Company Eight – Registered Club

OVERVIEW

FRAUD – TURNAROUND – PERFORMANCE OF BOARD & MANAGEMENT –LEADERSHIP – SECURED CREDITOR COMPLIANCE – INTERNAL CONTROLS

A factor that shows up in just about every report on the underlying reasons for business failure is, put politely the “short comings of management ability.” In referring to management it is normally a reference in this case to all parties involved in the operation of a business from the Board down. Each has a vital role to play and each must also act as a counterbalance and check to the others.

In this matter the Club had been ailing for some time and had been led by a Board that had in essence not really changed over a period of some 20 years. Yes there had certainly been changes to individual members but the Executive had virtually remained unchanged and was led by a very dictatorial figure who generally refused to be challenged on any point.

Gradually over time this led to the commencement of one of the earliest causes of demise, the hand selection of Board members and senior management not based on ability, experience or for that matter any other reason than their willingness to comply. The fundamental need for one arm to question the other is removed. In fact the person selected as the General manager for much of this period had no management experience at all prior to his appointment and had only very limited club experience, but he was compliant in the hands of the President and had been led to believe that he would be trained on the job.

Gradually over time this leads to the second common cause of failure, arrogance. With no one willing, or even able to question, the level of self-belief increases and the ability to listen and absorb decreases to a point where the organisation ploughs on relentlessly regardless of what is said to them or in fact what occurs in front of them.

Our earliest involvement came about because of unexplained stock usage levels that had finally become a concern to everyone. We then discovered the third cause for failure; lax or non-existent internal control procedures. With the ability to step in we created new control procedures, regular independent stocktaking and better record keeping. The result was the closing off of a stock loss of in excess of $2000 per week. Due to the lack of existing systems and a degree of unwillingness it was not possible in this situation to pinpoint the exact culprit. Notwithstanding as we closed off our assignment we drew to the attention of the Board that they had cut off a significant part of someone’s income stream and it was unlikely that they could sustain the loss and would therefore seek alternative sources. Arrogance stepped back in and we were promptly advised that all was not under control.

Needless to say within one month the pressure had become to great and one Monday morning it was discovered that the Poker Machine clearance was light by some $2500. After immediately notifying the police we were again requested to review the situation and again found less than perfect controls. This finally resulted in wholesale procedural change that soon had some staff leave “unwilling to put up with the new regime,” it is presumed that the culprit was one of those.

Whilst there had been change at the floor level there has still not been any real variiation at the Board or managerial levels.

Notwithstanding the recovery of what appeared to be something in the order of $100,000 per annum the Club’s performance still continued to wane, the impact of this saving was essentially non existant. Any attempt to have the Board consider any options fell on deaf ears. Gradually as the lack of performance continued the Club’s bankers became increasingly concerned.

Ultimately assets were sold off to prevent adverse action by the Board. Notwithstanding this the Board still took little action to abate the losses. Finally the person filling the General Managers role acknowledged his own shortcomings and resigned realising that the continuing state of decay was doing nothing for his own reputation. The existing Operations Manager was then elevated in exchange for her concurrence.

The new GM had had significantly more experience but none at the overall or strategic level. Suddenly there was some feint glimmer of hope as quickly coming to grips with the perilous situation steps were made to curb all unnecessary expenditure, negotiations were opened with major creditors and an austerity program introduced.

The Secured Creditor continued to grow concerned notwithstanding the asset sales and corresponding debt reduction. As a result of the fact that the Board had made no real attempt to abate the downturn of the Club the Secured Creditor lost ultimately lost all faith in the Board’s ability to manage its operations and indicated that unless they were paid out they would be proceeding to appoint Receivers, to at least recover the Banks remaining debt.

Based on our earlier involvement the new GM contacted our Firm to see what, if anything could be done to prevent what was fast becoming a fait-a-complete. It was at this time that we discovered the next terminal error. Information received by management and others was being filtered through a minority ‘executive’ of the Board much of our earlier observation and input was denied to the majority of people in executive functions or roles and therefore the majority of the leadership team were blind to the actual issues faced by the Club.

Having been approached to assist we initially contacted the Secured Creditor to advise of our now formal involvement and to seek to buy some time whilst we could formulate a strategy and plan to put before to the Bank as soon as practicable. We were immediately given 30 days in which to deliver a satisfactory plan to prevent the appointment of Receivers. It was also clear that the Bank had lost all faith in the Clubs ability to manage its own success. What also became obvious was that the ‘Executive’ of the Club had also been poisoned by the Bank.

With no immediate practical alternate arrangements were made to immediately refinance the remaining Club debt. Whilst the then current trading could not support a lender’s normal requirements the Club did have a substantial Real Property asset that could be used as security. The critical issue would be to convince the lender to overlook trading criteria in its approval process.

The solution came with the formation of a Turnaround Committee chaired by this Firm and made up of representatives from both the Club and the lender to supervise a period of change management within the environment.

The Committee was formed and the original bank discharged within 45 days of our initial contact. The process of change began. Interestingly the Board still fought the process at every possible point but the new funder could see the opportunity before them and were very happy with the return and security levels they had obtained.

Finally when the next election came and there was a wholesale change at the executive level the Club finally began to seriously experience the benefits of the change and profits, at first, began to slowly return.

Even greater steps have been taken since, but that is a tale for another day.

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