The denial trap: how a board of directors unwittingly contributes to its company's demise.

• Author: Pate, Carter

It is a tragic fact of business life that many healthy companies fail not because of an irrevocable downward spiral of their financial health but because of management's inability to face those problems and take action. In my 15 years as a turnaround consultant, this simple act of denial has contributed to the demise of a huge number of companies that might otherwise have been saved.

Denial is insidious because it delays important actions that, if taken in the early stages of underperformance, can dramatically improve the chances of survival. You don't have to be a psychologist to understand why company executives fall into the denial trap. They have invested tremendous emotional and intellectual energy into a management strategy that is failing. To change directions means admitting failure and exposes them to criticism by the company's board of directors.

The board members, in turn, find it hard not to trust the CEO and admit that the company has developed substantial problems on their watch. Both parties are reluctant to consider outside intervention because of the specter of company upheaval, mass firings, and other unpleasantness that is associated with the "chainsaw" image of turnaround efforts.

How can companies avoid the denial trap?

First, a clear-eyed, vigilant, and independent oversight by the board of directors in four key areas will help detect problems early and allow the company around:

1. Debt-to-equity ratio deterioration;

2. Market share/same-store sales declines;

3. Cash flow/quick ratio decline; and

4. Resignations of key personnel/morale issues.

Second, the problems that are spotted early need to be addressed in a forthright manner by an independent board member or outside consultant who specializes in reviving underperforming businesses. While this sounds self-serving, it is a critical next step for the company's regeneration. Simply stated, only an outsider can take the decisive steps that are necessary to help the company survive in the near term and provide the necessary long-term strategic planning that will restore the company's value.

I cannot emphasize enough the importance of early decisive action and outside intervention. Witness this recent example.

A CEO spent months convincing his board to acquire a competitor. After a seemingly successful acquisition, the deal almost immediately began falling apart. Sales and margins started eroding due to the maturity of the acquired company's product, and R&D and...