The Perils Of Turning A Blind Eye

What we risk when we don't confront obvious problems.

Perhaps one of these scenarios will resonate with you.

Family controlled While still in high school, the founder’s son decided to pursue a career dramatically different from the family business and he did just that, first acquiring the academic credentials and then entering the job market some 400 miles from home.  The work was fulfilling but the compensation was not and with one child and another on the way, the son soon returned ‘home’ to work in his father’s business. The first few years were a learning experience, 

Gradually overcome by his inspiration that he should be running the business, the son pressed hard, first for an executive title, then for his father’s BMW in exchange for his own Toyota and ultimately, for his father’s office.  The father’s love masked what was happening. Eventually, several key executives left, one to work for a competitor, profits became losses and the business was sold for half the value it commanded ten years’ prior.  

Closely controlled A chief operating officer had run the closely controlled business for more than 18 years.  He was essentially the de facto president, and even though there was a named CEO, he performed those duties as well.  He had a record of continuous growth and profitability. Over time, the company’s handful of shareholders yielded all control to the COO, essentially disconnecting from the business having been ‘sold’ by his record of results.

And then…the business was disrupted by a dynamic change in market conditions.  A regimented management style that worked so well in the past no longer got the same results.  Even so, the COO kept doing it harder! The disconnected shareholders were not able to contribute and, too late, stopped trusting that ‘it will come back.’  New management with new skills was brought in but the clock had run out. The business was sold in distress.

Public company A flamboyant president of a manufacturing subsidiary produced modest growth in revenues year after year and profits that grew disproportionately faster.  The performance was personally worth it; his defined bonus plan payout became more lucrative with each year that passed. He was happy, senior management was happy and the shareholder reports frequently featured the subsidiary’s strength.

To some not connected to the subsidiary, something didn’t seem right.  Their focus turned to inventory. It had tripled over the course of three years but revenues had not done the same.  A subsequent special audit showed it had been grossly overpriced to mask manufacturing losses and that the subsidiary’s controller, at the president’s direction, had supported the practice.  Both were fired and the parent company took a $1millon+ write-off. 

Family controlled A son, well-educated and well trained in the family business was appointed president as his father moved towards retirement.  The son’s vision was to expand the enterprise well beyond its regional footprint and he began doing so through multiple, capital intensive initiatives.  From the sidelines the father had concerns but when he raised them, his son pushed back and the father would retreat.

It took just over two years for the vise to close.  The business became cash constrained and couldn’t support its expanded operations; its lender lost confidence in the son, capped the credit line and then pushed the company into work out.  The father came back in, did what he could to right the ship and rebuild the lender’s confidence but both failed at both initiatives. Chapter 11 followed ending with a discounted asset sale.

Closely controlled An executive was known to be curt, impolite, and even rude to some of the women in the organization and worse, he was also known to be inappropriately amorous to others in both word and action.  His reputation was well known in the ‘office’ but not by his supervisor (the president), a personal friend. Eventually a woman who was a target of his amorous approach shared her concerns with another executive.

By doing so the matter was brought to the board of directors which in turn then confronted the president.  The latter agreed to ‘talk to him.’ Months passed and another incident was reported – again from the president…’I’ll talk to him.’  This time the board wanted confirmation and when they didn’t get it, they acted on their own. The offending executive was encouraged to seek other employment and sometime thereafter, for other reasons, the president was relieved of duty.

Public company A division prided itself as having the best and brightest game changers in the industry to serve its blue chip customers.  These highly skilled individuals always solved the customer’s problem, were highly paid to do so and generated an enviable gross margin on almost every job they undertook. The problem was…they only did this about 40% of the time; the under absorption of their cost more than offset the margin they generated resulting in big losses.

This dilemma was obvious to the board of directors and meeting after meeting they prodded the CEO to remedy the problem, either by generating more revenue with the same staff or reducing the staff.  New customers didn’t come easy; the selling cycle was long and worse, the CEO seemed to have an affinity for each of his highly skilled game changers. He effectively refused to act and in time the board was forced to; the division was folded as was the CEO.

Bad optics. Turn a blind eye. Suffer the consequences.

Lesson learned.

Fred Engelfried
Fred Engelfried is Director/Chair of North Coast Holdings, Inc. and its subsidiary Lewis Tree Service, Inc. He has been a member of the board of directors of Lewis for over 20 years, and for 10 years prior to that worked with the company intermittently in various consulting capacities. He also is President of Market Sense Inc., a participative management firm that has served more than 100 regional clients over 35 years.