It is widely accepted that stakeholders play a role in the turnaround of an organisation. However, the exact role is unclear. This study set out to investigate the roles of stakeholders in the success of business rescue through the lens of stakeholder theory.
The study research design is qualitative following an exploratory approach. The choice of technique for the study was semi-structured interviews.
The findings indicate that key stakeholders go beyond affected parties as described by Chapter 6 of the Companies Act. Creditors are considered the most influential stakeholders due to their ability to vote on the business rescue plan, followed by post-commencement funders and employees, to ensure business continuity. Customers were given the same level of importance by the business rescue practitioners as other affected parties. Due to the dynamic nature of business rescue, business rescue practitioners prioritise resourceful stakeholders when managing the process. A simplified framework illustrating roles of stakeholders during business rescue is presented.
Stakeholder management should be recognised as a valuable exercise that must be allocated time and resources. Business rescue practitioners should recognise stakeholder influences at different stages of the business rescue process.
The business rescue status quo report reflected a 9.4% success rate in business rescue (Pretorius,
Priego, Lizano and Madrid (
Smith and Graves (
Within the South African context, the legal and formal turnaround process an organisation would follow is referred to as business rescue. Business rescue is a formal process governed by Chapter 6 of the Companies Act. It is distinct from informal turnaround, where creditors and financial institutions may collaborate to provide financial assistance to aid the company’s recovery (Levenstein,
This study seeks to understand how stakeholder theory can be utilised in business rescues to facilitate successful turnarounds. The study examines the behaviour and power dynamics of stakeholders in declining businesses, with the understanding that stakeholder collaboration may result in a better chance of success in business turnarounds (Priego et al.,
The study’s primary research question is: what are the roles that different stakeholders play during a period of successful or unsuccessful business rescue in South African organisations? The study seeks to understand within the context of business rescue who the key stakeholders are, which stakeholders are influential and what factors contribute to their influence.
Faced with financial distress, business rescue proceedings can be commenced if there is reasonable prospect that the company can be rescued from failure (Le Roux & Duncan,
Section 133 of the Companies Act provides a stay or moratorium on legal proceedings. Levenstein (
The business rescue plan is considered one of the key activities carried out by the business rescue practitioner (BRP) and is integral to the business turnaround process. Once business rescue proceedings have commenced and the temporary moratorium becomes effective, the BRP must develop and implement the business rescue plan (Le Roux & Duncan,
Pretorius and Rosslyn-Smith (
The rights and powers of affected parties are detailed in section 144 to 146 of the Act. Salient points include the fact that shareholders have limited powers and rights when compared to employees and creditors. Shareholders are generally not consulted on the business rescue proceedings by the BRP and, unlike creditors and employees, cannot form a committee. (Jijana, Chetty, & Karodia,
Creditors are relatively influential in business rescue proceedings as the final vote to approve the plan lies with them (Le Roux & Duncan,
In conclusion, affected parties have rights and powers that are legally protected. The legal process makes provision for only employees, trade unions, creditors and shareholders.
The principal objective of the BRP is to rescue a company that is financially distressed. In achieving this objective, which includes providing relief to affected parties, the BRP’s rescue plan is important (Pretorius,
The ethics of the BRP are of paramount importance as there are opportunistic BRPs who focus ‘on the “profit opportunity” and uncertainty that emanates from the business rescue environment’ (Levenstein,
In December 2017 the ‘Diener judgement’ was made. This judgement was related to BRPs receiving their fees and expenses when the business rescue has failed and the company goes into liquidation. The judgement was that, if the company goes into liquidation, the BRP must prove their claim for fees and expenses with the liquidators and there is no special preference afforded to the BRP over secured creditors (Braatvedt,
When in decline and attempting a turnaround, stakeholders play a valuable role in a company’s recovery (Trahms et al.,
At the outset, it is valuable to recap the key definitions of stakeholders as they have evolved with stakeholder theory (Mitchell, Agle, & Wood,
Donaldson and Preston (
Friedman and Miles (
Pajunen (
Mainardes, Alves and Raposo (
Given the different classifications of stakeholders provided by Mitchell et al. (
In conclusion, it is noted that different stakeholders yield power, resources, network positions and compatibility which may be influential when the company is in business rescue. Stakeholder identification and classification is therefore relevant in tackling organisation decline. Additionally, early involvement and identification of stakeholders is beneficial to success in the turnaround process (Decker,
Employees play an important role in the success of business rescue and there is consensus that a successful business rescue will result in preservation of jobs (Conradie & Lamprecht,
Trahms et al. (
Consideration of multiple stakeholder roles is necessary during the decline and turnaround of an organisation (Trahms et al.,
Rosslyn-Smith and Pretorius (
The dynamics at play in business rescue are captured by Pretorius (
From a South African background, Pretorius (
Creditors, providers of capital and banks have a useful role to play as they have power and influence during the decline phase of the business (Ghazzawi,
Pretorius (
Pretorius and Du Preez (
The research design is qualitative following an exploratory approach. The technique for the study was semi-structured interviews. Interview subjects were asked questions about stakeholders within business rescue and the influence and power dynamics that play out during the process.
In qualitative studies carried out by Pretorius and Du Preez (
Purposive sampling was applied and BRPs were selected based on their knowledge and experience in the field (Elo et al.,
In-depth, semi-structured interviews were used to collect data. In total, 13 semi-structured interviews were conducted with BRPs with different ranges of experience. Mapping the questions to the propositions allowed for quality data collection. The interview questionnaire was used as a guide. Additional questions were asked and answered where necessary to develop further understanding and to obtain relevant information. As noted by Saunders and Lewis (
Data analysis according to Zikmund, Babin, Carr and Griffin (
Research propositions.
Proposition | Interview questions |
---|---|
Who are the key stakeholders involved in the business rescue process that an organisation goes through?
What is your understanding of a stakeholder within business rescue? How do you identify stakeholders? Within the context of business rescue, who constitutes a stakeholder? |
|
Which stakeholders are influential in business rescue processes?
Within the realm of business rescue, do you prioritise stakeholders? How would you rank the listing of stakeholders in terms of influence? Why do you consider a stakeholder or a group influential? |
|
What factors contribute to stakeholder influence?
Given that the stakeholders are influential, what basis or process do you follow to make your determination? What drives stakeholder power in business rescue? Are given drivers or factors considered in isolation? What is your view of the influence of personal surety by shareholders and subsequent behaviour by shareholders? |
The proposition seeks to address the notion that stakeholders are the only affected parties. In our findings the three main themes identified were affected parties, broad view and parties influenced by an outcome.
The themes shown in
Response to definition question
Theme | Respondents (%) |
---|---|
Referred to affected person in definition question | 76.92 |
Made other references in the definition question | 23.08 |
Referred to a broad definition | 53.85 |
Did not refer to a broad definition | 46.15 |
Made reference to an influenced party in the definition | 53.80 |
Did not make reference to an influenced party in the definition | 46.15 |
Rosslyn-Smith and Pretorius (
The findings demonstrate that the affected parties are seen as the primary stakeholders. It could be argued that the BRP’s primary focus is the affected parties and that, as noted from section 144 to 146 of the Companies Act, the affected parties have rights and powers that are protected by legislation. This view supports the work by Rosslyn-Smith and Pretorius (
To adequately answer the research question, it is important to understand who the key stakeholders are that BRPs consider in the process of ensuring that the business rescue process is successful. Although stakeholders vary from case to case, the BRPs provided a list of stakeholders they considered to feature prominently in the business rescue proceedings they had been a part of.
From a literature perspective, Donaldson and Preston (
All the respondents included creditors, employees (unions) and shareholders as stakeholders, which aligns to the affected party definition in the Act. Observations from
Key stakeholders identified by business rescue practitioners in the data collection phase.
Research proposition 2 sets out to understand which stakeholders the BRPs consider to be the most influential in the success of the business rescue. Before determining which stakeholder is influential, it is important to understand whether the BRPs prioritise stakeholders. After determining whether the BRPs prioritise stakeholders, the next step is to identify how BRPs rank the stakeholders in terms of influence and finally conclude with why the stakeholders are considered influential.
This aspect of the findings intends to establish the approach by BRPs on prioritisation of stakeholders in the realm of business rescue. In line with stakeholder theory, once stakeholders are identified, it is important to prioritise them such that emphasis is placed on relevant stakeholders to ensure success.
The findings indicated that 62% of the respondents prioritise stakeholders, while 31% took a balanced approach without prioritisation and 7% focused on prioritising employment. Employment emerged from the discussions on prioritisation. The BRPs indicated that preserving jobs was one of their leading priorities.
The views of the participants and the literature are aligned in respect of prioritisation of stakeholders. Mainardes et al. (
Approximately a third of the participants took a balanced approach to managing stakeholders in business rescue. The approach taken by the respondents is in line with section 7(k) of the Companies Act which requires the business rescue to balance interests and rights of all stakeholders (the Companies Act, No. 71 of 2008). Within literature, the balanced approach is supported by Harrison, Bosse and Philips (
Employment emerged as a theme in discussing the prioritisation of stakeholders. The aspect of employment is linked to the objective of business rescue and is also one of the indicators of a successful business rescue as put forth by Pretorius (
The BRPs were requested to rank stakeholders in terms of their influence in a successful business rescue process.
The results below indicate responses from 10 participants out of the 13 interviewed. Three participants were firmly against the ranking of stakeholders as they noted that their rankings differ from case to case depending on the nature of the rescue. The 10 that provided rankings provided them based on their general experience from the business rescues that they had undertaken. In their rankings, they took cognisance that variations may occur. The results of the ranking are presented in
Stakeholder influence – Ranking.
The discussion to follow reflects upon the stakeholder ranking in terms of influence but also seeks to understand why participants consider each stakeholder influential.
Creditors are ranked as the most influential stakeholder for their ability to vote and support the business operations. This aligns with Le Roux and Duncan (
Banks do not easily advance PCF to businesses in distress; security or surety is usually required before they decide to offer PCF (Pretorius & Du Preez,
Employees occupy the second ranking in the listing of stakeholder influence according to the respondents. Employees are affected parties as defined by the Companies Act and thus have powers and rights protected by section 136 and section 144 of the Act. Levenstein (
The participants highlighted the importance of a ‘jockey’, meaning a person in the organisation that will provide management and leadership to support the BRP. The importance of management supports the view of Trahms et al. (
The terms ‘government’ and ‘regulators’ were used interchangeably and featured in all the rankings of this study. Although not highly ranked, regulators were viewed by the participants as key stakeholders in business rescue and as influential in the business rescue process. The findings indicate that the SARS may be particularly impactful as, in terms of the Income Tax Act, the SARS is a preferent creditor in liquidation but not in business rescue (Levenstein,
Shareholders are also affected parties as defined by Chapter 6. From the ranking list, shareholders have been ranked fifth in terms of influence. It must be noted that shareholders may also be creditors but may have limited influence and BRPs do not focus on the shareholder when rescuing a company in distress.
This view mirrors the literature and legislation which limits the powers of the shareholder. Pajunen (
The proposition seeks to identify the factors that contribute to the influence of stakeholders during the business rescue process. After determining the influence drivers, we discuss the role of the BRP as an orchestrator of a successful business rescue.
The BRPs were requested to draw upon their experience and give a general view on the factors that contribute to stakeholder influence.
Factors that contribute to stakeholder influence.
Rank | Factor | Frequency | Source |
---|---|---|---|
1 | Creditor power from outstanding debt | 7 | Resource-based |
2 | Critical supplier – Ability to provide critical goods or services | 4 | Resource-based |
2 | PCF – Ability to provide PCF | 4 | Resource-based |
2 | Voting interest – Ability to vote for the plan | 4 | Resource-based |
2 | Security – Power leveraged through security | 4 | Resource-based |
2 | Ability to support business continuity | 4 | Resource-based |
3 | Influence because of knowledge of legacy issues | 1 | Network based |
3 | Regulatory powers for examples SARS, ESKOM, other regulators | 1 | Legislation |
3 | Directors surety, invested in business want it to work | 1 | Resource-based |
3 | Ability to influence to implement the plan | 1 | All the above |
PCF, post-commencement finance; SARS, South African Revenue Services.
What is of interest in the findings is that security is ranked second. However, the respondents did not mention security to the same extent as the other factors that are ranked second such as suppliers, voting interest, PCF and the ability to support business continuity.
The top factor relates to the ability of the creditors to use the value of the outstanding amount to influence the voting process. This is essential to the adoption of the business rescue plan and is the first major step towards a successful business rescue.
The resource-based view dictates that stakeholders with resources essential to the organisation have a compelling lever to influence the organisation to recover from decline (Pajunen,
Participants made reference to the competence and ethics of the BRP as a determining factor of the success of the business rescue. The main themes identified from the interviews were BRP expertise, BRP ethics and the Diener case.
A BRP’s expertise refers to the BRP, as a professional, being suitably qualified and skilled to take on the dynamic business rescue process. The BRP should be competent enough to ensure that an equitable outcome is achieved as required by the Companies Act in terms of section 7(k). The findings indicate that 62% of the respondents referred to BRP expertise and knowledge compared to 38% who did not refer to BRP expertise during the interviews.
This theme relates to the ethics and values of the BRP in their conduct of the business rescue assignment. The expectation is that the BRP will act in the best interest of the stakeholders and act in an honest and trustworthy manner. The findings indicate that 77% of the respondents referred to BRP ethics compared to 23% who did not refer to BRP ethics during the interviews.
In discussing the competence, skills and ethics of the BRP, discussions led to the question on the fees paid to BRPs. The Diener case makes it risky for a practitioner to charge fees to take on a business rescue that should be in liquidation. The BRP’s fees and expenses are ranked preferably in business rescue but should they remain unpaid in a business rescue that goes to liquidation they will be treated as concurrent. The views of the participants were not unanimous. Some participants seemed to support the Diener judgement as a way to curb unethical BRPs. The neutral responses noted that as much as the judgement may curb unethical behaviour BRP fees still needed to be paid.
BRPs consider affected parties to be the primary stakeholders within the business rescue process. Other stakeholders are considered as evidenced by the broad view reinforced by section 7(k) of the Companies Act which requires the BRP to balance the interests of all stakeholders.
Unexpectedly, customers were given the same level of importance as affected parties. This finding suggests that perhaps customers should be considered affected parties with the ability to vote on the business rescue plan, particularly where there are warranties or goods and services paid for before delivery.
In practice the business rescue process is dynamic; prioritisation is done to handle burning issues and to get the support of stakeholders who may be resourceful. Despite the prioritisation, BRPs try to act impartially in an attempt to balance the interests of all stakeholders.
While network position and legislation-based influence are apparent in the business rescue process the resource-based view dominates the source of factors that result in stakeholder influence. Resource dependency is key to various aspects of a business rescue. Voting rules dictate how creditors, through their outstanding debts, vote to approve the plan. At the plan implementation phase, critical suppliers, PCF providers and employees play a role in providing resources to support the organisation in distress.
It became apparent during the study that BRPs are key stakeholders in business rescues. These BRPs should be expertly skilled and possess the appropriate qualifications and business knowledge to turn around a business in distress. The quality of the BRP may have dire consequences on the success of the rescue.
Ethical considerations also play a role in the BRP’s ability to influence the business rescue process. Views from the BRPs interviewed indicated that some practitioners act unethically to drive their self-interested agenda of profit-making. They charge fees prolonging business rescue or where there is no hope of turning the business around. Although the Diener judgement may make such practitioners cautious, the participants had mixed views on the judgement. Ultimately, the presence of BRPs that are unethical has an impact on the ability of the BRP to influence providers of PCF and other affected parties. A fully qualified, skilled and ethical BRP is thus the foundation for successful business rescue.
This section presents a proposed conceptual framework that illustrates the roles of key stakeholders during business rescue. The framework presents a simplified timeline of the business rescue process with key aspects and influential stakeholders at different points in time. This framework (
Business rescue stakeholder analysis framework.
The conceptual framework draws on the findings discussed in the study. At the core of the framework is the BRP. The BRP has full management control, must be suitably qualified, skilled and ethical. The BRP forms the foundation of a successful business rescue. The pre-engagement activities bring into play the Diener judgement, implying that the BRP needs to be careful in ensuring a reasonable prospect of rescuing the business. The next phase of the framework reflects the views of most BRPs, that they will not undertake a business rescue without PCF.
Preparation of the business rescue plan is considered a key activity carried out by the BRP and it is instrumental to successful business rescue. The final vote to approve the business rescue plan lies with the creditors; therefore, creditors are influential in the business rescue plan adoption and implementation. In the implementation phase, stakeholders, including employees, regulators and the SARS, are considered key. The roles these key stakeholders play vary with each business rescue.
It has been demonstrated that stakeholder management should be recognised as an activity that must be allocated time and resources as it has an impact on the success of the business rescue. The findings suggest that BRPs should consider canvassing for customer support as customers play a valuable role in supporting business continuity during distress periods. Finally, BRPs should recognise that different stakeholders are influential during different stages of the rescue and focus their efforts accordingly as indicated by the framework.
The conclusions reached are based on the views of BRPs. These views may be influenced by their biases and perspectives, such as their bias towards the profession, their backgrounds and beliefs. The study is based on 13 BRPs and generalisation of the conclusions requires mindfulness of this fact. It is recommended that further empirical testing be considered. The sample consists of only BRPs; other stakeholders, for example financial institutions and attorneys, were not taken into account but may have different views.
A study of stakeholders in business rescue from the perspective of other stakeholders, namely legal practitioners and credit insurers, is recommended. These stakeholders play a role in the business rescue process and could present views different from the BRPs. A quantitative study can be carried out to enhance the findings of this study. Regulators and customers have been identified as important role players prior to and during business rescue. Thus, empirical research would enhance an understanding of their influence and impact. Should customers be classified as affected parties, one could investigate how much monetary loss is incurred by customers in business rescue.
The authors have declared that no competing interest.
All authors contributed equally to this work.
This study was approved by the GIBS MBA Research Ethical Clearance Committee.
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.
Data sharing is not applicable to this article as no new data were created or analysed in this study.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any affiliated agency of the authors.