Context

Mr. Uranus, 65 years old, founded the company Sky SA 20 years ago. He was very successful and sold it to a large group, Solar System Ltd. Thanks to this operation, he decided to invest in a new project 3 years ago and became majority shareholder of Star Ltd., a company created with some friends of him and external investors. The goal was clearly defined from the start -doing an exit of Star Ltd on year 5. To achieve this goal, Mr. Uranus appointed a management team and took the chair of the board. Unfortunately, the company was not able to generate the expected profit that was defined in the initial business plan. Even worse, Star Ltd was showing a loss in the quarterly accounts and was entering in cash management issues. The process and timing of the exit was at stake. Mr. Uranus changed several times the management, brought turnaround managers but could not prevent himself to intervene into company’s daily operations. It was a challenge for the management team to deal with Mr. Uranus, as he still represented the majority of the equity and he claimed he controlled the company. Mr. Uranus is very charismatic and can easily disturb the work environment. This brings difficulties to lead the company for the management team. In addition, the old recipes that made the success of Mr. Uranus don’t seem to work anymore. The traditional and paternalist management style is not functioning well, and teams start to be demotivated.

Actions taken

Fortunately, the board consists of 5 minority shareholders and 1 independent board member in addition to the chairman. After quite a number of difficult meetings, the board, led by the influence of the independent board member, asked for an external due diligence of the company to better understand the roots of Star Ltd.’s bad performance. Conclusions were:

  • It is not clear who is running the company
  • There is a mix in the roles, duties and responsibilities between chairman and CEO and management team
  • There is no clear and nor proper delegation to the management
  • There are no board rules that describe clearly how the board should function and what should be delegated to the management
  • There is no clear indication of what a board matter is or not
  • There are various sets of financial reporting with different results eventually as the chairman intervene to obtain his personal reporting and modify some financial conclusions to have a better picture for the board
  • Financial KPIs are misleading- there is no cost accounting statements. The company does not understand what part of business is profitable.

Results

The board worked in collaboration with the management and the chairman to clearly define the responsibilities, decisions processes in the company’s daily activities. There was an open discussion with the chairman to either keep the company’s management at the board level or properly delegate to the management team. Looking at the responsibilities, duties, obligations and time needed, it was clear to the board and the chairman that the management had to be fully delegated. The company was further reorganized with a special focus on profitability. The CEO conducted some internal analysis, working with few key employees, to better understand the margins per product and per key customers. It took few weeks to eventually identify that some customers were not bringing profitable business to Star Ltd., the pricing was not right (has been set up by the head of sales who was fired few months ago). The CEO had to renegotiate with the related customers a new pricing or terminated the contract. A 3 pages documents was produced with the description of area of responsibilities, decision process and signature rights. A special highlight was made in this document on the relation between CEO and chairman. Few key board committees were constituted (Audit & Finance, HR, Strategic Partnerships). Star Ltd. reached profitability 1 year after the measures were taken and was sold to a large US conglomerate 24 months later.

Lesson learned

  • As long as there is unclarity in the roles and decisions process of a company, this will impact negatively the efficiency of the company and its financial results.
  • When writing the board rules and definition of responsibilities, it is key to avoid using standard documents. It is important to design documents that are based on a specific situation with the necessary details that matters to the company. These documents should be reviewed regularly as the situation changes. They have to be known by all involved parties.
  • It is important to understand the emotional attachment of a founder / major shareholder with his/her project and to recognise it. To counterbalance the emotions and address this type of issues, the board has to bring facts on the table and avoid being dragged into political debates. Helicopter view and factual analysis is the answer. Sometimes it may help to call for external help to have a “neutral” voice.
  • The presence of an independent board member in a friend/family environment can truly help to assess critical situation, especially when emotions are at stake.
  • The intrusiveness of a powerful chairperson and shareholder in company’s operations can be disturbing and potentially influence company’s performance. In most of the situations, the person is truly thinking it is the right thing to do and does not realize this can create major disturbances in the organisation.
  • When constituting a board, it is important to take personalities in account and to assess the capacity of the CEO to work with the chairperson of a company.
  • The board has to have the capacity to voice its opinion and defend the interest of the whole company, however it could hurt founders’ or major shareholders’ feeling. This requires courage.