THE BRITISH APPROACH TO CRISES
By Anthony Holmes
In Ben Pimlott’s biography of Harold Wilson he recounts an interview Wilson gave after meeting with John F Kennedy. Wilson is quoted as contrasting the John F Kennedy administration’s preparation of a range of positions applicable to various possible outcomes of emerging events with the UK government’s established method of allowing a crisis to arise before reacting.
Wilson was an enthusiastic devotee of planning and sought examples of the process being applied successfully. In Pimlott’s book no mention is made or analysis given of the effectiveness of detailed contingency planning compared with the other processes that governments may have employed in addressing emergent issues. However the basic comparison between the observed US and UK approach is interesting as we see the same divergence in other aspects of contemporary institutional behaviour.
In particular I have in mind the difference between the UK and US bankruptcy codes which reflects a divergent attitude towards how corporate financial distress should be managed.
The US code is more varied in the options available to creditors and debtors and provides a flexible basis from which corporate America is able to prepare for possible emerging crises and thereby seek to modify their character and impact. A remedial process is considered preferable to collapse.
If a legislative environment provides a good indication of the cultural approach to an issue then analysis of the UK’s Insolvency Act suggests that the opposite mentality prevails to that exhibited in the US. In the UK a company appears to be assigned to one of only two sets; it is either fine or unsalvageable, a catastrophe.
There appears to be minimal recognition of any intervening stages between these extremes as the procedures available to distressed but viable companies are at best weak and limited. This suggests a rather naive conceptualisation of a modern, dynamic commercial environment. As a result a narrow and false view of reality has been enshrined in a powerful and important legislative framework.
Why should this be?
The relevant current UK legislation is the result of modifications to the law made in reaction to the evolution of commercial conduct over the very long run. The US bankruptcy code was established more recently and has had to adjust less from positions that were once appropriate but are no longer entirely relevant to contemporary conditions.
Moreover the echoes of European inequities, reported by the immigrant influx which populated the US at the time that the rules were being established, encouraged legislators to avoid creating the same conditions and to provide an environment in which the able could achieve despite the occasional set back.
The US Bankruptcy code is not ideal. In particular it can be expensive for both debtors and creditors, time consuming and bureaucratic. By comparison the UK insolvency procedures are streamlined, simple and comparatively inexpensive but they are designed to protect the interests of creditors and tend to favour secured creditors.
The UK establishment is noted for its moderate and conciliatory nature. Therefore, whatever the historical imperatives of its evolution, the preservation of this rigid, if not extreme, modus operandi into the complex commercial environment of the 21st century is uncharacteristic.
Usually the UK legislature avoids the instigation of mechanisms that channel all problems of a given genre towards single point outcomes. Normally our culture dictates a readiness to recognise the heterogeneity of situations and our institutionalised procedures reflect this in the degree of diversity they accommodate. Conformity is seen as desirable or, perhaps more accurately, non conformity and radicalism are regarded as threatening but homogeneity is ideologically and sociologically alien to the system which has emerged from and functioned through a society diversified and stratified by a pervading class structure.
In this long cherished concept of “natural order” people are not considered equal in all respects; they are acknowledged to be diverse as are their needs and problems. Why then, you may ask, should corporate economic units and their problems seemingly be regarded as being any less diverse than individuals?
So why then, as Wilson observed, do we allow a crisis to arise before we address the issue which created it?
As a nation we are known to be uncomfortable in the presence of failure. Americans are said to avoid association with failure to an even greater extent but tend not to regard it as a permanent impediment and often pragmatically regard it as a necessary precursory step to success.
Perhaps for we British the spectre of failure is the signal for the denial and concealment of adverse developments. It may seem irrational but we exhibit a tendency, often seen too clearly in British managers, to do nothing rather than to take action if doing so confirms our recognition of unwelcome possibilities.
As a race, if we possess sufficient homogeneity to be so considered, we are secretive. Our society is not as open as the US nor are our citizens generally as willing to share with others their actual or potential difficulties. Perhaps our reticence is driven by fear of the embarrassment that would result from alienation or rejection. If you have problems then I don’t want to be involved other than to offer sympathy and be relieved that I don’t share them.
We do not court failure but our institutions tend to be comparatively risk averse and we readily turn the Nelsonian blind eye to emerging problems with crisis potential.(Can a single action of so long ago be so descriptive of a nations modern attitude? Perhaps behaviour of this kind is evidence of, and is imprinted mimetically on, a national psyche.) It is difficult to understand how rational individuals can accept the disregarding of obvious threats as a positive tactic in constructive crisis management.
Pessimism may lead us to conclude that the deterioration of so many “little local difficulties” into full blown crises is not evidence that our societal and legal framework discourages remedial treatment but confirmation that there is no known remedy and the law simply reflects this fact of life.
This argument would hold if no other developed economy adopted, with any degree of success, a contrary approach which did not prejudice the interests of creditors. But that is not the case.
In the US there are more ways in which a creditor can manage his exposure than exist in the UK. Loans and receivables can be sold at a discount into an active and liquid secondary market populated by specialists in dealing with the risks inherent in distressed companies.
It may therefore be argued that creating a legislative framework which enables a debtor company to call for a suspension of creditor claims while its management seeks to reorganise the company’s affairs need not automatically prejudice creditors by locking them into a problem situation but may stimulate the emergence of markets through which they can trade their risk.
It is sometimes said that the process of managing corporate distress in the UK is as if our corporate immune system (the internalised procedure) has failed to manage the commercial illness and consequently there can be no superior external treatment available and our efforts should most usefully be directed towards preparation of an orderly funeral.
We seem to be saying that there is comfort to be found in acceptance of the inevitability of a conclusion which is certain, even if it is catastrophic failure. Collapse is desirable for its predictability, its defeat of uncertainty, it is understandable and neat. The body corporate may collapse and die but we can salvage a few useable organs (assets) cheaply and recycle them.
The company died of an incurable disease for which there is no known cause and the dependants were thrown onto the street. How sad. Next!
At the personal level our much heralded Welfare State is founded on the opposite principle. It aims to moderate distress and avoid terminal crises through intervention designed to create conditions of stability for a period during which other action can be taken to remedy the underlying difficulty. At the corporate level the same capacity to gain stability through the legislative environment is unavailable and the general economic well being suffers as a result.
We enjoy the benefits of preventative action in public health and policing programmes but make no similar provision through education, training or intervention to prevent corporate crises.
Biological crises command resources and legislation to prevent their occurrence. Corporate crises, while no less detrimental to individual and societal welfare, command less attention. If consuming a loan on which the company defaults is analogous to eating a fish which turns bad then we would find it abhorrent if the standard response of the emergency services was to send an undertaker to measure you and quote for a casket and work out the price that could be obtained for your saleable organs. But that is in absurdum what happens to companies in distress in the UK.
Like premature biological death, corporate demise is not avoidable in all cases but by minimising our preventative programmes and accident and emergency treatment services we allow companies to die which could have been saved. We owe it to our economic well being as a nation to treat emerging corporate problems creatively and openly and not to wait until a crisis seemingly satisfies some subliminal desire for corporate euthanasia.
We do not differentiate sufficiently between a crisis and disaster. A crisis if left untreated can rapidly acquire the effects of a disaster. However the latter is regarded as excusable as it is a supriseful, unpredictable event which is therefore unavoidable as it is caused by matters outside of our control. As such no one can be blamed. A disaster is an act of God. A crisis is a folly of man.
Someone is responsible for a crisis and therefore for many corporate managers a disaster is preferable to a potentially terminal crisis which has been recognised and openly acknowledged and is possibly beyond the managers aptitude to resolve. If a crisis is conspicuous and deteriorates to the extent that a collapse results then this is not a crisis but a disaster with blame attached which is the worst possible occurrence on a personal and reputational basis and is to be avoided.
Are Americans better at crisis management than the British and does it really matter?
Certainly I think that in the US there is a more understanding and tolerant attitude towards corporate crises and therefore a more open and flexible system of managing them has evolved. Corporate crises appear to be recognised as a fact of commercial life (You’re not trying unless you are failing in some things!). In the UK corporate crises continue to be regarded as something of an aberration.
In the US corporate distress appears to be regarded as a problem to be solved whereas in the UK it is treated as a potential catastrophe to be avoided.
After so many recessions each with its collection of corporate failures one would have thought that, by now, we British would have got the message that corporate failure is here to stay and, in the more turbulent environment which appears to prevail, may increase in frequency.
Clearly the message hasn’t sunk in otherwise greater efforts would be made to create the rescue culture spoken of as the UK emerged from the last recession. We tend to want to forget the bad times when they are over and, despite our pessimism, behave as though similar conditions will not return.
However despite somewhat premature conclusion that the good times are here to stay, drawn from the present comparatively long period of economic growth, I suggest that the economic cycle, like death and taxes, will be with us for some time yet.
Does it matter?
Some say that there are casualties in every war and it is better to concentrate on equipping the healthy to strive for competitive advantage rather than squander scarce resources on life support for the wounded.
Let me suggest some reasons why a more active rescue culture is desirable.
1. Conserving resources may be more economically efficient than recycling them. The cost of creating a new job may be considerably greater than preserving an existing job. This is not a cry for government to subsidise ailing industry to avoid the short term employment implications. That was tried in the 1960’s and 70’s and resulted in a disorderly and painful retreat when the policy failed. However there is no rule that says rapid asset recycling is economically advantageous.
2. Recycling through an insolvency procedure is not cheap and may be more costly than doing so through restructuring in the open market. The assets of companies undergoing an insolvency procedure are usually heavily discounted as they are seen to be forced, distressed sellers who also find it hard to maintain normal supplier relations.
The discount is transferred to unsecured creditors who may be unable to absorb the effect of the loss and they may also collapse.
Therefore insolvency procedures often lead to a multiplier effect of losses as the shock wave of distressed company asset disposals moves through the economy.
The interference pattern of many such waves may deepen and lengthen a recession producing a feedback loop and causing companies that may otherwise have survived to fail.
3. Companies which undergo restructuring in the course of successful rescue emerge fitter and healthier than their competitors who have had no such stimulus to re invent themselves.
I have no doubt that management theory has contributed much to conditioning management to believe that they should accept, and can control, a higher risk profile.
In the 1980’s the work of Michael Porter and Tom Peters advocated the pursuit of competitive advantage as the single worthwhile corporate objective the achievement of which maximised return on capital. Sub optimal strategies were relegated as unsound and unsustainable.
I have no query with this as an analysis but, pragmatically, I am reminded of the economists virtual reality world of perfect competition. Competitive advantage is hard to describe in operational terms, difficult and usually prohibitively expensive to achieve and almost impossible to maintain over the medium term. Consider for a moment the large number of those companies Peters and Waterman recommended in their early 1980’s blockbuster “In Search of Excellence” that have subsequently encountered problems relating to their competitive position which has precipitated financial distress. Think only of IBM!
Avoiding competitive disadvantage, while not so macho and seemingly being sub optimal, may be a more achievable objective. Firstly it can be described more easily and is therefore manageable. “We just want to be number two and make reasonable returns over a longer period than the company ahead” is a mission statement that is no less valid and is possibly more attractive to investors than adoption of the more capital intensive and higher risk strategy of striving for meaningful and discernible competitive advantage.
Commercial life is not so simple that an Aristotelian philosophy can be followed with impunity and by resolving problems we will leave only that which is satisfactory and thereby avoid crises and eliminate the prospects of having to endure the attendant disastrous consequences.
We must recognise that risk behaves in a dynamic manner and manage it actively and continuously and we must provide ourselves with the maximum degree of flexibility in which to deal with the problems that will undoubtedly arise. Inevitably this will result in the preservation of some uncertainty.
This is not the place to elaborate further on this but I hope that it serves to illustrate that companies promoted as benchmark examples of what others should strive to achieve are not necessarily worthwhile role models and it is certainly wrong to suggest that to fall short of some ideal that these companies are thought to represent is indicative of unacceptable performance.
Many other US companies that were once highly profitable have encountered severe problems which indicates the ephemeral nature of competitive advantage. E.g. Worldcom, Enron, LTCM.
Not all were abandoned to collapse and their assets recycled, many were restructured and reinvigorated. Some notable US examples are Toys R Us, IBM, Compaq Computers, National Car Rental.
It does not follow, therefore, that a company which encounters major difficulties should be allowed to fail when it may be possible to apply a corporate life support system. There is no evidence that such companies are destined never again to prosper as distress imposes a permanent weakness which condemns them to, at best, exist on the threshold of potential failure.
I believe that encouraging corporate survival does matter and that the minimisation of both the hard and soft losses associated with corporate collapse is a necessary condition for the creation of economic and commercial conditions which encourage investment both short and long term, in what may be a persistently turbulent environment.
Regrettably, in the UK, there are too many examples of companies that receive additional funds to finance a recovery programme collapsing within the following two years. There are a number of important conclusions to draw from this observation regarding the quality of recovery plans and the management the financial institutions back to expedite them. However, for the moment, I wish only to highlight the fact that these post financing failures serve to emphasise that additional finance and balance sheet reorganisation is not the whole solution even when the most pressing problem is poor liquidity.
Why are more rescues attempted in the US and why do a greater number appear to succeed?
Where does the difference lie?
Possibly more succeed because the conditions encourage more rescue attempts and therefore there are more success stories to report. But it is clear that a cultural difference lies at the heart of the matter. In the US corporate rescues are attempted more frequently and apparently with the determination and confidence that they can succeed.
British scepticism seems to limit our confidence in such attempts and as a result we fail to give them our best shot.
Returning to our starting point. JFK seemingly possessed within his administration the capacity to manage a crisis successfully. The Cuban missile crisis brought the world close to a nuclear exchange and one cannot envisage a crisis for which its associated potential disaster could be more profound.
It has been said that the crisis was manageable only because the Soviets had not completed their construction and installation programme and therefore the Kennedy administration had the meaningful option of blockade available to prevent completion and thereby minimise the threat. The options following delay would have been limited to the exponentially more risky actions of invasion, conventional bombing or a nuclear first strike any of which may have triggered a nuclear response from the Soviets using the by now operational Cuban based missiles.
The wider choice of options was available because good intelligence, in this case photo reconnaissance, enabled the USA to identify the threat at an early stage and therefore have the time to verify its conclusions and prepare a considered plan of action. They actively sought information and were not reticent about confronting unattractive conclusions.
The phases of denial and concealment, which are designed to project an image of stability, control and certainty and are so prevalent in the conduct of UK corporate management when presented with equivalent intelligence would have resulted in a rapid reduction in the options available and an increased risk of an unsatisfactory outcome as the threat grew and changed its nature.
As the risk grows then management’s reluctance to act increases and the analogy of the rabbit frozen by fear in the headlights of the on rushing truck applies.
Contrast the outcome of the Cuban missile crisis with the consequences of the apparent denial and appeasement practised by the British government in the run up to the 1939-45 war with Germany. Or the events leading to the Suez crisis. Or the economic management leading to the crisis call for IMF funds.
Institutionally we British, or perhaps English would be more precise, are reactionary. We resist modification or moderation of our behaviour to suit conditions. We carry on regardless, even though privately we may acknowledge that there is a better way. If it is not part of our tradition or culture we will not embrace it.
“Mad dogs and Englishmen go out in the midday sun,” and they did so dressed for an English summer with a “stiff upper lip” and if uncomfortable were advised to “Grin and bear it”.
These phrases have come to epitomise the “British” approach and capture our unwillingness to adapt. Our recent history is not about learning from others to stimulate the evolution of our society but about imposing our norms of behaviour on others and believing it to be the gift of progress. Latterly and domestically we are characterised as resisting the changes necessitated by evolving economic forces.
We do not heed the signals until it is often too late to take preventative or, for that matter, advantageous, action.
Had our reactionary institutions been confronted by the Cuban missile crisis the likelihood is that we would have prevaricated. In this respect Wilson was right in his observation. Perhaps this behavioural trait is the true British disease.
As a nation we appear to direct our creative effort towards identifying an alternative more benign explanation for signals which may be the “green shoots” of a crisis. In doing so we often use self delusion as a device to confuse hope with optimism. Maintaining our standards in the face of mounting adversity is a characteristic of Victorian and Edwardian Britain that seems to lie at the very root of our contemporary approach to crisis management. An orderly collapse is preferable to a seemingly undisciplined retreat from earlier conquests.
But you cannot “face down” a corporate crisis with a show of inflexibility and arrogant will. Such signals lie outside of its limited sensory equipment. It just carries on coming.
A clear example of this British institutional behaviour of allowing a crisis to develop before action is taken is provided by the British government’s conduct in the Sterling crisis of 1964 (although nearly 40 years ago the availability of records and the biographies of contemporary figures enables a more rounded analysis than would be possible for more recent events although there are several appealing candidates to illustrate this point such as The Falkland’s War, The [1985]Miners Strike, The Winter of Discontent and the collapse of Barings Bank).
In October 1964 the Government was informed of the difficult economic conditions faced by the country causing ‘tectonic’ pressure on the fixed pound/dollar parity. Irrespective of the economic sense arguments in favour of a quick devaluation were rejected mainly on the political grounds that to do so would damage irreparably the credibility of the Government which had recently been elected to implement a manifesto formulated on more optimistic economic assumptions.
The record shows that the Government, having persuaded each other that devaluation was undesirable and, moreover, avoidable, muddled through most of 1964 defending the Pound’s parity with the Dollar but at the expense of a substantial depletion of reserves. Towards the end of 1964 the cost of continuing this tactic became unbearable and floating the Pound became irresistible unless additional funds could be found. (This is the classic situation of corporate management facing a liquidity crisis following a period of denial and concealment). At the last moment the Bank of England borrowed a further $3bn from other central banks and as a result the liquidity crisis was averted and, as an undesirable action was no longer the only option, the Government withdrew immediately from consideration of varying Sterling’s parity and devaluation became an ‘unmentionable’ subject in Government circles.
Devaluation was regarded by ministers, correctly, as being evidence confirming the severity of the economic crisis they had been denying. Not only would devaluation represent an apparent failure of economic management but would diminish the credibility and perceived truthfulness of the Government.
It is interesting to note that the Prime Minister during this period was Harold Wilson and turning to Pimlott’s biography of Wilson we find the following paragraph at the end of his discussion of the episode.
“For the Government as a whole, defence of Sterling started to be an end in itself. Critics saw it as a kind of fetish, to which other policy considerations took second place. ..... As one commentator put it ‘a sort of Churchillian Dunkirk spirit began to take hold of the Prime Minister’.....To flinch, he believed, would be fatal, precipitating under the worst possible conditions what he had sacrificed so much to avoid. But the danger, as he deliberately closed off alternatives in order to provide added certainty, was that his own words, and the significance attached to them, would be devalued along with the Pound.”
However the fundamental economic issues remained and were not addressed effectively. Consequently after subsequent denials that devaluation was necessary and a further Sterling crisis in 1966 during which devaluation was narrowly avoided once more, the Government was forced into an embarrassing reversal in November 1967 when devaluation finally became unavoidable.
The Government had the information, the motivation and the capacity to act, just as the US did in the Cuban crisis, but chose instead not to take forthright action.
Generally speaking economists have criticised the timing of devaluation suggesting that it was inevitable in 1964 and the reticence to act made the subsequent devaluation less effective and disadvantaged Britain for many years thereafter.
Indeed to avert economic collapse in 1976 the Government had to call for an emergency loan from the IMF and in doing so accept stringent conditions relating to the management of the economy which eliminated their capacity to implement the programme on which the had been elected in 1974. Despite the contribution of several important economic events during the intervening years many economists identify the failure to deal robustly with the Sterling crisis of 1964 as being the single most significant event which led ultimately to the need to call for external assistance.
A similar pattern of public denial and private prevarication characterises many if not most of the corporate financial crises that British companies have encountered. The evidence of impending difficulty is usually clear as is the conclusion that immediate and robust action is required as the best course to prevent deterioration. However the standard response is not to admit the extent of the problem (engage in collective self delusion), to seek more time, borrow additional funds to avert short run liquidity problems that may force the action management seeks to avoid, close down the options mainly through prevarication and try to weather the storm.
Perhaps because so much British managerial received wisdom emanates from the military methods of the Clausewitzian era this Victorian concept of confronting an emerging crisis with a demonstration of strength, control and determination to stand the ground, almost irrespective of reality, ( “I see no ships”) has become engrained.
Usually the result is the same as that which the UK government faced; eventually specialist external management and resources have to be called on when the problem has deteriorated into a crisis and the options remaining are few and all of them unpalatable.
Interestingly shortly before the IMF episode Wilson, who was by then once again Prime Minister, resigned leaving his 1964 Chancellor, Jim Callaghan, to deal with the crisis and be the man associated with calling in the IMF. The corporate world often mirrors this with the CEO choosing to leave the ailing company of his own volition when he realises the severity and unavoidability of a crisis and seeks to minimise his association with the consequences.
Certainly the USA has not averted the disaster inherent within all crises. Vietnam is the not an example as it presented only a weak ideological threat to US interests and in this respect it was only a serious passing storm. An error of strategy rather than a failure of overall policy as the subsequent retreat of communism has demonstrated.
The Savings and Loan collapse is a better example of the failure to act to prevent a financial disaster which was clearly predicted. Denial played a major part in this. Three Mile Island and the Bhopal chemical catastrophe in India may also offer an examples of a system failure where warnings were ignored in the arrogant belief that “it just wouldn’t happen”.
At the point of crisis those with an exposure to potential loss tend to seek certainty. Hence banks, who in the UK tend to monopolise power in such situations, foreclose to give themselves control of the assets they hold as collateral and the certainty of some level of recovery. To attempt a recovery may raise only false hopes of survival and result in a subsequent collapse which crystallises a loss which currently cannot be estimated but is probably larger than that created by immediate action.
Successful crisis management depends significantly on risk reduction. If receivership is, perceived by a secured lender to be , less risky than a rescue attempt which will consume time and may require additional funds then it is unlikely to be attractive.
Creating a rescue culture requires manipulation of a risk reward equation. The following rule applies;
For a rescue attempt to be attractive to stakeholders who possess the power to determine the fate of the company it must offer a significantly higher level of recovery with no more than a moderate increase in the risk of greater loss than will be sustained from alternative action which can be implemented immediately.
Perhaps the key reasons that the UK does not enjoy the corporate “rescue culture” observed in the US is the inflexibility of the legislative framework. However there is prima face evidence to support the contention that at the root lies a cultural distinction.
The forces which combine to create a nation’s culture are complex but are conditioned by both its historical perspective and the conduct and attitude of its principal institutions. Echoes of the way in which we acted in the past are detectable in today’s policy formulation.
The behaviour of these defining institutions, of which the government is the most pervasive, sets the tone for other bodies. The substantial change in conduct in the 1980’s & the partial reversal in the late 1990’s is a clear indication of this. Documented behaviour in the USSR and pre war Nazi Germany are further examples.
I conclude, therefore, that the creation of the “rescue culture,” which is generally acknowledged to be desirable, must start with the Government adopting a position, evidenced by legislative modifications, which deliberately and actively encourages institutions in general and financial institutions in particular to change their behaviour.
This is not a plea for Government intervention, that will not work. What is needed is for Government to set the scene, promote the policy, give a lead but most of all to create a conducive climate.
We must recognise that risk behaves in a dynamic manner and aim to manage it actively. To do so we must provide ourselves with the maximum degree of flexibility to deal with the problems that will, undoubtedly, arise.
Inevitably at some stage the EU with harmonise bankruptcy procedures. They must do so in the direction of less rigidity recognising that the global economy is dominated by US corporations and that, in times of distress, the flexibility of their bankruptcy system can, if used creatively, provide a comparative competitive advantage.
To create a corporate rescue culture in the UK requires many changes both legal and cultural. The time to start is before the economy begins its next cyclical downturn. We should learn the lesson of the last recession and not wait for the crisis to happen before we begin to consider the ways to repair the damage.
END
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