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By Ruediger Mueller CSC Capital Group

fN CORPORATE distress situations. lrestructuring specialists typically focus on the financial aspects of the turnaround and neglect an equally important component- leadership.

Leadership is distinctly different from management. Whereas management deals with day to day management, operations and structure, leadership is oriented toward the future and deals with developing a shared vision, creating core values, and culture.

According to the Tumaround Management Association, the overwhelming majority of distress cases are the result of internal corporate issues. These are almost always the result of ineffective leadership, which fosters a culture of complacency.

Just as inadequate leadership often leads a company into distress, it is a key element in turning around a company and assuring its long-term viability. The Leadership Profile, developed by Rosenbach and Sashkin, has been used to assess and improve leadership and create high-perf,ormance organizations. The instrument measures various scales of leadership, each of which can be directly applied to turnarounds in small- and mid-market companies.

. Capable Management refers to the leader's ability to manage day-today business activities. In distress situations this includes quickly identifying key talents and involving them in critical turnaround activities. It also means identifying individuals who, either because of their performance and competencies or because of the structure of the company going forward, need to be laid off.

Personnel to be retained, especially those in key roles, need to be given clear, challenging and measurable objectives. Turnaround executives should create a strategic team and involve it in decision-making processes. An outside expert can benefit from the insights on vendor and customer relationships as well as internal operations that these individuals can bring to the table. Convey to the entire team not only objectives, but also priorities and make available the tools required to achieve objectives.

. Reward Equity. To cut costs, distressed companies often cut compensation and benefits for individuals remaining in the organization. Such cuts can lead to an exit of key talent, especially when their skills are in high demand. Reward equity requires fair, equitable compensation for all personnel without preferential treatment of any group or individual. High-profile bankruptcies, such as Delta Air Lines, have promised employees, in return for often substantial cuts in compensation, shares in the company once it emerges from bankruptcy.

In small and mid-market companies, employee stock ownership is typically not an option, given that companies are privately owned. However, alternative plans, such as profit sharing, are appropriate ways to retain key personnel. Intrinsic rewards, such as recognition and appreciation, can further support commitment to the organization if perceived as genuine. Awards, plaques, certificates, etc., if perceived as empty gestures, are counterproductive.

. Communication. In distressed companies, rumors abound and affect the morale of employees as well as customer and vendor relationships.

For the turnaround manager, it is critical to manage rumors. A manager brought in from the outside is often seen as the enemy, whose only objective is to lay off people and dismantle the company. This author has been labeled "hatchet man" before even arriving at a company for the first time. Therefore, it is important to communicate that any actions that will be taken, no matter how painful, ultimately serve the purpose to preserve the organization and with it as many jobs as possible.

Communicating to the extent possible the state of the organization and the actions that will be taken to save it helps manage expectations and creates buy-in into even painful and unpopular measures. Communication must focus on the positive (the benefits derived from even painful steps) and deal with real issues. Finger pointing is counterproductive.

Assume that any rumors circulating inside the company will be amplified to the outside world, especially customers and vendors, through contacts with employees. Communication, therefore, is not limited to employees, but is equally critical in relationships with the outside world in order to ensure continued supplies and prevent customer defection. In one situation the best sources of information about employee morale and rumors were vendor reps, who reported to management the rumors about the company they had picked up at competitors.

. Credibility. It can be tempting to evade questions about layoffs, plant closings, or other unpopular measures as long as possible. However, experience has shown the rumor mill to be highly effective; any planned actions become known whether they are communicated or not. However, in the latter case, the magnitude of any planned actions tends to be exaggerated.

Furthermore, undue secrecy or false information undermines the credibility of the turnaround manager. This makes the implementation of needed actions difficult. creates an atmosphere of distrust, and fosters passive resistance and sabotage. The manager, especially if brought in from the outside, has to engage in trust building activities, mentoring and coaching as an important step to generate buy-in and to build a team that can lead the company into a successful future.

A typical example for the importance of communication and credibility is the handling of layoff decisions. Honesty about the need to cut the current workforce is unlikely to increase defections because in typical distress situations morale is already low and insecurity about continued employment will already have prompted job searches. Open communication may very well stem an exodus of capable employees in areas where layoffs are not planned. Wherever possible, go through only one round of layoffs instead of multiple incremental rounds. This allows a turnaround expert to refocus the remaining workforce on the job at hand without fear of additional layoffs.

. Caring Leadership. This should not be misunderstood as weakness or as being soft. Caring leaders should be firm and decisive. At the same time, they should show respect for those they deal with. Openness and candor are no excuse for an insulting "inyour-face" attitude. Such behavior only serves to alienate those one works with and leads to resistance, defection or sabotage by key talent. Demonstrating concern for people creates trust in one's abilities as a leader.

Enabling Leadership. Managers don't turn around companies, employees do! Turnaround and restructuring experts must rely on key talent in their client organization to get critical tasks done quickly and efficiently and, therefore, must create the conditions for them to succeed. Enabling leadership requires identifying the right individuals and giving them the authority and the tools to work independently. The restructuring expert takes a calcu- lated risk by allowing key personnel to work largely independent, form their own teams, and as a result having the freedom to make mistakes. Acting as an enabler creates dedicated managers and with it the management infrastructure the company needs.

In crisis situations more than at any other time, people look for strong, capable leaders to solve the current crisis. In distressed companies the turnaround expert assumes that role. Whether employed as c.e.o. or brought in as consultant, they are often perceived as arrogant, self-serving individuals with abrasive personalities. The nature of the task requires quick decisive action that leaves no room for lengthy discussions about the merits of one approach over another.

Autocratic, self-centered leaders are counterproductive in most situations, but especially harmful in distressed companies. Employees look for leadership that not only will rescue the company, but at the same time keeps their interest in mind.

Articulate the Vision. Most important, stakeholders need a vision for a better future. The turnaround manager has to develop and communicate a vision that sets goals and expec- tations for the workforce and assures external stakeholders that the company is here to stay and is a viable partner for the long term.

. Rebuild the Culture. Finally, in order to assure long-term survival and lead the organization out of its current crisis, the turnaround expert has to rebuild the organization's culture. The typical stresses in distress situationslayoffs, budget cuts, increased workloads-leave a mark on the remaining workforce. The successful leader identifies a set of shared core values for the rebuilding and stabilization phases that increase performance and refocus the workforce on the future.

Leadership is rarely mentioned in turnaround situations. Cash management, cost cutting, banking, customer and vendor relationships take center stage. Yet, creating a viable future for distressed organizations requires leadership capable of re-energizing a downsized, demoral ized workforce.

- Dr. Ruediger Mueller, CTP, is a principal with CSC Capital Group, Portland, Or., a corporate restructuring firm specializ,ing in the lumber and building materials industry. He can be reached at (503) 5 59 -2 300 o r v ia www. c sc-caoital.com.