of the executive wing.So we do a tremendous amount of �hand holding� during our engagements: talking to the parties regularly�many times a day if needed. Oftentimes, lenders who�ve been kept in the dark by a management team have found out too late that the situation is worse than suspected�their financial risk is far greater than thought.�

According to Dooley, there�s definitely a need for financial people who have strong analytical or technical skills to understand the importance of communication, especially in a financially troubled situation. �In many of the companies we deal with, the CFOs have not been overly helpful in fixing things,� he says. �And this is often more an issue of their people skills.

�What we often see is a dominant CEO who tells the CFO what to do, under the theory that it�s �his� company and he can do whatever he wants. The problem is that many other people are depending on that company as well�it�s the CFO�s company, the bank�s company, the vendor�s company, the customer�s company.

�We advise companies looking for a CFO to look beyond the education, certification and technical skills to their people skills�their fortitude. To be able to stand up for what the right economic move may be, regardless of the personal risk involved. It�s that fortitude to assume the role of the �loyal opposition� and debate issues with the CEO, peers and owners.�

Ross agrees. �When we see CFOs in troubled companies, they�re often the least powerful manager in the organization�they just do what they�re told, and it�s a prescription for disaster.

�Negotiation with stakeholders at the outset buys company management enough time to find out where the problems are and what the solutions may be,� he says. �More time also means you can usually find a way to make the company stronger�to bake a bigger pie. �So for the CFO, it�s most important to provide lenders and other stakeholders as much information as quickly as possible. Try to anticipate what they need or ask for. Most lenders are in large bureaucracies�if their deals go bad, they get skewered by their bosses and their job is on the line.�

Adds Dooley, �That�s why for turnaround consultants like us, negotiation is paramount. We have to convince these parties, which are at economic risk, that it�s worthwhile to sit tight. We have to convince the employee not to quit; the customer, not to go to the competition; the banker, not to demand debt paydown or foreclosure; and the supplier, not to stop at least C.O.D.-paid goods and services.

�If anyone moves quickly, it�s to the disadvantage of everyone else,� he says, �and the company may go into a freefall, leading to an unplanned bankruptcy and the destruction of value.�

But open and honest communication is often the only road to a solution. �And that�s hard,� Dooley says, �when we�re all taught to be polite and politically correct. Some of the facts are unpleasant to share and discuss. So this is the time for the management team to let everyone know that it�s going to take some time to rebuild the company.�

So how does the accountant step outside the financial analysis and overcome the fear of communicating bad news It�s all about focus. According to Potter, focusing on one goal is the objective at this stage: to find a mutually agreeable action plan.

�Of course, during a financial crisis, everyone is angry�they�ve invested time, effort and money, and they may get less back than they bargained for,� says Ross. �But if we focus on an agreeable plan, we can get past the anger.�

And what if it�s a family-owned business �We�ve got to all work together to convince him to do things that may be distasteful,� admits Dooley. �Laying off long-term employees, shutting down a plant that�s been in his family�s business since the beginning, reducing salaries or perks, stopping payment to vendors he golfs with�again, the financial manager needs that fortitude!�

Dr. Potter reminds her readers that sometimes it�s necessary to accept small changes�a process Dooley and Ross know very well. �Sometimes you don�t get everything you want,� says Dooley, �but making gradual progress is better than nothing.�

Ross sums it up. �In this day and age, one person�a CEO, a consultant�can�t come in and be heavy-handed and dictate what needs to be done. Business is simply too complicated. It takes a lot of smart minds working together�and that definitely includes the financial experts.�