3 options to revive troubled firms

By Shin Jang-sup

The Korean economy is currently undergoing major corporate restructuring in the shipbuilding and shipping industries. Once symbols of the mighty Korean economy, these industries are now bleeding heavily. Reasons for them being in trouble are of course complex ― the collapse of oil prices, the global economic slowdown and the consequent shrinking of shipping volume, management failures, alleged collusion between business and government in prolonging some “zombie” companies and so on. The restructuring also involves a complex array of players, encompassing not only companies and banks but also financial authorities, labor unions, and politicians, as it will incur a huge amount of tax-payer money as well as massive layoffs. It is thus not surprising that restructuring has become a political issue in Korea.

However, it will be worthwhile to borrow the wisdom of a businessman purely from the business perspective of reviving troubled operations since this is the ultimate aim of corporate restructuring whatever the surrounding circumstances are. The businessman I am quoting anonymously here is a chief executive officer (CEO) of a major flagship company of Korea whose name is very well-known to the public. He has been frequently involved in reviving troubled business operations in his career.

When he starts at new posts and is briefed of the situation by managers of the troubled operations, it is mostly the case that they ask him,“Will you give us the overall direction to move forward?” He invariably answers to them, “I am not here to give you direction. You are the ones to set the direction and solve the problems.” He then offers them three options. First, “If you find a solution and you are capable of executing it, you will work with me.” Second, “If you find a solution but you are not the appropriate person to do it, I’ll move you to another operation.” Third, “If you cannot find the solution and cannot do it, you will be fired.”

He gives these options to them mainly for two reasons. First, he is convinced that it is crucial to draw the voluntary initiatives of managers in reviving the troubled operations. He said to me, “High-ranking officers of big corporations are well-trained and capable of making good decisions at least 70 percent of the time when they are engaged in a completely new business to them. If they insist solely on their judgment, however, they lose chances to draw the remaining 30% that they might have missed. If the top guy is imposing his judgment on the mangers, they do not raise different views of their own and simply do as they are told, even flattering him with‘Yes, your opinion is great!’”

How could those who are responsible for the problem dare tell the top guy who came to resolve the mess, “You got it wrong”? If the top guy behaves as if he knows everything, this shuts up his subordinates and blocks the opportunity to draw on their ideas and energy. Even if they are responsible for the problems, they are experts who know the business better than most of the others. If they set a new direction and mobilize their accumulated resources in full, they may come up with good solutions that outsiders hardly think of.

Secondly, he gives the options to managers in order to minimize negative fallout in the process of restructuring. If the managers are simply treated as incompetent trouble-makers, they are disgruntled. Their dissatisfaction can be channeled through informal outlets. It is also possible that, rather than trying to solve the problems of the company, they would try to find ways to save themselves, and important assets or information about the company may spill over to others in the process.

He boasts that he has hardly faced such negative fallout in the troubled operations he was in charge of. This is because, being given the options, managers clearly understand what they should do to save the company and themselves. They then make their best efforts to do so. Even if they are fired, they accept it with hardly any grudges.

The current corporate restructuring in Korea involves a lot more complex issues and participants than restructuring within a firm. It may be stretching it to apply this businessman’s wisdom to the problem as it is. Restructuring is also already in progress and there are surely some matters that cannot be reversed. However, at least one lesson can be learned from his wisdom. If one wants to revive the company, it is essential to draw voluntary initiatives from managers as much as possible.

Doing business is never about finding “correct” answers from textbooks. It is an ongoing process of providing customers with cost-competitive quality products and services through creating and mobilizing internal and external managerial resources in response to changes in business environments. It involves numerous pieces of innovation and efforts that may not be seen by outsiders. The task is more daunting in reviving troubled corporations. They cannot be revived simply by cutting down their debts and shedding the workforce. Managers and workers of the company should combine their resources, ideas and determination earnestly for the common good of the company.

In Korea at the moment, it is regretful that the voices of those who treat managers of troubled corporations as if they are criminals or incompetent are too loud. They are surely responsible for the current problems. But one should also consider the fact that they are the ones who were responsible for dominating the world’s shipbuilding and shipping industries for a long period. Their competence and contribution should be evaluated in a balanced manner.

It is urgent to configure their commitment and competence into the overall design of the corporate restructuring process.

Shin Jang-sup is an economics professor at National University of Singapore and former economic adviser to the Finance Minister of South Korea. Contact him at ecssjs@nus.edu.sg.