When bankruptcy and restructuring professionals evaluate the health of a company, they typically focus on the pieces of information that they can touch—balance sheets, cash flow statements, working capital. They look at liquidity, solvency, and profit and loss. They also look at the company’s external operating environment, including economic indicators, global forces, market influences, and competitors.
But what about the company’s internal operating environment? Can factors such as leadership, employee engagement and productivity, internal communications, leveraging of diversity, and generational issues impact a company’s financial health and prospective growth? The answer is a resounding yes. These elements are a key part of any healthy corporate culture—and ultimately a healthy, profitable organization—and cannot be underestimated or ignored.
With the business world changing at breakneck speed, organizations need to be agile and innovative enough to understand how those changes impact their internal operating environment and, ultimately, their financial viability. They also need to be equipped with the tools to proactively implement change. Without this awareness, growth mindset, and vision, many companies will ultimately prove to be unsustainable.
The impact of a failing internal operating environment on a company’s financial health is not an unquantifiable or amorphous factor. There is no need to look beyond Uber as the quintessential example of how these internal elements can derail an organization. Uber’s financial position is not unusual; there are other similarly situated companies, such as Twitter and Snap Inc. (Snapchat), that are not profitable. Further, Uber is not in danger of filing for bankruptcy—its losses have been offset by rapid revenue growth and access to billions in cash and credit.
However, Uber’s seemingly dismissive attitude toward human resources, cultural, and leadership issues has had a toxic effect on its operations and market share and is taking a toll on its investors, profitability, and overall business.1 At the beginning of 2017, Uber’s share of the U.S. ride hailing market was 84 percent. However, as reported in Fortune, “ [t]he number dropped to 77 percent in May…possibly due to challenges and controversies faced by the company.”
The challenges and controversies that have eroded Uber’s market share and made its investors nervous stem from the company’s unhealthy internal operating environment.2 On February 19, 2017, former Uber engineer Susan J. Fowler posted a blog detailing allegations of sexual harassment and threats of termination if she continued to report such incidents. Chief Technology Officer and CEO Travis Kalanick knew of these allegations, as well as the threat of retaliation against Fowler, and did nothing.
Further, a February 22, 2017, New York Times article detailed an “environment at the company in which workers are sometimes pitted against one another and where a blind eye is turned to infractions from top performers.” The article described an “often unrestrained workplace culture” where sexual harassment, homophobic language, and threats of violence were not only tolerated but were also common, as people undermined each other and their superiors to get ahead in the organization.3
Following extensive investigation, Uber announced in June that it had fired more than 20 employees, and Kalanick stepped down as CEO amid reports that many shareholders had demanded his resignation. Despite these actions and the recent appointment of a new CEO, it is unclear whether investors will ultimately support the company going forward.4
Less-than-ideal work environments are not novel, but there are three main reasons they have more of an impact on the financial health of companies today than ever before. First, stakeholders today are less tolerant of hostile corporate cultures and are not afraid to publically detail, via traditional and social media, what was once kept within company walls. Second, most companies consider attracting and retaining talent to be a crucial component of their success and sustainability in the marketplace. Finally, there is now an abundance of data that a healthy, diverse, collaborative culture creates innovation, better problem-solving, stronger performance, and ultimately more profitability.5 Promoting a corporate culture that actively cultivates and supports its stakeholders, particularly diverse stakeholders, can help to achieve these objectives. As the business world changes, it is no longer enough simply to not be an Uber.
What factors are causing the rapid changes now in the business world? Certainly technology, the globalization of the economy, and the diversity of consumer culture are major influences. Who is working in the business world is also changing—in terms of age, gender, and ethnicity—and that is having a significant impact as well.
An estimated 10,000 baby boomers will retire per day through at least 2030. Replacing them are millennials6 and members of Generation Z, who hold different assumptions about the workplace. These younger generations value certain intangibles, such as collaboration, meaning in the work they do, and feedback, and have clear expectations of equal access to opportunities and professional development. As a result, employees today expect very different internal operating environments than did prior generations; employees will no longer stay with a company that does not promote a collaborative and invested culture.
Companies that do not have the vision to recognize change and adapt to it can lose competitive advantage and become unsustainable and irrelevant (e.g., Blockbuster, Kodak). A failure to be sufficiently agile and innovative can translate into real and significant financial costs and even bankruptcy.
At the root of Blockbuster’s demise was its unwillingness to adapt to change. It failed to see where technology and the internet would take the at-home movie watching industry. It ignored the significance of emerging technology and the ways in which customers’ needs were changing (i.e., rental return times and fees became unsustainable as more people worked busy 9-to-5 or longer days). Netflix, in contrast, understood all of this and strategically acted on that change and vision, first creating a sustainable model for rentals and returns and then moving to online streaming.
The same lack of foresight and inability to change also negatively impacted Kodak. On the surface, Kodak’s downfall was attributed to not moving into the digital world quickly enough, even when people at the company saw change coming. The real issue is why Kodak did not act when it should have. Kodak’s leadership ignored people within the company who saw the problems and even offered viable solutions for addressing the issues. Leadership was content with the status quo and had created a culture where most employees did not have sufficient power to be heard. As a result, Kodak fell into an abyss of complacency, which ultimately led to its demise.
Blackberry and the recent spate of retail bankruptcies are further examples of errors in strategy and narrowness of vision. Blackberry failed to anticipate that consumers, rather than business customers, would actually drive the market and did not grasp the emerging importance of digital applications. Perhaps most importantly, Blackberry failed to anticipate that mobile phones would evolve into entertainment devices, rather than merely instruments for communicating via voice or email.
Today, many brick-and-mortar retail stores are facing the same consequences because of their failure to adapt to new and changing realities. Technology has had a major impact on the retail industry; because everyone can buy anything using their smartphones, the practice of going to an actual store to shop is becoming increasingly rare. Further, the types of products that millennials and Generation Z want—locally sourced, environmentally friendly, and experiential—in conjunction with how they shop, has transformed the retail space. Organizations that fail to recognize or embrace these changes, and adapt their consumer strategies accordingly, are no longer able to compete.7
What do these companies, and their financial failures, have in common? Their leaders all ignored changes in the marketplace and missed key opportunities to adapt to shifting realities. They did not have the vision or agility to innovate their business models on a proactive basis and, particularly in the case of Kodak, failed to recognize individuals who challenged leadership and the status quo.
The lessons learned from these companies can easily be applied to any organization that chooses to ignore new developments in today’s business world, including changes that can impact a company’s internal operating environment. The impact on a company’s healthy margins, profitability, and bottom line is directly related to its willingness to not only recognize the changing landscape but also to effectively implement the necessary innovations.
For example, today’s employees expect their employers to be fully invested in them, paving the way for equal access, support, and growth within the organization. If this is not the case, good employees seek change, eventually moving to companies where those principles are put into practice. This can impact the bottom line vis-à-vis the cost associated with losing a good employee and then onboarding a new one. For law firms, according to the Project for Attorney Retention, these costs can range from $250,000 to $500,000 per associate, depending on the number of years of experience. In non-legal settings, the cost of losing an employee can range anywhere from 16 percent of the salary for hourly, unsalaried employees to 213 percent of the salary for a highly trained position.8
And before these employees leave, they likely will create another financial drain on a company: the cost of a disengaged, unproductive workforce. Disengaged employees are estimated to cost U.S. companies $450 billion to $550 billion in lost productivity each year, according to a Gallup poll. Further, according to a CareerBuilder study, 69 percent of employers say they have been negatively impacted financially in the past year as a result of a disengaged employee.
While hopefully most companies do not have the level of toxicity exemplified by Uber, many have an unhappy, dissatisfied workforce, leaders who are not visionaries, and a culture that does not value and cultivate its stakeholders equally. The reputational costs of not having a healthy internal operating environment create additional financial exposure for companies.
Unlike the business world of the past, the marketplace now knows immediately when a corporate environment is unhealthy, and the resulting reputational costs to a company’s bottom line are real. Websites and social media are ideal venues for people to vent, rant, rate, and describe in detail their less-than-ideal working environments.9 Companies that are the subject of such negative rants and ratings may be unable to attract and retain the best talent and as a result may not be able to operate as effectively.
But perhaps the most damaging cost is the loss of innovation, creativity, problem solving capability, and diversity of thought that comes with including different voices at the table. It is that forward-looking mindset which is necessary to drive competitive advantage, profitability, and ROI. Business goals, objectives, and strategies can only truly be achieved in a positive, healthy internal operating environment.
The good news is there is nothing stopping a company from embracing change and creating the kind of high-performing internal operating environment today that will ensure that it is a financially sound, sustainable, successful, and sought-after workplace tomorrow. The most important element is the purposeful commitment of leadership. Without this top-down driver, any attempt to create a healthy internal operating environment will not work. Senior management must clearly and repeatedly demonstrate that a collaborative, open, team-oriented culture that values and supports all employees, including diverse employees, is a top priority of the organization.
To accomplish that goal, leadership needs to develop strategic, comprehensive, integrative, and actionable plans to address these issues. As with any other business plan, companies should identify what they want to look like in one, three, and five years with respect to issues such as diversity and inclusion, attraction and retention, employee engagement, communication, and culture. Education, professional development, accountability, and benchmarking then need to be put into practice to embed these goals into all company processes from the bottom up. Diversity and inclusion, innovation, and respect then become core values of the company, woven into the fabric of the organization in a real and meaningful way.
After issues requiring immediate attention are addressed, restructuring and turnaround professionals should analyze a company’s internal operating environment. Many organizations believe they have a healthy internal operating environment, and of course some do. But too many are not taking the necessary steps to implement change—or at least not until a crisis forces the issue. By then, it may be too late. These companies are being reactive instead of proactive and may have difficulty rebounding financially.
In today’s environment, perhaps more than ever, it is no longer enough to look solely at EBITDA, capitalization, and valuation; management also must look at diversity and inclusion, leadership, and employee morale. Cultural health, innovation, diversity, and forward-focused thinking drive financial success. And what company does not want to be successful?