IF NOTHING CHANGES, SOUTH AFRICA’S STATE-OWNED ENTERPRISES WILL CONTINUE TO FAIL IN THEIR EFFORTS TO IMPLEMENT TURNAROUND STRATEGIES
Over the past few years, a growing number of South Africa’s State-owned enterprises (SOEs) have found themselves financially in trouble. In February this year, arms manufacturer Denel announced yet another loss, which saw the company’s cumulative losses adding up to R4,4 billion over the past three years. This triggered resignations by a number of Board members, among them Chairperson Monhla Hlahla. Chief Executive Talib Sadik described the company as being “structurally and operationally inefficient”.
Denel, which has at times struggled to pay salaries, is not the only SOE that can be so described, or which has registered a series of financial losses. Others – among them Eskom, PRASA, the SABC, the South African Post Office and SAA – have had similar experiences. For years now, they have all been said to be in the process of being turned around, yet there has been no improvement in their fortunes.
What, then, is a turnaround strategy? What is its origin and why have the country’s SOEs failed to implement their respective turnaround strategies successfully?
As an academic discipline, turnaround strategy is relatively new. It dates back to the early 1970s when corporate decline first reared its ugly head in the United States of America (USA), following a period of sustained economic growth, low unemployment and low inflation between 1948 and 1973. During that period, the US economy grew at an average of 3,7% per annum and American companies sold their products and services both at home and abroad, mostly in Europe, Asia and South America. At the time, the US was a net exporter, with a global trade surplus of $157 billion.
However, that changed in 1973 when the Arab-Israeli war broke out, when Arab members of the Organisation of Petroleum Exporting Countries imposed an oil embargo against the USA following the US government’s decision to support Israel and to supply military weapons to that country. The result was that oil prices soared in the US (and the other embargoed countries), inflation increased until it reached 20% in 1981 and fell to 8% in 1986, and the country’s growth rate fell to an average of 2,3% per annum until 1985. The US’s trade surplus was halved to $79 billion as foreign-based products started flooding the US market. Additionally, the rate of technological changes accelerated to the extent that foreign substitutes posed a real threat to long-established American products.
It was then, when corporate declines and stagnation began to be experienced in the USA, that turnaround management as a discipline was born in that country. Schendel and Patton and Schendel, Patton and Riggs were the first to publish academic papers on “Corporation stagnation and turnaround” and “Corporate turnaround strategies: A study of profit decline and recoveries”, both in 1976. Charles Hofer followed in 1980 with his much-quoted paper on “Turnaround strategies” and, following research lasting a decade, Donald Bibeault built on Hofer’s work when, in 1999, he published a book, based on his PhD thesis, called Corporate Turnaround: How Managers Turn Losers into Winners! Since then, other scholars like Robbins and Pearce, Arogyaswamy, Barker and Yasai-Ardekani, Boyne as well as Trahms, Ndofor and Sirmon, among others, have contributed immensely to the body of knowledge on turnaround strategies.
So, what is turnaround strategy? Simply put, a turnaround strategy is a series of urgent interventions which are taken to arrest and reverse a company’s decline and to place the company back on the growth path. Bibeault calls a turnaround situation “an abnormal period in any company’s history” which requires unique management approaches that are vastly different from those used during a normal period. He and other scholars argue that during such a period, proven management principles routinely used during moments of stability are no longer valid.
It follows, therefore, that a turnaround situation is different from a normal situation, and that a company undergoing a turnaround is different from one which is performing well. Similarly, managing such a company is much more demanding than managing one that is doing well. This is because by the time a company finds itself in a state where it needs to be turned around, it is already in trouble, hence consistent, urgent actions are required. Agility in decision making is vital.
In order to improve the chances of a successful implementation of a turnaround strategy, it is crucial that at least four primary conditions must be met. Bibeault, who calls them prerequisites for a successful implementation of a turnaround strategy, lists these as
• “new competent management with full authority to make all the required changes”, with the CEO being the architect and implementer of the turnaround strategy; • “an economically and competitively viable core operation”; • “‘Bridge’ capital to finance the turnaround”; and • “a positive attitude and motivated people so that initial turnaround momentum is maintained”.
Absent any one of these factors, a company’s chances of implementing a turnaround strategy successfully are very slim.
Turnaround scholars are unanimous in their view that no turnaround strategy can ever be implemented successfully unless the leadership of the company in question can take drastic steps to reduce its costs and to sell off non-core assets in order to generate much-needed revenue. They call these steps cost retrenchment and asset retrenchment. Among the most common forms of cost retrenchment, in addition to efficiency improvements, is reducing the number of a company’s employees.
These are not easy or popular actions to take, but they are the bare minimum required to improve the chances of a successful implementation of a turnaround strategy. That is why it takes a particular type of person to lead a company during a turnaround situation. Like other scholars, Bibeault insists that the CEO of a company implementing a turnaround strategy should have “maximum authority” delegated to him/her and he/she must be prepared to be unpopular as a result of the tough decisions which need to be taken: “At the outset, he’s going to step on a lot of toes, but if he doesn’t step on a lot of toes, he probably hasn’t done his job….In both tone and action, the turnaround leader has to show that he is taking charge. His tone must be assertive and his action must be immediate. How he says things and how he does things are almost more important than what he says and what he does.”
It is during the first stage of a turnaround, called the emergency stage when an emergency plan is put in place, that most of the urgent, tough decisions are taken and implemented. During the stabilisation stage and the final, return-to-growth or redevelopment stage, it is important to ensure that ways are found to improve the morale of the remaining employees, who will have been demoralised during the first stage, and to incentivise them to work towards the attainment of the company’s turnaround goals.
According to the literature, it takes three years, on average, to implement a turnaround strategy.
Given the background given above, what are the chances that South Africa’s SOEs can implement their turnaround strategies successfully? Based on the findings of an intensive doctoral study on SAA that I have just completed, the chances are not good at all. In fact, as things currently stand, no South African SOE will be turned around successfully.
For instance, SAA was poorly capitalised and could not afford the kind of fuel-efficient aircraft flown by its competitors, and the Government dragged its feet when it came to providing the funding on which the Long-Term Turnaround Strategy (LTTS) was premised. The national carrier found itself shackled by an unfunded, ill-defined dual mandate which required it to fly non-profitable routes, a requirement for it to advance transformation (among other ways, by purchasing through intermediaries which inflated the prices of goods and services but added no value), and the need to have all important decisions approved by the Shareholder Minister, as is stipulated in the Public Finance Management Act (PFMA).
The SAA management team even needed to get Shareholder approval for something as mundane as having an off-the-record briefing with the media. The airline was not permitted to effect important cost-saving measures which would have resulted in retrenchments, and the Board was not allowed to place the airline on business rescue until the eleventh hour when Solidarity was about to ask the court to order that SAA be placed in business rescue.
Although Shareholder Ministers had up to 30 days within which to approve or reject decisions made by the SAA Board on important matters which required their approval, some Ministers took twice as long to do so on some occasions, and did not take decisions at all on others. Then SAA CEO Vuyani Jarana said Shareholder Ministers refrained from making decisions if those decisions stood to “undermine or affect their political careers”.
Other challenges included lack of coherent Government aviation policy, frequent changes of Shareholder Ministers and their different approaches to the airline, reluctance by Shareholder Ministers to make decisions and their tardiness in honouring important financial undertakings, unhealthy Board dynamics, Directors’ fears of reckless trading, leadership instability, lack of management skills and expertise, too many executives in acting positions, as well as publicly contradictory Government voices.
The effect of all these challenges is that the airline was robbed of agility, which is critically important in the airline business. The analogy often used by SAA participants during interviews with them was that of a boxer thrown into a ring for a world championship fight – but with his hands tied behind his back!
Since Shareholder Ministers functioned like the SAA Board, some members of that Board interfered in operational matters, thus leaving the CEOs – most of whom were acting – emasculated and frustrated. With the exception of Khaya Ngqula, Sizakele Mzimela and Vuyani Jarana, who felt that they were appropriately empowered, SAA CEOs generally had little authority to run the business.
An exasperated SAA Chief Commercial Officer, Peter Davies, stated during an interview: “In a competitive environment which is fast changing, it’s quite difficult for an airline to make commercial decisions when you are being treated like a Post Office … I think it’s a fact that SAA has never been allowed to operate as a normal commercial airline because of restrictions placed by the Shareholder. I’m being brutally honest.”
At the end of an hour-long interview, Jarana had advice for the Government:
When we speak about SOCs, accept that they have been in a hole for a long time and are the children we don’t like, but to get rid of the children you need a process. That process must be bought into by everybody else; or rehabilitate them, take them to a rehabilitation centre. You need to actually work on a rehab programme with everybody. It doesn’t help to complain and say ‘hey, my children are on drugs’, and so on. It helps no one. At the end of the day, they are your children.
By the way, you parented them. You chose them a nanny; you chose what they eat; you chose which school they went to; you chose who was a minder. Now you can’t, therefore, throw them up in the air. If you want to kill them or send them somewhere in the north pole, you must agree and take them to the north pole. So, if you want to rehabilitate them, you must commit to the rehabilitation programme, painful as it is. This is where I see lack of cohesion. We need to do that.
Malusi Gigaba, who was twice SAA’s Shareholder in his capacities as Minister of Public Enterprises and later as Minister of Finance, shared the view that the Government was responsible for SAA’s problems:
The biggest problem, I think, for SAA has been the Shareholder, and the reason why you have had the turnaround strategies not succeeding has been because the Shareholder lacks vision, continuity and persistence. So, in the middle of implementing one turnaround strategy, you change everything, and the people who come in are not given an instruction to pursue the reform.
Instead, they come in and they are told: change everything. Or, if they are not told, they do it themselves because they presume that to be their mandate, otherwise why has everybody been changed? If you were happy with the political and administrative plan, you would have left the people in charge to continue. If you change all of that, uproot them, you are sending a message to us who are coming in that you were not happy, so change everything – and then they do. You then have to spend more money on consultants, doing more consulting, coming with new plans, which are also not going to be implemented because by the time they need to be implemented, there is a new leadership and there are changes.
Although my study was based on SAA, which failed spectacularly to implement its LTTS between 2013 until it was placed in business rescue in December 2019, there is a good chance that the same problems which confronted the airline are replicated in other SOEs in the country. We know for a fact, for instance, that the other SOEs have also not been allowed to include employee lay-offs in their cost-retrenchment strategies.
What, then, would need to be done to improve the chances of implementing turnaround strategies successfully in South Africa’s SOEs? Based on my findings, I propose the following framework:
1. Firstly, there needs to be leadership stability, with a CEO and a Management Team that have the requisite skills and expertise. Organisational stability is a sine qua non. It is vital that a CEO who introduces or drives a turnaround strategy remains in office throughout its implementation. Organisational stability at top leadership level increases the chances of success in implementing turnaround strategies.
2. Secondly, a CEO implementing a turnaround strategy must own that strategy. This is consistent with Bibeault’s view that a turnaround leader should be “the architect of the turnaround strategy” and its implementer. If he or she was not party to that strategy’s development, it is important that he or she should have an opportunity to review and/or tweak it accordingly and then own it. A CEO has a better chance of successfully implementing a turnaround strategy which he or she believes in and has ownership of.
3. Adherence to good corporate governance is paramount, with the Board being responsible for strategic oversight and the CEO and the Top Management Team (TMT) responsible for operations. This is consistent with agency theory, which posits that the existence of a Board, in addition to the payment of remuneration incentives to a company’s leadership in order to align their interests with those of Shareholders, reduces agency loss.
4. It is vital that the CEO should have full operational autonomy. This is consistent with stewardship theory, which contends that corporate leaders are ethical individuals who act as stewards of the companies entrusted to them and are motivated by the need to maximise organisational performance.
5. A supportive Shareholder that leaves a capable, empowered Management Team to run a company under the direction of a similarly supportive Board of Directors increases the chances of a company’s success in implementing turnaround strategies.
6. Clarity on decision rights and accountability within an organisation increases the chances of success in implementing a company’s turnaround strategies.
7. There should be a turnaround implementation fund. As British aviation consultant Chris Tarry argued, a turnaround “needs cash and a lot of management time and a reasonable expectation”. Such a fund is vital to ensure the successful implementation of a turnaround strategy.
8. Finally, there should be government policy/regulatory coherence. Policy/regulatory coherence is vital not only for SOEs, but for all companies in the different sectors of the economy. Policy coherence and its consistent application make long-term planning possible. Knowing the rules applicable to business or a sector of the economy and being certain that they will not change willy-nilly during the implementation of a turnaround strategy, but will be enforced consistently, is vital for business in general, not only for SOEs.
THE FRAMEWORK IS ILLUSTRATED DIAGRAMTICALLY BELOW
Kaizer M. Nyatsumba is a turnaround strategist and the author of