Stakeholder Support

A business transformation presents an abundance of challenges for any leadership team, regardless of tolerance for conflict.  In the business press, financial issues often take center stage in reporting on a business transformation, and with good reason.  The task of systematically resetting the capital structure and profit potential of an enterprise is an enormous endeavor, and when that task is combined with intense time pressure, it is easy to see how financial concerns naturally take the forefront, particularly in the discussions of outside observers.  The challenge in focusing too narrowly on financial issues in a business transformation is that such a focus obscures a key driver of success: fostering stakeholder support by rebuilding relationships and crafting a narrative of future success that effectively sets the stage for productive collaboration moving forward. 

It is difficult for many leaders to intuit the crucial importance of stakeholder support, and as a result that importance is felt most keenly when it is absent.  By their nature, relations with stakeholders are often marked by long stretches of monotony interspersed with intense periods of rancor.  The time commitment necessary for productive relationship building with multiple stakeholders has none of the glamour of the 11th hour restructuring that saves a company, or the heroic return to profitability following years of losses that the most dramatic business transformations are known for.  And yet, as the work of professor Michael Jensen at Harvard Business School suggests, value maximization is inextricably tied to cultivation of stakeholder support.  Simply put, the headline grabbing value maximization results of a successful business transformation are impossible without stakeholder support. 

The stakeholders in every situation are varied, but the overriding theme in the early stages of a business transformation is their sense of anger and betrayal.  Capital providers feel misled by performance that has fallen short of forecasts and are impatient for a credible pathway to an acceptable level of profitability or a palatable option to cut their losses and exit the investment.  Employees are demoralized by poor performance and frustrated by management’s inability to solve the problems that are overwhelming the company.  Suppliers are furious at a lack of communication as they nervously assess their exposure while hoping for a return to better days.  Each stakeholder group has a good deal to gain from a successful business transformation, but the reality is that, for any transformation effort to truly be successful, each stakeholder group is going to need to grapple with a set of hard truths first.  

Earning stakeholder support in the context of a business transformation is very much a process of guiding stakeholders through the acknowledgement of hard truths and on to a workable framework for a forward-looking relationship with the company.  Over time I have come to see this process as one of the defining crucibles of transformational leadership.


We can safely generalize stakeholder constituencies into the following groups: Capital Providers, Employees, and Suppliers.  Each of these broad constituencies has a unique set of concerns, risk tolerances, and levers at their disposal to help or harm a nascent business transformation.  It is the role of leadership in a business transformation to manage each constituency for the maximum benefit of the enterprise.

With each of these constituencies a few key principles apply:

Rebuilding Trust

Capital Providers: This group, which comprises lenders ranging from banks to private credit funds and shareholders ranging from family owners to private equity firms, is broad but has a common interest in earning an attractive risk-adjusted return on investment.  The challenge with this group is in respecting a party’s risk/return preferences and structuring a formal proposal that will result in a palatable long-run equilibrium.  Banks, almost always at the low end of the risk/return spectrum, will seek a path to reduce their exposure in a business transformation, while private equity firms, at the opposite end of the spectrum, will be more amenable to deploying additional capital at an attractive return.

The hard truth for this stakeholder constituency is the definitive end to prior forecasts and a resetting of the baseline, both short and long-term.  In the short-term, this resetting of the baseline will often involve a violation of lending covenants, a worrisome level of liquidity (cash plus untapped borrowing capacity), and a need on the part of capital providers for intensive monitoring (often weekly, but usually no less than monthly).  In the mid-term, a restructuring is often necessary, which raises the specter of considerable losses to all capital providers, but most often to equity investors and subordinated debt providers.  Given these dynamics, trust is low, all analysis is heavily scrutinized, and it is of the utmost importance that leadership at the company under-promise and over-deliver.

Capital Providers

Employees: As a group, employees are the stakeholder group most open to a plan that will return the company to success, but most resistant to the idea that they (individually) had a role in the company’s troubles.  Executive team members are often defensive and unrealistic in assessing their performance prior to the launch of a formal business transformation initiative and are noteworthy in their frequent attempts to envision a successful business transformation that somehow leaves their personal status quo unchanged.  The hurdle with this constituency is to address layoffs, reassignments and key promotions quickly, and instill a sense that, following a brief but intensive transition period, their efforts will again be the prime determinant of their future success at the company.   

The hard truth for this stakeholder constituency is that the status quo is at an end, permanently.  People will lose their jobs, and for those who remain there will be considerable changes: departments will be reshuffled, executive departures and new promotions will scramble old power dynamics, former sacred cow divisions or projects will be objectively reassessed.  The promise here is that the change is premised on making the company better, the challenge is in recognizing that such an outcome will be secondary to those facing an individual loss in power, status, or control. 

Suppliers: This broad stakeholder group encompasses landlords, key supply chain partners, and miscellaneous service providers large and small.  The key dynamic for this group is the overwhelming desire to maintain and grow their commercial relationship with the company, mediated in part by concern over their current level of financial exposure and a desire for clarity on the path forward. 

The hard truth for this stakeholder constituency is that every business transformation takes time, and so the fix is unlikely to be immediate.  Past due balances are more likely to be worked down over time rather than paid off immediately.  In some cases, this disappointing news must be delivered simultaneously with a request for additional concessions.  The key here is to focus on the plan that is being executed, and appeal to greed (growing with the company post-transformation), over the fear of current levels of financial exposure.

Employees and Suppliers

Time and Attention

The investment in leadership time and attention necessary to rebuild stakeholder support is considerable.  In the short-term, even formerly low-value stakeholder communications should be handled by executive leadership.  Routine interactions such as vendor calls, quarterly financial reviews with capital providers, and employee townhalls should be recast as opportunities to reinforce the message that a business transformation is in progress, get real-time feedback on how the process appears to those outside the c-suite, and provide a forum to address questions and concerns promptly. 

Leaders executing a business transformation must recognize that they swim in a sea of skepticism, and that the way to change that condition is to address the skepticism patiently, clearly, and often.  Results ultimately carry the day in any business transformation initiative, but in the early stages the process can also be envisioned as a series of interlocking public relations campaigns to different stakeholders.

Capital provider communications can most effectively be recast through upgraded report quality and an accelerated reporting cadence.  If updates had been quarterly under normal circumstances, consider a weekly or semi-monthly update call along with appropriate financial reporting.  Look to provide additional metrics, featuring an appropriate mix of leading and lagging indicators, and tell a consistent story.  Once the transformation has gained traction, invite capital providers to an on-site presentation of the long-term strategy.  The goal here is to provide visibility into near-term performance, provide advance warning of any issues, showcase improved performance, and build excitement for the future. 

Employee communications offer the prospect of the rich bounty of energy and goodwill that comes from an energized, enthusiastic workforce.  Unfortunately, the risk of declining morale and skepticism is ever-present.  Communication to this group must represent a mix of styles: townhalls, small group gatherings, email, etc.  Few people are equally disposed to all methods of communication, and leaders in a business transformation should keep that in mind when crafting an approach aimed at winning, and keeping, the hearts and minds of this group.

Vendor communications are a risk area for all but the most iron-willed leaders in a business transformation.  Accusations and threats are to be expected in the early days, as months or years of pent-up frustration are released, ironically on the very leaders with the discipline to hear out angry vendors.  The key with this group is consistency and access; setting a rhythm of weekly updates with critical vendors and providing them with an executive level point of contact goes a long way toward reestablishing a positive working relationship.   

The investment in time and attention necessary to rebuild stakeholder support is considerable.  In the short-term, even formerly routine stakeholder communications should be handled by executive leadership.  While this approach might initially seem to represent a questionable allocation of precious time, when considering the crucial importance of stakeholder support, the cost is low. 


Business transformations strain the political skills of even the most persuasive leaders.  The dynamic challenge of setting expectations, addressing past missteps and rebuilding trust, all while driving cultural, financial, operational, and strategic change, is daunting.  But with stakeholder support even the most challenging business transformation becomes less so, and without it even seemingly minor situations can falter.

About the Author:

David Johnson is founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. 

David can be contacted at:

Burger King Revival


For years, Burger King was the sick man of the quick service restaurant industry.  A perennial laggard to McDonald’s in scale, the company was also widely seen as hamstrung by poor execution, a revolving door of leadership (Joe Nocera noted in 2012 that the company had had 13 chief executives in the prior 25 years) and an unclear strategic vision.

The company’s purchase for $1.5 billion by a private equity consortium of Bain Capital, Goldman Sachs and TPG in 2002 marked a brief resurgence, but when private equity firm 3G, acquired the company in 2010 (for $3.3 billion), Burger King was still seen as a troubled operator.

What a difference focused ownership can make.  Burger is now setting a grueling pace that its fellow quick service restaurant competitors are being pressured by Wall Street to match. 

3G’s playbook has been heavy on the fundamentals, and laser focused on solid execution. 

  • By refranchising restaurants, Burger King is challenging industry orthodoxy that a franchisor should operate a large number of its own restaurants.  Also, divesting those company owned restaurants has allowed Burger King to offload the capex requirements for those locations onto franchisees, boosting free cash flow.
  • Increased focus has been placed on international expansion, an area where Burger King had long been seen to be badly trailing McDonald’s and others. 
  • General and Administrative costs have been rationalized, creating further operating leverage to the business model. 
  • Increased focus has been placed on advertising and marketing. 

This approach is simple, but not easy.  The focus and clarity of vision that 3G seems to have infused into Burger King is generating excitement on Wall Street, while driving competitors (in particular McDonald’s, Wendy’s and Yum! Brands) to adopt similar approaches.

The example of Burger King highlights the value potential of an outside perspective paired with a simple yet audacious strategic plan.  In a market awash in capital, private equity firms will increasingly seek to execute value creation strategies premised not on simple financial engineering but on re-envisioning their portfolio companies, as 3G has done with Burger King.

About the Author

David Johnson is the founder of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to companies in transition.  David has served as advisor or interim manager on over $5 Billion of distressed transactions, and is a recognized expert on the topics of value creation, change management, performance improvement, turnaround, and restructuring.  He can be contacted at or 312-505-7238.

Failure to Recognize the Obvious

This article originally appeared in Business Insider

Article Date: 7/3/11

I had a chance to see “Page One” this weekend, the documentary on the troubles facing the New York Times.  Many have opined on the issues facing the New York Times, notably Henry Blodget here at Business Insider, but this documentary illustrated for me how well and truly screwed NYT may be.

A turnaround situation requires, more than anything else, honesty about the nature of the problem and at least a sense of what success looks like.  With revenues down over 24 percent from FY 2008 – LTM, the situation at NYT is clearly a turnaround situation.  And yet, over the course of a very well executed if muddled documentary, I was left with the strong impression that too few of NYT’s own people have a sense of how this ends, other than hoping that each round of layoffs will be the last, or patting themselves on the back for the admittedly impressive breadth and depth of their news coverage.

Death is Not the End

It was interesting in watching “Page One” to hear the vitriolic comments of NYT employees regarding a January 2009 Atlantic article written by Michael Hirschorn.  In the article, Hirschorn outlines the serious financial troubles facing NYT and suggests that the world might soon find the company consigned to the dustbin of history.  Hirschorn’s boldest prediction, that NYT could fail in 2009, has clearly been proven false, but on rereading the piece I am struck by just how much of his analysis remains relevant.

Hirschorn makes a number of fantastic points, notably:

“journalistic outlets will discover that the Web allows (okay, forces) them to concentrate on developing expertise in a narrower set of issues and interests, while helping journalists from other places and publications find new audiences.”

“over the long run, a world in which journalism is no longer weighed down by the need to fold an omnibus news product into a larger lifestyle-tastic package might turn out to be one in which actual reportage could make the case for why it matters, and why it might even be worth paying for. The best journalists will survive, and eventually thrive.”

Facing Up to the Challenge

As a public company valued at not quite 5.4x LTM EBITDA, the markets are telling NYT that something needs to change.  A quick look at the numbers suggests that the low-hanging fruit has already been consumed (see exhibits on key financial ratios, there is just not much left there) and it is time for serious discussion of the types of unpalatable options that make executives nauseous but have a tendency to save struggling companies.

·       Say Goodbye to the Past: Man, the 70s were great for the major papers.  NYT had the Pentagon Papers, Washington Post had Watergate, and journalism was on the march.  A lot has changed and it is time to get over it.

·       You Are Not a Public Trust; You are a Corporate Governance Basket Case: I am not a shareholder in NYT, but to hear Bill Keller, the Executive Editor at the time of Page One’s filming, explain that all options had been considered; including running the company as a nonprofit, made my blood run cold.  This is a publicly traded company, and regardless of the dual-class structure every investor who is not a Sulzberger has a reasonable expectation that management is focusing on turning this ship around, not turning it into a megalithic non-profit dedicated to the idea of its own greatness.

·       Adopt a Bold Strategy and Hunker Down: This is not a call to buy something.  Rather, divest everything that is non-core, put together a clear-eyed view of where this company will be in five years, and then execute.  The people at NYT are an erudite lot: think Fabian strategy, think the Siege of Constantinople in 626, think Stamford Bridge.

Revolution is Not a Tea Party, and Neither is Business

Same Zell got kicked around briefly in “Page One”, and I think somewhat unfairly, when a clip was shown of him at a meeting with Tribube employees exhorting them to change the company.  Yes, Tribune became a fabulous mess, but Zell was right: in the end a company must be able to afford its cost structure, or else reduce it.  This basic law of business does not include a special dispensation for newspapers with foreign offices and numerous Pulitzer Prize winners.

The Change Agents We Need

The leader of men in warfare can show himself to his followers only through a mask, a mask that he must make for himself, but a mask made in such form as will mark him to men of his time and place as the leader they want and need.

― John Keegan

The middle market has seen considerable change in recent years, and these changes have led to an evolving shift in how capital providers view distressed situations among their portfolio companies. Increasingly, capital providers (including banks, commercial finance companies, subordinated debt lenders, private equity firms and fundless sponsors) are seeking out versatile professionals able to serve as Chief Restructuring Officers in order to manage a distress situation from the inside, and steer a troubled company to an optimal outcome.  In many middle market companies a CRO will often find him/herself to be the lone advisor on-site, and as such these professionals must embrace the role of change agent.

The emerging generation of CROs will need to possess the following traits:

1) Focus on Substance over Form.  Too often distressed situations devolve as a result of an overly restrictive view of form success will take.  An experienced CRO will recognize that a sale of the company, refinancing, or balance sheet restructuring are all likely to generate superior value to a liquidation, and as a result will pursue a flexible strategy to position stakeholders for the highest value outcomes while not excluding the possibility of lower-value (but still viable) solutions.

2) Strong Communication Skills.  A distressed situation is always a tenuous balancing act, with multiple constituencies angling for position.  Skilled CROs understand the need for clear and consistent communication to all stakeholders, both within the company and without.  Inevitably certain constituencies will receive more or less information, but the messaging should be clear and the focus should be on executing toward an identified goal.

3) Comfort with both Strategy and Tactics.  In the middle market the day of the armchair CRO is coming to an end.  Small and midsize companies experiencing distress can no longer afford to have turnaround advisors dictate broad strategy while the company internally struggles with execution issues.  Today’s distressed situations call for advisors able and willing to first develop a viable strategy and then take a central tactical role (i.e. leading the charge) in executing that strategy.

The role of Chief Restructuring Officer is becoming increasingly central in driving distressed situations to a successful conclusion.  However, changes in the capital provider universe as well as an increase in the general tempo of distressed situations has given rise to a need for a more versatile, independent type of CRO than those who previously served the market.  Increasingly stakeholders must look not only for a CRO, but for a CRO with the right mix of skills, in order to steer a distressed company to a successful outcome.

Challenges Facing Midsize Manufacturing Companies

This article originally appeared in Business Insider

As we review the landscape for small and midsize manufacturing companies, we see considerable challenges.  A review of some items in the February 2013 ISM Report on Business® is instructive (see report here).

Gross Margins

Gross Margins have been an issue that we have focused on extensively at ACM Partners.  The operating expenses of a company are certainly important, but in our experience understanding where gross margins might be headed and why is often a useful exercise in predicting pockets of distress in the broader economy.

The gross margin picture suggests that challenges lay ahead.  In February the index of prices paid by manufacturers increased by 5 percentage points.  As companies lose the ability to protect gross margins, management teams often panic and seek to address the problem by increasing sales.  The pursuit of higher sales at declining margins and with less discipline over the costs of servicing new clients is a long-established recipe for taking a company from mild under-performance to deep distress.

Inventories: Up at Producers, Down Among Customers

Among small and midsize industrial companies we anticipate demand shocks as customers, now comfortable with a historically low level of inventory, respond more quickly to changes in end-market demand.  The disconnect between customer inventories having been below 50 (the point at which they are considered too low) for nearly 4 years and producer inventories increasing suggests that producers are increasingly ill-equipped to address fluctuations in demand, and may be making the implicit choice to tie up cash in increased working capital rather than in capital expenditures.

These diverging trends in inventories present two serious challenges to small and midsize manufacturers:

1.      From a pricing standpoint the existence of slow-moving inventory will provide for some companies a temptation to sell at reduced prices, further eating into gross margins.

2.      From a financing standpoint this approach is a recipe for trouble, as asset based lenders will advance considerably less on inventory than on accounts receivable.  Additionally, for troubled small and midsize industrial companies there are fewer options to get any availability on inventory, further heightening the risk of this approach.  

Changing Power Dynamics

Power flows up and down the supply chain, depending on industry, quality of management, availability of financing and a multiplicity of other factors.  At the moment large national and multi-national customers control the fates of their suppliers, both the small and midsize manufacturers making the products, and the similarly sized distribution companies that store those products and handle order fulfillment.  As these dominant customers seek to maximize profitability and optimize their working capital, they are causing ripple effects throughout their supply chains.  The dominant strategy for the small and midsize industrial companies seeking to adjust is to become indispensable by occupying high value niches or gaining scale.  


Companies will continue to make and ship things, and so manufacturers and distributors will continue to have a role in the economy.  But there is no guarantee that their role will be a profitable one.

The Transience of Advantage

This article also appeared in Business Insider

June 17, 2013

Round the decay of that colossal wreck, boundless and bare, the lone and level sands stretch far away

– Percy Bysshe Shelly, “Ozymandias”

In recent weeks we have seen two developments that, to us, capture the shifting nature of all competitive advantages.

  • Microsoft (MSFT), which rode to tech dominance in the 1980s and 1990s on the back of its wildly successful Windows operating system and Office suite for productivity software, is working on a comprehensive restructuring to streamline the company.

The Least Bad Outcome

This article originally appeared in Business Insider

October 1, 2011

By David Johnson, ACM Partners

The range of options available for addressing a problem is directly correlated to the amount of time available.  As the amount of time available to address a problem shrinks, so does the universe of options.  Eventually, the options all start to look painful.  Followers of Eastman Kodak are currently learning this lesson in corporate turnaround dynamics.

News that Kodak is looking to shop a portfolio of 1,100 patents (with the help of Lazard) had excited investors.  The $2.4 – $3 billion an IP sale would fetch would be a welcome cash infusion for a company with cumulative operating losses of $1.2 billion over the last three years.

But the market is fickle, and when Kodak drew down its $160 million revolving line of credit earlier this week, sentiment turned strongly negative.  Moody’s downgraded the company’s bond ratings to Caa2 from Caa1 (way to be ahead of the curve, guys).  Alarmed at Kodak’s cash burn, Scott Dinsdale of KDP Investment Advisors noted: “They could run out of cash in early 2012”.

Taking a look at Kodak’s financials, I think that analysis is fair.  It does not take much of a leap, given a continuation of the company’s recent poor performance, to see Kodak having burned through its current cash balance of $957 million by this time next year, if not sooner.

Given this situation, Bloomberg notes that Kodak may need to file a chapter 11 bankruptcy in order to ensure that bidders for its intellectual property are not liable for a fraudulent conveyance claim.  With the patents now for sale expected to yield several times the current market cap of the company, and additional patents that may offer further opportunities to reap some return on years of R&D (Kodak holds a total of 7,600 patents), any roadblocks to the sale of intellectual property clearly must be dealt with.

This is a sad development for a company that has seen change coming for a long time, but has been unable to make the necessary adjustments.  A 1995 Fortune article highlighted issues facing Kodak that are depressingly familiar today: managing a mature business in decline, building a business around digital imaging, right-sizing the cost structure.  The difference is that in 1995 Kodak had many more options than it does today.  After spending so much time searching for the optimal strategy, it may be that Kodak will have to settle for the least bad option of a chapter 11 filing and the sale of IP that it was never able to fully utilize.

Bowing to the Inevitable

This article originally appeared in Business Insider and TMA Midwest Blog

January 4, 2011

By David Johnson, ACM Partners

Eastman Kodak (EK), once among the preeminent companies in the U.S., is reportedly preparing to file for chapter 11 bankruptcy.  This is a sad but not entirely unexpected development.  In October I wrote on the evolving situation at Eastman Kodak, noting that in distressed situations there are no optimal outcomes.  Rather, a distressed situation is brought to a successful conclusion when the least bad outcome is pursued and achieved.

It seems that the least bad outcome has been settled on.  With its $900 million of cash being quickly eroded by persistent operating losses, Kodak must sell its prized intellectual property (IP) in order to maximize value.  The prospect of utilizing this IP in order to reinvent its business is gone.  Lazard has been managing the sale of 1,100 patents, and it appears that one of the drivers of the likely bankruptcy filing will be the need to complete that sale with the protections of the U.S. bankruptcy court.

In addition to facilitating asset sales, another benefit of a bankruptcy filing is the increased availability of financing.  For those unfamiliar with the world of restructuring, it may seem counter-intuitive that a bankruptcy filing could result in Kodak having easier access to financing.  However, given the priority assigned to debtor-in-possession loans, it makes sense that lenders would feel more comfortable providing Kodak financing to complete the sale of its most valuable IP.

Things did not need to be this way.  Eastman Chemical, once viewed as the stodgy spin-off to the more dynamic Kodak, is now thriving.  The key difference, unsurprisingly, between success and failure for these two corporate offspring of entrepreneur George Eastman was the willingness of Eastman Chemical to embrace change.

There is some poetry to the art of restructuring and turnaround, and at a moment like this, with one of the “must own” companies of the 70s reduced to contemplating a chapter 11 filing in order to sell off intellectual property that it was never able to sufficiently capitalize on, the bleak words of Shelley’s “Ozymandias” come to mind.  We should all take a moment to look on this wreckage and despair.