It’s been more than ten years since the global financial crisis. Yet as cases like Alitalia and Ilva show, Italy still hasn’t found the formula for preventing or contending with corporate crises, despite our country’s dramatic exposure to this phenomenon. And anyone who regularly tracks the headlines in the news would readily agree. So it’s worthwhile to try to understand the reasons for this disheartening reality and whether we can do something to deal with the problem.
The size of Italian companies is extraordinarily small and shrinking. Our ‘big’ companies (by European standards) employ little more than 20% of the work force in Italy, while in Germany this number tops 50%, and France is just below that. As every global study clearly demonstrates, big companies accelerate internationalization, as well as research and innovation.
Statistics show that just above 1% of Italy’s GDP is earmarked for R&D, subsidized substantially by public funding. In contrast, the European average is double this number, while Finland normally exceeds 4%. In addition, if we sum up R&D investments for the top ten Italian companies by size, we get well over half of the total private investments. Beyond a doubt, the capacity for innovation and international penetration are powerful anti-crisis tools for companies.
The world over, the most damaging demonstration of corporate distress is illiquidity, i.e. the inability to meet the conditions and due dates on debt obligations. To mitigate the risk of illiquidity companies need financial flexibility, that is, the ability to quickly access various sources of financing with ‘normal’ economic conditions. But smaller companies have no real funding alternatives other than their own capital (typically family assets) or bank loans. Large enterprises instead have a deep portfolio of options, beginning with the bond market and various forms of these instruments. Yet there are 30 or so non-financial Italian companies that have issued bonds on the Euromarket, compared to several hundred from Germany, France, Great Britain and Switzerland. The ratio of short-term bank loans over total debt in our country runs to 35%, while in Spain the percentage is just over 10%.
The reality is that companies are too small, which means that they don’t have enough antibodies to actively defend themselves from crises. What’s more, there are no signs of a turnaround: the average firm size in manufacturing is constantly dwindling, in part as a result of generational transitions, which very often lead to painful breakups and selloffs. Added to this, the capacity for growth through mergers and acquisitions seem to be gradually disappearing. In 2000 Italy’s weight on the world M&A market was around 3%, but in recent years that number has slumped to 1%. In this context, our companies are far more often prey than predators, not only in our celebrated fashion industry but in many other sectors as well.
In terms of the factors that are incompatible with Italy’s role in the world and global standing (at least in theory), along with company size there is also a crisis management system that has proven to be exceptionally ineffective. This despite the remarkable number of regulatory reforms that have been adopted over the past fifteen years.
What are the most obvious weaknesses? First, the entrepreneurs who are the causes (or unfortunately for them, unwitting casualties) of the crisis are the still ones who hold the reins on reorganization. They choose consultants and deal with the creditors; they weigh the options on the table to survive the crisis; and in the end, they ask for sacrifices from suppliers, banks, and in some cases their employees and the State. But here’s the rub. Leaving aside the fairness in an ideal world of a process handled by the very people who caused the crisis, there is an objective fact that we have to keep in mind: it’s one thing to manage growth, and quite another to deal with a crisis. The two scenarios call for totally different skill sets, and entrepreneurs certainly do not possess both.
Second, in the procedures prescribed in bankruptcy laws (the foundations for which date back to 1942), the time frame is incompatible with the need for rapid intervention that crisis situations demand. There are often delays in intercepting these situations, which is another reason why the hemorrhage should be stanched immediately.
Coming up with a new business plan, finding a way to restructure debt and negotiating this solution with counterparties, and possibly getting a stamp of approval for all these measures from a court or from creditors – if ‘doctors’ need to do all this, the ‘patient’ risks dying before they find the right therapy. A much better option would be to take action right away with measures aimed at improving management in operational terms, curbing expenditures and facilitating the generation of liquidity as far as possible to face the emergency.
A particular case, one that may be even more serious, involves the procedures for big companies. Regardless of technical form, the measures these players can adopt include nominating one or more Extraordinary Administrators, who step in for the entrepreneur to take control in an already-compromised situation. Generally, these people are qualified, competent professionals (for the most part CPAs or lawyers) with prior experience in ongoing concerns. But the question that instantly springs to mind is: Will these brilliant experts have the time to take up their positions from one day to the next, in the companies they’re assigned to? Will they work, nose to the grindstone, until the turnaround is complete? Will they have the managerial and sector-specific skills they need? If you have your doubts, you’re not wrong.
The International Finance Corporation of the World Bank conducts an annual study on the effectiveness of the crisis management tools in various countries (Doing Business Database). Three profiles are analyzed that accurately represent the results of interventions in operations protected by bankruptcy laws: the ‘quantum’ recovered by creditors; the duration of the procedures in question; the cost of those procedures as compared to the amount recovered. In this ranking the situation in Italy is revealed in all its weakness: the recovery rate here is around 60%, compared to over 90% in Norway, Japan, and Canada. What’s more, the duration runs far longer than two years, while in other contexts on the continent such as Belgium or Norway, this window is measured in months. Lastly, the cost of bankruptcy procedures in relation to the amount recovered in Italy is over 20%; in Denmark and Finland and Singapore, it’s under 4%.
As the old proverb says, “Prevention is better than cure.” In our case, that means promoting growth in size to strengthen the defenses of companies and make them more resistant to the germs of crisis. Then, to more effectively manage reorganization processes, we need to come up with solutions that prevent the people who caused the crisis from dealing with the fallout and finding the way out. Modifying the timeframe for bankruptcy procedures, to include intercepting and not simply managing the crisis, is a prerequisite to boost the chances of success.
And one last note: When a crisis strikes in all its devastating power, the people in charge of dealing with it have to do so with determination, competency, and single-minded focus. It’s work that can’t be part-time (or worse still, squeezed in between other commitments).
To win the battle against the “Invincible” Spanish Armada, it took Sir Francis Drake, not three midshipmen.