By Moneef Shaibani-Moneeff@hotmail.com
There is a strong belief that organizational failures and financial hardships in Yemen are only due to macroeconomic factors. Contrary to this belief, it is often the failure of organizations to react to changes appropriately that exacerbates negative effects, and eventually leads to serious consequences.
No one denies that the environment plays a significant role in shaping the economic landscape, but the sad reality remains that – most often than not – an accumulation of mistakes and “bad habits” contribute greatly to failure in times of crisis.
No environment is immune to crises – causes may differ, but the fact remains that every country is vulnerable to economical upheavals and the effects of global shocks. But when management fails to foresee the challenges that lie ahead, and fails to react to them too, then it would certainly be wrong to blame external factors alone for their failures.
The problem with poor management is that it fails to see the fallacy of its ways in times of prosperity. It is only in times of hardship that the quality of leadership is put to the test.
When bad management becomes a culture, and is justified as a small price to pay for perceived successes in times of prosperity, then its effects reach far beyond single firms or an entire industry. The effects become a widespread culture of “how things are done” in a country, and become part of the problem by intensifying these same effects, at the same time causing them to deepen.
It is at such times when the difference between good and bad management comes to light. Good management would provide good control over its resources. The amount of waste is already minimal, and resources would be utilized more effectively. This leaves an organization with fewer problems to tackle, allowing it to use its “once expendable energy” to better use. It will have the ability to recognize risks and opportunities in ample time, to form a plan/strategy to react, and have the ability to execute those plans, sometimes turning a disadvantageous situation into a favorable one.
In less-developed countries, there may be a lack of proper governmental regulations and control to set proper standards and rating systems. This is often blamed as the cause of substandard performance in industries in such a country. This may be true to some extent; however, in such cases it becomes the role of management or directors to set higher standards voluntarily, for it is the best way to achieve better management, control, and to improve performance.
Supervision appears to be a key element in preventing or limiting the damages of bad management. And in the absence of strict regulatory controls, self-imposed supervision becomes even more relevant.
A lack of strong supervision that holds management accountable for its actions and measures performance eventually leads to mismanagement. As performance will only be measured by their predecessors or past performances, and as long as they are making profits and achieving growth, then their management style and performance would not be in question. Sadly, measuring performance in this way does not reflect the true picture as to where the company really stands in its environment – or whether its growth is being measured in real terms.
The lack of proper standards and supervisory controls makes it difficult for management to identify or correct existing problems. And in the planning process, they may be seek to implement inadequate policies, and fail to monitor their effectiveness or quantify their results. When this happens, management tends to look more inwards that outwards. Steady growth and profit margins become the only standard they have to achieve and the sole performance indicator, and they fail to recognize potential risks and challenges and will be under no pressure to tackle problems as they arise, as they are in fear of falling below set goals and standards.
Poor planning then becomes an attitude or a culture, and in the absence of supervision starts to serve the interests of top management at the expense of the organization itself. When such management is faced with macro or micro challenges, it will find itself unable to draft proper plans or strategies, and will not have the proper controls to implement it or evaluate its effectiveness and correct its course. The organization may then find itself in a situation where equity is increasingly eroded by hidden losses, and where real profits are decreased. With the lack of supervision, no alarms will be raised, and the problem will be allowed to continue undetected. At this point, the culture of the organization will deteriorate as ineffective strategies will be felt across the organization but will not be measured.
However, the organization will start to go down a spiral of losses and management will find itself having to hide them in an attempt to buy time and remain in control, while looking for a solution or waiting for things to get better.
If things continue to go wrong, then management may resort to “cosmetically” managing the firm by hiding the economic realities and cosmetically presenting them in a way that makes them appear more “presentable.”
This can be done in many ways, such as presenting dividends as predetermined figures (i.e. before undistributed profits, provisions, etc), and with the lack of supervisory control that would properly analyze the presented data, investors and stakeholders will usually buy into the explanations and justifications of management into why these figures have not materialized into real money.
With the continuation of unfavorable economical conditions, management finds itself having to resort to more extreme measures, where they try to magnify their profits (even if that means having to pay more taxes). Examples of such practices are wrongly classifying elements of financial statements so as to increase the profit margin, such as classifying uncollectable debts as income; advancing accruals of income and postponing the accruals of expenditure, not accounting for damaged or expired goods; revaluation of assets, etc.
When managers have depleted all these tricks and no hope is at sight, they usually resort to desperate measures, where they start to take on risky deals, or start to finance operations with debts – even on unfavorable terms. They may even try to pledge assets as securities against loans or facilities if they get the authorization to do so.
At this point, the firm is destined to become illiquid and unless a miracle happens, the business is doomed to fail.
The culture of management is of major importance in an organization. For it is the culture that allows the accumulation of mistakes and allowing them to go unfixed. Once a culture of mismanagement prevails, management style becomes extremely authoritative, and a climate of secrecy and a lack of information engulf the entire organization.
In order to avoid such a scenario, a number of important elements need to be weaved into the fabric of an organization. A reliable system of information technology and documentation needs be established. A clear system of responsibility and accountability needs to be set in place to avoid any ambiguity about the duties of all members of the organization. The adaptation and implementation of proper and relevant rating systems that set standards and measure performance, accompanied by a system of supervision that is independent from management to raise the alarm when things go wrong and to ensure that the real picture is reflected.