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Why businesses fail



In my previous discussions on measuring performance of businesses, I indicated that both financial and non-financial indicators can reveal a lot about whether the business will survive into the future or not. The financial (lagging) indicators show how the business has performed in the past year/s whereas the non-financial (leading) indicators show how the company is likely to perform into the future.

From these indicators, you can assess the chances of the company surviving into the foreseeable future. In this article I will discuss those issues that business leaders should attend to if they have to reduce chances of their businesses collapsing. I hope business leaders will learn from these reasons for failure and therefore avoid repeating them.
In recent years, the business environment has been marred by a series of major corporate failures and catastrophic collapses, in the likes of Enron, Kodak, AIG and a lot more. With each of these corporate failures there are certain symptomatic issues they all had in common which led them to fail.

One of the most obvious reasons for corporate failure is managerial inefficiency and ineffectiveness. This could result from a lack of a well-articulated corporate strategic plan which is executed and regularly monitored by top management. The other factors which would be related to managerial inefficiency and ineffectiveness could be over expansion, ineffective sales force, high production costs, inappropriate costing strategies, low productivity, poor financial management strategy, poor risk assessment strategy and lack of staff development among others.
Another issue that causes corporate failure is the lack of an effective board. Lack of critical skills, or lack of experience by board members in core business areas and the inability of non-executive directors to hold executives to account for their decisions have resulted in the collapse of businesses.

For instance, the collapse of Enron in 2001 was a result of directors that were inexperienced and a board which was riddled with conflicts of interest. The board failed on its fiduciary duties by knowingly allowing Enron executives to engage in high-risk accounting, interest transactions and extensive undisclosed off balance sheet activities. In their ruling the US lawmakers ruled that it was Enron’s ineffective board that was responsible for running America’s seventh-largest public company to the ground.

If boards have to be effective they need to be open and honest with each other and they should scrutinise the information provided by management and should be able to ask hard questions to the CEO. Usually boards that are filled with friends and people who see eye to eye on everything will not be effective because they can’t challenge the CEO or ask hard questions to the management team.

The other issue that causes the board to fail in executing its responsibilities effectively is what is regarded as risk blindness. This is a situation where boards fail to deal with identified risks but instead ignore it thereby letting the risk to grow and fester making the whole situation worse and difficult to address. Risk blindness was one of the reasons that led to the collapse and subsequent bailout in 2008 of the blue chip company AIG.

AIG had set a very ambitious strategy to increase profits by 15 percent per annum in a very challenging competitive industry. The board was blind to risky decisions that one of its executive was taking to ensure profit targets were maintained. The company ended up falsifying accounts and using false reinsurance policies to inflate its profits. The company had to be bailed out by the government because of the huge losses it had accumulated. AIG had grown rapidly from 2001 to 2007 into a $1 trillion business but in 2008 because of the board’s ineffectiveness it collapsed like a deck of cards.

The above issue with AIG is a result of the business putting high demands on achieving high profits which resulted in staff taking highly questionable and risk-taking decisions. In this instance, the board was emphasising short term profitability at the expense of long term shareholder wealth creation. The board should have dealt with this culture of risk taking instead of casting a blind eye.
This same culture of risk taking resulted in Société Générale collapsing in 2008 when its junior French trader Jérôme Kerviel was taking dangerous bets against the market. He made big gains which benefited the business for a while so the board turned a blind eye because the trader was generating so much profit.

However, when he began to make losses he ended up hiding the positions by filing a lot of tiny, fake hedge trades elsewhere. It all transpired that Société Générale’s poor company culture of wanting huge profits was to blame for the trader’s rogue trades. However the board failed to stop the rot. One other cause of corporate failure is not responding timely to technological disruption. Technological innovation has been posing huge challenges for market incumbents. Business leaders who fail to leverage new technological developments to remain competitive have sadly seen their entire huge organisations crumble to their demise because of complacency.

A classic case is the 2012 bankruptcy of iconic brand Kodak. Kodak was founded in the 1880s, and had held a monopoly over the global photography industry for almost a century. Unfortunately when the sector went digital in the 1980s, Kodak refused to acknowledge the disruptive technology only to adopt it very late when the market had shifted to the new technology.
The company’s sales dwindled as a result of smartphones which had entered the photography market. The company had to close shop in 2012.

The board should constantly be alert to what is called information glass ceiling in which internal audit teams or those responsible for risk management fail to report on risks that are coming from top management. Because of this, executives tend to overrule any red flags generated through audit processes, or information is heavily filtered by the time it reaches board-level resulting in the board making wrong decisions. This was the case at Société Générale where managers did not report or act upon internal compliance red flags raised during Jérôme Kerviel’s wild trades which clearly demonstrate how an “information glass ceiling” can lead to corporate failure.

Highly undercapitalised businesses are likely to fail. During periods of financial distress boards struggle to source liquidity and maintain high enough levels of working capital to continue operations. Undercapitalised firms can’t buy relevant fixed assets or invest money in generating assets, leading to underutilisation of capacity and ultimately failure. Undercapitalisation is one of the several core reasons why business collapse.

One other issue that can cause companies to fail is an economic downturn. Environmental economic instability can decimate sales and adversely affect the activities and performance of organisations, resulting in failure or even collapse. Some economic distress can be very difficult for the boards or executive to deal with successfully. It’s therefore very important for the board and its executive to constantly assess the impact developments in the economic environment so that appropriate strategies can be put in place to avert corporate collapse.

l Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts:, call on +266 58881062 or WhatsApp +266 62110062.

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Short courses for ex-mineworkers



THE Lesotho Diamond Academy has introduced mining short courses, particularly to ex-mineworkers, to help them re-enter the mining sector.
The Essential Introductory Courses, which will run for two weeks, will start from June this year. The courses are meant particularly for people who worked in mines in South Africa.

The Academy’s CEO, Relebohile Molefe, unveiled the new courses during the graduation of 18 students last week, four of whom are now armed with Cutting and Polishing certificates while 14 graduated with Rough Diamond Evaluation certificates.

The new courses include the Essential Certificate in Diamond Grading and the Essential Certificate in Diamond Evaluation.

“The decision to offer these courses aligns with the Academy’s dedication to bridge the gap and ensure that individuals with valuable experience can seamlessly reintegrate into the diamond and jewelry industry,” Molefe said.

“By providing short courses, the academy does not only impart essential skills but also contributes to the sector’s growth by reactivating experienced individuals who had lost access to the industry due to no formal documents showing their experience in the industry,’’ she said.

During the graduation celebration, Molefe also unveiled a new sponsorship programme for various courses.

One outstanding student previously sponsored, who demonstrated exceptional proficiency in Rough Diamond Evaluation, was granted a fully funded bursary to further his studies into Advanced Certificate in Round Diamond Brilliantering.

In pursuit of its multifaceted objectives, one of which is to serve as a catalyst for employers in the diamond and jewelry sector to devise skills development strategies, the Academy is set to sponsor four additional students in the upcoming intake starting from February 15.

Two of these bursaries will afford a 30 percent discount on overall fees for two students progressing from Cutting and Polishing to advanced studies in Rough Diamond Evaluation.

Two will be fully funded bursaries to study for a Certificate in Diamond Cutting and Polishing.

Additionally, the institution will extend two fully funded bursaries to the public, fostering inclusivity and expanding opportunities.

The Academy says it plans to announce the search for two deserving Basotho individuals on its social media pages and website.

“Importantly, the bursary programme bears no age restrictions, reflecting a commitment to fairness and inclusiveness, ensuring that opportunities are accessible to all, irrespective of age,” it says in a statement.

The Academy says it seeks “to be a dynamic force in shaping the industry, not just within national borders, but also on regional and international platforms”.

“The emphasis on competitiveness within these markets underscores the institution’s commitment to producing graduates who are not only proficient but also globally competitive,” the statement reads.

“The recent graduation ceremony symbolises a milestone in the Academy’s journey. The success of its students is a testament to the quality of education and the foresight embedded in the curriculum.”

The Academy says its decision to sponsor further education for outstanding performers reflects a belief in nurturing talent and contributing to the continuous improvement of the diamond industry.

The Lesotho Diamond Academy was founded by the late Mpalipali Molefe, a prominent educator, diamond trader and an MP, who recognised the imperative to elevate professionalism in the diamond industry.

Staff Reporter

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Bank hands over uniforms to students



THE Lesotho Post Bank donated uniforms to students at Leqele High School worth a staggering M60 000 as part of its Back-To-School campaign.
The bank said it did this “to keep needy children in school and to promote their education”.

A teacher at the school, Tšepo Semethe, said the uniforms will likely motivate the students to work harder in their studies.

Semethe insisted on giving the bank the names of the students so that it could check their performance at the end of the year.

“At Leqele High School, we work very hard because what we want is excellence above all. To us, hard work pays,” he said.

The bank’s Chief Risk Officer, Molefi Khama, said they are getting old, they will soon retire and Lesotho Post Bank will be in the hands of these children.

He pleaded with the students to work harder.

“This is why we decided to come here to support the students in their education so that when coming to school, they should be confident,” Khama said.

“We are watching you and waiting on you,” he said.

The school’s head prefect, Tholoana Monatsi, said from now on, “no student will be identified by what they wear”.

“(Lesotho) Post Bank made us one and we thank them for that because what we wear cannot stand before our education. We indeed thank you and forever you will hold special places in our hearts,” she said.

A parent, ’Marorisang Latela, said they were very grateful for the gift from Lesotho Post Bank adding that they must also donate to other schools.

Minister of Trade, Mokethi Shelile, promised to go back to the school to discuss how the children could learn in comfortable surroundings.

Relebohile Tšepe


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Mamello School of Special Needs wins prize



MAMELLO School of Special Needs is the first-place winner of Standard Lesotho Bank’s Scaled-Up Pitching Den held at Maseru Avani on Tuesday.
The school has secured a grand prize for an all-expenses-paid trip to Kenya to participate as a finalist representing Lesotho at the Standard Bank Africa Awards.

The school, pioneered in 2020 during the early days of the Covid-19 pandemic through Zoom classes, deals with children who live with conditions such as autism, attachment disorders, Attention Deficit Hyperactivity Disorder (ADHD) dyslexia, Down syndrome and slow learners.

STKTM Solutions claimed the second-place spot, receiving a commendable M10 000, while Masia Farms secured third place and a M5 000 prize.

Pheello Masia of Masia Farms, thanked Standard Lesotho Bank for backing their vision and that of other Basotho entrepreneurs.

He acknowledged that the bank’s faith in their endeavours serves as a source of inspiration, propelling them to work harder and foster growth within the community.

The event, aimed at fortifying support and fostering regional integration for Basotho entrepreneurs across the African continent, showcased the bank’s commitment to driving the growth of Lesotho.

Malatola Phothane, Head of Enterprise Banking at Standard Lesotho Bank, set the tone in his welcoming remarks.

“As Standard Lesotho Bank, through business and commercial banking, we strive to turn possibilities into opportunities,” Phothane said.

“Lesotho is our home, and we drive her growth,” he said.

His words resonated with the bank’s dedication to nurturing local talent and fostering economic development.

Phothane acknowledged the eight finalists, commending them for their resilience and passion for their businesses.

He emphasised how each entrepreneur had stood their ground, displaying knowledge and unwavering commitment.

The recognition not only highlighted the achievements of the finalists but also underscored the bank’s role in recognising and uplifting the entrepreneurial spirit within the community.

Aliciah Motšoane, founder of Prestige Furnitures and Sentebale Gap Funeral Services, played a significant role at the event as a motivational speaker, sharing her entrepreneurial journey filled with challenges and triumphs.

She recounted her humble beginnings when she was selling bread in high school, leading to the establishment of Prestige Furnitures in 1998.

Despite facing a significant setback after her shop was burnt down during the riots and incurring a loss of M5 million, Motšoane never gave up.

She said business is always a demanding endeavour adding that it needs hard work and a unique mindset.

She urged entrepreneurs to embrace their roots, seek inspiration, and persevere through challenges.

The keynote speaker, the bank’s Head of Business and Commercial Clients, Keketso Makara, said the bank is committed to foster a thriving business environment, highlighting the pivotal role of youth collaboration across diverse economic sectors.

Makara said their mandate aims to empower youths in steering the private sector towards growth, contributing to economic diversification.

Makara urged the eight finalists to actively involve bankers in refining their proposals for maximum impact on economic stimulation and sustainable development.

The bank said the Scaled-Up Pitching Den not only served as a stage for entrepreneurs to present their ventures but also acted as a driving force for networking, collaboration, and collective empowerment.

Staff Reporter


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