According to classic economic theory, business failure can be a good thing – the market’s way of transferring resources from inefficient or outdated organisations to those whose products and services are more relevant.

That view is fine up to a point, but it is also the case that otherwise successful enterprises hit the rocks because of avoidable defects in the way they are run, leading to flawed decision making and unnecessary risks to their reputation.

In 2011, Airmic published research by the Cass Business School into the causes of corporate failure. The report, Roads to Ruin, looked in detail at 18 crises including 23 companies where enterprises had come badly unstuck. Seven of the firms had collapsed (with three having to be rescued by the state), while most of the rest suffered large losses and significant damage to their reputations.

Around 20 chief executives and chairmen subsequently lost their jobs, and many non-executive directors were removed or resigned in the aftermath of the crises. In almost all cases the companies and/or board members personally were fined, and four executives were given prison sentences.

We wanted to identify whether these failures were random or whether they had elements in common. Cass studied a wide range of corporate crises, including those suffered by AIG, Arthur Andersen, BP, Cadbury Schweppes, Coca-Cola, EADS Airbus, Enron, Firestone, Independent Insurance, Northern Rock, Railtrack, Shell and Société Générale.

The outcome was to demonstrate clearly that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail. We identified seven types of weakness, as follows:

Board ineffectiveness. Limitations on board skills and competence and the ability of non-executive directors to monitor and control senior executives effectively. 

Jan-Mar 2013 Issue