We should be afraid of zombie companies that eat away at good assets and valuable finance. Allowing bad business models to persist spurns one of the very few positive effects of a recession: clearing out the economically unproductive companies to make way for strong, innovative ones. Forbearance is a nice phrase, but a little pain for a few zombies now will avoid more economic suffering later down the line. Zombies are typically companies with declining productivity; part of the reason that the UK has growing employment and poor economic growth, the so-called productivity puzzle. This doesn’t necessarily mean that we need to kill all zombie companies off; just dumping failing managers could help to transform a zombie into something with more life. The UK needs better people and stronger companies to grow. Darwin understood the theory well; the UK now needs corporate Darwinism.
Jon Moulton is chairman at The Better Capital Team.
Cautious, yes. Afraid, no – so long as you understand what sort of zombie you’re dealing with and take decisions accordingly. The idea that an insolvency feeding frenzy will kick-start growth and automatically boost UK productivity is utterly misplaced. Zombie companies aren’t just numbers on bank balance sheets, they are people with livelihoods, families, and suppliers at risk. Zombie companies need the opportunity to be transformed for the long term. Banks are reluctant owners of businesses. Turnaround investors know how to create value in zombie situations – if given the chance. Establish potential viability, mind cash flow, get a credible plan, have the team to deliver it, deal with debt hangover and the living dead may revive. The only real fear is the unintended consequence of a poorly-conceived policy on debt forbearance.
Christine Elliott is chief executive and director at The Institute for Turnaround.