De Nile Not Just a River in Egypt (John H. Newman Commentary)

My wife Darla asks me, “Are you mad at me?”

And I say, with a touch of surprise, “No, I’m not mad,” thinking I am telling the truth. Five minutes or a day later I realize that I was angry. I just couldn’t see it.

It’s called denial and I suspect we are all guilty of it. Perhaps it even serves a positive function in some situations.

It is, however, a big factor in causing the decline of troubled businesses.

Here are some examples:

A year ago, I was called into a 90-year-old farming business in Ohio. For 87 of those years, the company had done well, building $3 million of equity over three generations. In the past three years, all the equity had been lost through bad luck and poor management.

I asked the owner, “If you had the last three years to do over again, what would you do differently?”

His reply was brief. “Nothing,” was all he said.

Unbelievable, right?

Five years ago, I received a call from a financially troubled company run by two longtime partners. The call came from one of those partners. I’ll call him Mr. Sober. He could see that they were in trouble but didn’t know why or what to do about it. As I made my rounds, talking to employees, nearly all of them complained about the second partner, Mr. Alchy. It turned out that Alchy had a drinking problem, spent little time in the office but lots of time partying. Guess who was the last one to see that this guy was a major source of the company’s troubles? Right — Mr. Sober, who was closest to and would seem to have known the most about the activities of his partner, Alchy.

Fifteen years ago, I took a call from the desperate owner of a manufacturing company in Northwest Arkansas. Recently, his expenses had been running out of control, greatly exceeding his inflow. In just the past year he had lost $1 million, a tremendous amount for this small company. The losses were creating a cash crisis. I asked what changes we might make to stop the losses, assuming he would talk about cutting expenses.

His response: “Just get us some cash. If we can just get our hands on some more funds, everything will be fine.”

The first time I encountered such blatant denial, my reaction was to think, “My God, how stupid can someone be?” Now I realize how wrong I was. These are smart people, people who, prior to getting into trouble, were admired as successful business leaders.

And if you just had a thought about how you are different from these people, how it couldn’t happen to you, well maybe you just took a dip in that river called “de Nile.”

My point is that we are all capable of amazing denial. I’m not sure I understand it, but I have seen it too many times to ignore it. Like trying to focus on something that is an inch from your eye, it can be hard to see what is right in front of you. And if the thing that you are looking at is unpleasant, it’s even harder. So, how can you prevent denial from getting you into financial trouble like the businesses discussed above? The answer, I think, is to listen; listen to those with a different perspective, those that can view the situation from more distance. Who? There are lots of possibilities:

Maybe your spouse. As much as I hate to admit it, Darla often has some wonderful insights into my consulting challenges, even though she has no business experience. Friends can also help because they likely have no ax to grind.

Your finance people’s job is to give you objective input. Do you manipulate the financial statements to support your denial, or do you use the numbers to manage your business? When your banker raises concerns about your financial statements, do you address the concerns, or do you just spin the numbers more to the banker’s liking?

Try talking with your receptionists, truck drivers, new employees, or departing employees. They may have unique perspectives.

If you tend toward defensiveness, time will wear down your defenses. A tool that works for me is to make notes of a conversation, and then to reread my notes a month later. The process still surprises me when I discover that the notes contain powerful insights I had missed.

Of course, there is an alternative solution. Do nothing. Wait until you are close to losing it all, and then call me. I’ll be your Mirror Man. If we’re lucky, it won’t be too late. After 18 years in the turnaround business I’ve realized that my No. 1 role is to hold up a mirror to my clients and tell them, “Deal with it.”

John Newman of Fayetteville leads turnarounds of troubled companies nationwide and may be e-mailed at [email protected].