Management-led correction

Management-led correction as the first stage in the timeline of financial distress

Management-led correction takes place outside the insolvency and business rescue law framework. 

Management-led correction is achieved through business transformation or turnaround action to address emerging problems before creditors become concerned.

Banks may be informed of turnaround action as a matter or courtesy, or may be involved in friendly financial restructuring. 

Trade creditors may participate in a supply chain initiative.  However, since creditors are not at risk they don't have power in turnaround decision-making.

These turnarounds typically occur at:

  • Companies where early warning signals of impending distress are recognised early enough and acted upon.
  • Companies that are underperforming but not in financial distress.
  • Distressed companies supported by benevolent shareholders - e.g. distressed subsidiaries of strong groups which support management-led correction financially.
  • Organisations in the public sector. 

 

Timeline of financial distress

 

View the position of management-led correction in the timeline of financial distress.

 

 

 

Click on Timeline of financial distress table for a popup table explaining the four stages.

 

Restoration of corporate value

 

View the restoration of corporate value at different levels of company health.

Triggering and managing management-led correction

Triggering is normally by a concerned Board of Directors. 

A Board may exert pressure on management to improve performance, or replace management with turnaround-oriented managers who is better equipped to do so.

In practice, this type of turnaround is led by any of the following:

  • Management, incumbent or new.
  • Management supported by consultants, either turnaround consultants or corporate renewal / business transformation consultants.
  • Professional turnaround managers.
  • Professional turnaround managers supported by turnaround / corporate renewal / business transformation consultants.

Further characteristics of management-led correction

Turnaround practitioners tend to be management-oriented (if the focus is on fixing the business) or accounting-oriented (if the emphasis is on financial restructuring). 

The most important stakeholders are normally shareholders (Board of Directors), management, and employees.

The full scope of turnaround practice in terms of driving a turnaround through its natural stages and applying all the components of the turnaround plan are applicable. 

However, since there may be less financial pressure, crisis stabilisation remedies may not be that prominent. 

If the company is mildly rather than severely underperforming, the process is also known as a business transformation or corporate renewal rather than a company turnaround. 

In the SA context, though, term "business transformation" is easily confused with political transformation (although the two may take place at the same time).

Most management-led correction type turnaround action occurs behind the scenes. 

With the notable exception of listed company turnarounds, these turnarounds largely escape the attention of the financial press. 

Press coverage of listed company turnarounds normally amounts to reporting on turnaround results, company press releases, and profiling of successful executives and consultants. 

Management-led correction turnarounds in the news are listed in the box on the right.

Benefits of management-led correction

Benefits to directors and management

  • Shareholder-led turnaround has the highest success rate and the lowest cost of all processes applied to troubled companies.
  • Directors and management remain in charge of the agenda.

Benefits to creditors

  • The action taken by management automatically protects the exposure of creditors without the need for creditors to intervene or to invoke a formal insolvency process.

Failure of management to react timeously and successfully to early warning signals of distress normally leads to intervention by creditors (normally banks) - see informal creditor workout (next page) as the second stage in the timeline of financial distress.


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Management-led corrections in the news

  • AdvTech (Frank Thomson)
  • AST (John Miller)
  • Beige
  • Brait (Anthony Ball)
  • Bridgestone Firestone Maxiprest
  • Bytes (Peter Redshaw)
  • Command
  • Cullinan
  • Didata (Brett Dawson)
  • Durban Roodepoort Deep
  • Don Group (Thabiso Thlelai)
  • Edgars (Stephen Ross)
  • Elexir
  • Frontrange
  • Glodina Textiles (Claas Daun)
  • Idion
  • IST (Lindsay Robertson)
  • Karoo Water (Mathias Bode/Christoph Miller)
  • Kingco (Tony Cotterell/Ivan Nitsche)
  • Kolosus (Claas Daun/Paul Schouten)
  • Mercantile Lisbon
  • Nedcor (Tom Boardman)
  • OneLogix
  • Pals
  • Prism
  • Rainbow Chicken
  • Sage Group
  • Sallies (Lindsay Robertson)
  • Sanlam (Johan van Zyl)
  • Sekunjalo
  • Sita (Mavuso Msimang)
  • SA Post Office (effected by Maanda Manyetshe, who has since moved on to MTN)
  • Spoornet (Dolly Mokgatle)
  • Transnet (Maria Ramos)
  • Venter Leisure and Commercial Trailers
  • Wispeco (effected by Roland Rohrs, who has since moved on to Dorbyl)
  • Zaptronics (Gandalf Trust)

Note: Some of the management-led correction turnarounds listed here are in fact informal creditor workouts, but if agreements with their bankers are not explicitly mentioned in the press, they are placed here instead.