As regular readers will recall, Moving Tribes remains free for you to read (and circulate to colleagues) thanks to occasional and generous partnership with businesses that share our interest in the retail and hospitality sectors.
I’m delighted, then, to begin such a partnership with the team at Howard Kennedy, a full service law firm based in London with rich experience advising businesses in all sorts of areas. As always, all posts from Moving Tribes (and therefore any errors!) remain mine, but from time to time this is a great opportunity to tap into the expertise of some of HK’s team. I’m especially pleased to be starting with a discussion with Vernon Dennis, who leads the HK Business Advisory team.
After a year of subdued consumer demand and with the economy and consumer confidence still looking weak, I know there are many leadership teams worried about what another year of poor trading might mean for them, and so I took the opportunity to ask Vernon some of the questions I know many of those teams want answers to.
IS: What do you say to management teams struggling to navigate difficult trading?
VSD: The reason our team is called Business Advisory is because we provide advice in wide variety of situations, helping businesses face challenges and navigating change. The use of the ‘big tools’ of insolvency and restructuring is only one aspect of how the fortunes of a businesses can be turned around . Key to success is early consideration of the interests of the various business stakeholders, the shareholders, creditors, employees, suppliers, landlords, the business’s wider networks and of course its customers.
That’s a difficult thing for teams to do, however. It requires, for a start, some admission of failure - that something has gone wrong in the business or a plan hasn’t worked. It is human nature to want to deny that and soldier on, pursuing the ‘sunk cost fallacy’ but brave Boards are the ones which recognise when things are going off track early. If they do, there are plenty of ways we can help them long before an insolvency process is the only option.
IS: The problem is that almost every business in the retail or hospitality space could build a ‘worst case’ forecast for the next year that saw them fail - if you do that too early, aren’t you in danger of creating a self-fulfilling prophecy?
VSD: Yes, and that’s why judgement is required. Boards have a responsibility to manage the business in the interests of their various stakeholders including their creditors. That doesn’t mean shutting up shop at the first sign of trouble - often the best thing to do for every stakeholder is to invest, evolve and continue to run the business.
What respecting the interests of those stakeholders does mean, though, is having a careful eye on how things are going, acting at all times in good faith, with rational and justifiable decision making, alert to risks and the impact of those risks on all stakeholders. Good corporate governance is fundamental and will ensure the right balance of optimism and caution. A willingness to act early and decisively is necessary.
IS: What do you think business leaders reading this should know, that perhaps they don’t?
VSD: If you have not been through a painful restructuring before, there can be a lot of bewildering terminology and I’m often surprised to find directors having to make big decisions about the future of the business with very little background knowledge of what is involved in turnaround activities.
That’s why I recommend to Boards that they try to ensure that they have a mix of skills and experiences around the table so that there is at least someone there with the knowledge they need to draw on when times are tough. It’s also why I suggest businesses are careful about who they draw advice from. There is an old adage that if you only have a hammer, everything looks like a nail, and if your advisors only really know about the use of insolvency processes, there is a danger you’ll end up going down that road too early.
IS: A lot of people reading this may see insolvencies, CVAs, pre-pack administrations and other restructuring processes through the cynical lens that they are just business owners absolving themselves from debts so that they can have another go. How do you react to that?
VSD: I think what it is easy to miss from the outside of these processes is that they are very hard - not only practically, but also emotionally. Putting a business through an administration or a CVA for example involves intense negotiations with lots of parties, and Boards have to make some very careful judgements to ensure that they are genuinely balancing the needs of different stakeholder groups properly.
I do understand the concern that these processes can be misused, of course, but in practice Boards are under ever greater scrutiny and failure to initiate a process in a timely manner can be ruinous. The two recent record breaking court awards against BHS directors rest on findings that by failing to have proper regard to the interests of creditors and continuing to trade the directors were in breach of their duties owed to the company (and its creditors). This finding of 'misfeasant trading' led to personal liability for the additional loss caused to creditors by its continued trading after a point that it was in the interests of the creditors for BHS to have entered into an insolvency process. This finding of ‘misfeasance’ effectively sets personal liability at a date earlier than the date of ‘wrongful trading’ (i.e. when insolvent liquidation is inevitable); a concept with which most directors will be familiar.
It also should not go without saying that, almost by definition the companies going through these kinds of business rescue processes would have failed and seen the business broken up, with consequent loss of jobs and enterprise value for stakeholders. We return to a question of what is the appropriate balance between the various stakeholders.
IS: Finally, if you could get the new government to change the laws around business restructuring, what changes would you make?
VSD: Firstly, I think we should be careful about the current trend of criminalising lots of things - in a recent count, we found 34 acts of Parliament that created criminal penalties for directors. Whilst it sounds attractive to outlaw something we don’t like in that way, it can have all sorts of negative consequences. As a counterbalance to that, though, I do think the UK should make greater use of disqualification of directors where they have not conducted themselves appropriately.
Secondly, my own view is that we need a lighter touch administration process in the UK - perhaps one which is administered directly by boards rather than a third party administrator, to give them time to restructure and save their business. Something with the same spirit as the Chapter 11 process in the US, but with a lighter touch.
Fundamentally, what I’d like to see from businesses, professional advisers and Government alike is more focus on business ‘rescue’. Even a company in real financial difficultly often has a good business inside struggling to get out, and we are a stronger economy if we are able to reinvent businesses when they need it.
IS - thanks, Vernon, I really appreciate all of that.
PS:
If the topics we’ve discussed here have struck a chord with you, feel free to leave a comment here and as ever I’d love you to share this post with your colleagues. If you’d like to follow up some more with Vernon, he can be reached at vernon.dennis@howardkennedy.com or via LinkedIn.