Soriano: A founder’s spectacular failure!

This is the story of Company A and its visionary/founder. Company A was a successful family business engaged in housing development for the last 30-plus years. It started as a homebuilder and slowly morphed into a mass housing developer creating communities with thousands of homeowners. Despite the twin financial crises that wrecked the global economy in 1998 and 2009 and dealt a heavy blow to many businesses, Company A did not just survive but thrived, exceeding revenue targets year after year. Every major housing project it constructed was successfully sold. They even started the paperwork for an initial public offering.

In short, company A felt invincible, banking on the remarkable skills of its founder, they were now poised to take the business to the next level. The adult children were ‘partly’ involved in the business. Partly in the sense that the offspring were asked by their father to join the business after finishing university. At first, they became excited but due to the lack of proper entry rules, the appropriate training and orientation, some ended up frustrated and confused. After a year or two of doing on-the-job training, three out of the four children dropped out and two even migrated to the US with their respective families.

Navigating through the Black Swan

When the pandemic struck in the first quarter of 2020, Company A was obviously unprepared and all throughout 2020 and 2021, their operations tanked. As the Covid-19 infection raged without letup, the market dried, sales spiraled, buyers stopped paying their amortizations, construction stalled, suppliers and creditors panicked, pressures mounted, revenues nose-dived, and the company took a massive hit. Sensing the need for specialists to intervene, the shocked founder together with major creditors sought our services. It was a challenging intervention as our mode of communication was 100 percent virtual. But our frequent meetings made up for the zero physical engagements.

Major findings

Founders can get away with a great deal when times are good, but an extraordinary event like the pandemic depicted as a major black swan turned many minor issues into major problems. As we always say in times of crisis, “good times can cover many sins, but during bad times it can uncover many weaknesses.” The global health crisis created a down market where overall demand slackened, the unemployment rate peaked, a notice of foreclosures and evictions increased and credit squeezes were happening everywhere. On top of the external crisis, we discovered several strategic and functional failures in Company A’s operations like poor operating controls such as cost management, asset valuation, cash flow forecasts and overexpansion that led to bad acquisitions and the accumulation of too much debt. Overall, it was a combination of external and internal blind spots that compromised the business.

Major cause of failure: Founder hubris and lack of governance

But our findings pointed to the real culprit, its founder. Take note, a company is only as good or as bad as its leaders, so the real fault lies on those who run them. It was clear that the management team overlooked business fundamentals, either they were complacent or shortsighted, or both. It didn’t help that the board was run by one colorful founder dictating the campaign. Cowed executives and directors, mostly family members, were there to tell him what he needed to hear. In short, he created a climate of fear among his subordinates. Any business failure is an extension of failed leadership and this company represented what was entirely wrong with family-owned enterprises. In the next article, I will share several internal reasons for the sudden decline, notably the visible symptoms of failed management leading to the founder’s spectacular downfall.