Earlier this week, Deutsche Bank’s co-chief executives Anshu Jain and Juergen Fitschen jointly resigned from their posts. Their resignation comes just a month after the release of Deutsche’s restructuring plan. The plan, which took four months to produce, disappointed investors. Several large shareholders voiced their concern as to why the restructuring, which began in 2012, had taken this long to even start. One noted that Deutsche “could have taken much bolder steps, much earlier.”

Deutsche Bank is a large institution with an international presence but the company’s issues are not unique. Timing seems to be the most stand out problem: as co-executives delayed bold steps to the point that the first bold step taken was self-elimination. Investors welcomed the announcement of Jain and Fitschen’s departure and share price increased ~4% by the end of the day. Deutsche, like many other companies that put off recognizing and addressing issues, will face future turbulence after the management change and the delay in effective restructuring efforts is largely to blame.

Change in top management is a strong signal to stakeholders about the well-being of the business. Leadership creates a sense of identity for a company and its sudden departure can create immediate challenges for all levels of business. Various parties may view top management departure (whether willing or forced) as a last resort to stay afloat and a sign of despair. Clients and vendors alike are left wondering how it will impact their relationships and general policies with the company and if future transactions will be equally beneficial. In return, to cover themselves, clients and vendors will explore options with the company’s more reliable competitors. Employees could also be alarmed that this is just the beginning of major changes in a corporation and naturally question if they will be part of the strategy going forward. Top talent will shift their focus to seeking other opportunities. It’s one thing to tell priority stakeholders that the company is facing issues but is working to fix them; it’s another to alert clients and vendors that the firm is now in the hands of an entirely different leadership.

At the same time, there is the issue of who would want to step in to a desperate situation as the leader. John Cryan will be taking over Jain and Fitschen’s shared spot. Cryan, as any new leader of a struggling organization, will inherit not only his predecessors’ day-to-day competitive challenges but a large body of frustrated investors, international press and research analyst scrutiny, wary government regulators and agitated employees. All because old management was too slow to act on obvious issues! For smaller companies in less public situations, managers with expertise who are willing to put their reputation on the line for a struggling company are few and far between – especially if the last guy quit. It is difficult to head hunt someone willing to step in at the helm of the Titanic inches, away from the iceberg.

For managers, recognizing the need for restructuring is often equivalent to admitting failure and, understandably, many put it off as long as possible. Unresolved issues turn into a catastrophic tidal wave that sinks good managers and alienates employees, vendors and customers – the entire lifeblood of a profitable business. The more restructuring analysis is put off, the more drastic and time consuming eventual restructuring becomes, with lower chances that it will be successful.

Posted by Olga Ivleva,  Senior Associate, Range Advisors

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