LESSONS FROM THE FAILURES THAT SHOOK THE WORLD..

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Titanic, name and thing, will stand as a monument and warning to human presumption.The Bishop of Winchester, preaching in Southampton, 1912.                                 
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TITANIC which was supposed to be an unsinkable ship, sank without a trace after hitting an iceberg in the early hours of April 15th, 1912 in the North Atlantic seas.


In the recent history, we have seen a number of large companies which were successful in their own way for a long time, suddenly loose way and disappear from the corporate landscape. While a number of factors have to fall in place together to create a successful organization, a few factors are sufficient to cause the companies to fail, just like how a few unplugged leaks caused by a rock hit could sink a huge ship if not plugged in time.


Let us review some recent corporate failures and the reasons that caused them.


Lehman Brothers:


Lehman Brothers was one of the biggest investment banks in the world, when it declared bankruptcy on 15th September 2008. A fall from a market capitalization of USD 60 Billion in February 2007 to almost zero in around 19 months, this is one of the most spectacular failures of a blue chip corporate with over 25000 employees.
Reckless exposure to low quality assets and unbridled aggression in acquiring subprime mortgage business after a rapid rise in prices led to its fall.  Holding over 639Billion USD of assets at notional value and over 620Billion USD of liabilities at the time of filing for bankruptcy, Lehman's fall was one of the biggest collapses of all time.
Lehman's high degree of leverage with debt over 30 times the shareholder's equity, and a rapidly falling value of its mortgage portfolio in a weak market, led to huge losses and inability to cope with the situation leading to its ultimate filing of bankruptcy. Lehman Brothers brushed many loopholes in its accounting practices under the carpet by regular window dressing of accounts and ignored many early warning signals.
Lack of fiscal discipline and ethical accounting practices led to this giant crash and vanish into oblivion.
This shows that, lack of transparency, undue aggression in the market place, lack of fiscal discipline can mean an end to any large organization and hence no one is infallible.


Enron:


 Rated, "America's Most Innovative Company" by Fortune for six consecutive years, from 1996 to 2001, listed on the Fortune's "100 Best Companies to Work for in America" in 2000, and having offices that were stunning in their opulence, Enron, once one of the largest American corporations with a market capitalization of over 70 Billion USD. When it filed for bankruptcy in December 2001,its supposed financial strength was managed through a set of fraudulent and innovative accounting practices termed later as "Enron scandal" and its claimed turnover of 101Billion USD was found to be mostly fudged and non-existent.  
The fraud committed by Enron led to the fall of a Global Accounting Consultancy firm, Arthur Anderson and also led to the creation of Sarbanes-Oxley act 2002 to guard against such fraudulent corporate accounting practices in the US.

This shows how greed, lack of ethics, manipulation of accounts and fraudulent managements can destroy the wealth of the society.

Swiss Air:

The formal National Airline of Switzerland, was once known as the 'Flying Bank' due its financial strength till it followed an aggressive loan backed acquisition strategy also known as the ' Hunter Strategy' in the late 1990s. The economic downturn that followed the September 2011 Attack on the World Trade Centre, led to a severe drop in its turnover and profits, making it difficult to pay back the loans it had taken leading to operations becoming unsustainable and subsequent closure of the airlines on 31st March 2002.

BPL Limited:

BPL Limited, the promoter of BPL TV was the most admired company and a leader in the consumer electronics space in India with a market capitalisation of over Rs 1300 crores. BPL had a rapidly growing portfolio of Consumer Electronics/ Appliances products till the group diversified into Telecom and Power Generation business in the mid 1990s.
Diversion of resources to other businesses from the core business and inability to feed its core businesses with requisite funds and also inability to raise funds due to stock market related issues, led to the downfall of BPL Limited. It not only lost market share rapidly, but also had to close down all its manufacturing facilities, sales & marketing operations and lost all its net worth.

Subhiksha:

Subhiksha was once the fastest growing retail chain in India with over 1600 retail outlets selling groceries, fruits & vegetables, medicines and mobile phones. Having grown rapidly in just 12 years of existence, Subhiksha had to shut its shop in 2009 owing to severe cash crunch stemming from financial mismanagement. Starting as a discount retailer and a price warrior, Subhiksha aimed to become a chain of Super Markets offering a shopping experience coupled with discount pricing to the consumers. This led to a dramatic increase in its working capital requirements as it rapidly expanded its outlet base across the country backing them with high decibel advertisement campaigns.

Frequently changing business models, too fast an expansion without the backing of sufficient funds, lack of appropriate systems to handle growth and poor supplier and principal relations led to the downfall of the retailer, once hailed as a star on the Indian organized retail landscape.

Global Trust Bank:

Run by the eminently successful Ramesh Gelli, known as the super banker who was behind the success of Vysya Bank, GTB was once the darling of investors and account holders. One of the earliest new generation Private Sector Banks in India, GTB expanded its operations and grew rapidly till the early 2000s. Its over exposure to risky assets against the prevalent norms, that crashed in value due to the economic downturn in early 2000s led to a rapid worsening of its financial health. It was forced to stop operations before being taken over by Oriental Bank of Commerce by the intervention of the RBI to protect the account holders. Its efforts to be taken over by Axis Bank failed when Axis Bank got a scent of the asset quality of GTB leaving it high and dry.

Chasing growth by throwing caution to winds, compromising on ethics and involving in malpractices, manipulation and dressing up of accounts, share price manipulation, excessive focus on providing return to promoters at the cost of depositors, minority shareholders and borrowers were considered to be the main contributors for the fall of the Global Trust Bank.

Satyam Computers Ltd:

Satyam Computer Services Ltd (Satyam) was once looked upon as the poster boy of Indian IT Outsourcing Industry and was ranked among the top 4 IT Companies of India. With more than one third of Fortune 500 companies as its clients, Satyam was one of the most admired companies from India.

A command and control style of functioning by the promoters who showcased a galaxy of eminent persons as board members and a globally admired auditor in Price Waterhouse, led to the external world being completely oblivious to the happenings in the organization.

Underneath an image of respectability the company undertook massive window dressing of accounts, inflating the accounts consistently over a number of years, showing much higher sales and profits than actual figures thus defrauding the shareholders, investors and the media by lying about its actual performance. When the problems and real issues were coming to light, the promoter of Satyam Mr Ramalinga Raju admittted to fudging the accounts for several years and also about overstating the cash balances of the company by thousands of crores that were supported internally by duplicate demand drafts.

The problems came to the surface when Satyam wanted to merge with the real estate and infrastructure companies owned by the sons of Mr Ramalinga Raju, Maytas Infrastructure and Maytas Properties, which led to suspicion & uproar in the investor fraternity and subsequent exposure of the fraud.

Excessive promoter greed, diversion of promoter's interests into other areas like infrastructure, falling short on integrity and ethical approach, lack of internal controls and poor corporate governance led to the fall from grace of an enterprise and destruction of the shareholder value.

While these are the companies that have failed their investors, employees and the society, there are many companies that have failed to read the signals from the market place and were swept aside by the changing dynamics. The rapid loss of market shares of brands like Nokia and Blackberry, the flight to oblivion of brands like Ambassador, LML, Lambretta on the Indian roads, the bankruptcy in 2005 of Polaroid, the makers of Polaroid camera are a few examples of the companies unable to take corrective action in the right time to reinvent themselves and keep up their growth and profitability.

Most often, organizational failures happen when the managements are unable to forecast the changing situations that affect the fortunes of the company and take appropriate actions when it is very much in their realms to do so.

Failures can be arrested if the organizations:

a) Stick to the core values and maintain their focus on adding value through their business,

b) Act on problems that may arise during the operations immediately with foresight,

c) Maintain ethical and transparent approach,

d) Be pro-active in guarding themselves against factors that destroy value like complacency and putting self-interests in front of their stakeholders and the society and

e) Adhere to the very principles that have led them to success in the first place. If not, they are either wanting to fail or preparing for their failure.