Nov 19, 2017

The most frightening phrases you’ll hear in the boardroom

If you sit through a lot of board meetings, there are certain dread phrases that make your heart sink. Here I list some of the remarks that are a signal of trouble ahead.

“We tried that once before and it didn’t work.” Institutional memory can be a good thing. Too often, though, early experiments scar companies, so they lose the appetite to take risks and innovate. Times change, and what failed five years ago might succeed now. Timing is all: as technology and consumer behaviour shift, organisations need to examine their business models constantly, and never shut down ideas just because an earlier attempt was a flop.

“Let’s hire some consultants.” Often, bringing in outside experts is a device to cover up management shortcomings. Perhaps the executive team is lazy, or incapable of making hard decisions, or has run out of imagination. An external view can be useful, but normally, consultants concentrate on coming up with recommendations that involve commissioning more work from the same consultants.

“We put our prices up every year by 5%.” Most companies can increase their prices occasionally, but relentless rises will inevitably damage volumes and undermine value, which will encourage competitors to take market share. Charging customers more always has consequences.

“We deserve our bonuses even though we missed targets.” Executives manipulate incentive schemes a lot, and if the rules are badly drawn up, the board has little choice but to follow them. It seems to me that bonuses should not be paid if targets are undershot, except on rare occasions. Curiously, people who benefit from such rewards tend not to see it like that.

“I’m choosing to resign but I still want a payoff.” In too many companies, the culture of departure settlements has become so ingrained that all senior staff feel they deserve a severance package. Some type of payment may be legally necessary when people are dismissed or made redundant, but there should be no compensation for those who depart of their own volition.

“We need to change all our IT systems.” This type of giant project almost always goes over budget and misses the deadlines. Frequently there is paralysis during the implementation period — customers are not invoiced, products remain undelivered, bills unpaid. Computer upgrades are needed for modern companies to function, but beware the big, expensive solution.

“That’s not my responsibility — that’s operations.” When chief executives say this, I despair. Business is operations — the rest is largely waffle. Of course, bosses don’t deal with every customer or product decision, but the best want to lead from the front, remain hands on, and are happy to get into the detail of the organisation when necessary. Delegation is appropriate in large companies, but problems will arise if the headquarters is too disengaged from the true place of business.

“We’ve just won a huge order but we won’t make any money from it.” Landing whales is all very well, but what is the point if they are unprofitable? Grocery suppliers rejoice when one of the top supermarkets gives them a contract that dominates their capacity. But loyalty in such circumstances is scarce, and existing, profitable customers can be pushed aside in the rush for scale. Margins fall, working capital is stretched, cash is absorbed — and the producer has become a slave, working at a pitiful return for the high street goliath.

“Don’t worry about the cash deficit, we can treat this item as a profit.” Companies that prioritise the profit and loss statement over the cashflow statement end up in difficulties. Cash does not lie, whereas profit can be stated in myriad ways. Companies that generate cash don’t go bust, while those that appear to be profitable do sometimes go broke.

“The bank is very keen to lend us lots of money.” Just because banks want to lend does not mean you have to borrow. The inconvenience of debt is that you have to repay it — with interest. Also, loans usually come with covenants, and breaking them is expensive — sometimes even fatal for a business. This is probably not the ideal time in the economic cycle to be taking on a great deal of borrowing; better to be repaying it.

There are, of course, many other such grim comments that should scare any rational board member. Perhaps readers would like to submit their own suggestions — if I have enough good ones I’ll write a follow-up article.