Live and learn: Hap Stephen

The legendary turn-around man shares what it takes to save a sinking company.

“I was born in Halifax right after the war. My father was in the Navy. He was killed in a ship crash when I was nine months old. So my mother ended up moving with me as a baby to Windsor. That's where my father's family was based.

I got into accounting by accident. I was thinking of going into engineering, but I found the hours required for study too long. So I ended up taking a business course. When I wrote my CA exams, I won the gold medal for the highest marks in the country.

After I got my CA, I worked in France, mainly on mergers and acquisitions. When I got back to Canada, to work with Clarkson Gordon, I became involved in doing special projects that involved insolvency work. I enjoyed that. Insolvency is planning for the future. You have a real problem, and you have to solve it. I didn't really like auditing–that's looking at the past.

When it comes to why companies get into trouble, management is often at issue. It's shocking how many companies can't tell you their cash flow forecast, and will often produce a profit forecast that has little relation to reality.

Going into any troubled situation, the first thing you discover is how defensive managers are about their own past decisions. And that's human nature. You just have to be aware of it and understand they will spend time rationalizing why it's not their fault.

If you look at successful companies, management is often very focused. They obviously spend time thinking of their strategy.

Talking to people at the middle management level is where you learn what some of the fundamental problems of a company are. You can detect what the company's culture is — whether the culture is one of teamwork or not.

In a restructuring, you have to quickly pull together a team. You have to stop looking at the past and just get on with it. It is like a car accident. When you arrive on the scene, the first thing to do is patch people up. With insolvencies, the first thing is to make sure there's enough cash, to find a way keep things hanging together.

At Stelco, the unions are, and maybe with some justification, pointing to what management has done in the past. They might be absolutely right about everything they say. But the point is that this is totally irrelevant when it comes to fixing the problem.

All restructurings can be complex, though for different reasons. One of the tougher ones was Eaton's, which went through bankruptcy protection twice. The first one was very successful — it was done on a financial basis. The problem was, there just wasn't the time or resources to implement the strategy we had come up with. That is what led to the second filing.

I agreed to take on the position of CFO at Eaton's with the view that we were trying to sell the company. The company needed to be part of a bigger organization. We developed a strategy to keep it going, and new money was raised. But it just started to unravel.

The temptation in a restructuring is to do it too thinly — to not cut back enough on costs, to keep more things going. Restructuring provides an opportunity to amputate problems. But if you keep some of the problems — either because you want to be a nice guy and save more jobs, or you think you can turn this thing around when you really can't — then you run into problems.

Growing too fast is another common problem with businesses that end up in trouble. They may have a good reason for making an acquisition, but if you don't capture those benefits through proper integration, it won't work.

After Eaton's, I decided to go off on my own. I just found what I really enjoyed is going up to a troubled organization, rolling up my sleeves and getting involved in putting the company back on its feet.

Restructuring solutions are ultimately resolved by people getting together to make contributions. But they have to think that everyone else is doing their fair share, too.”

Harold (Hap) Stephen
Born 1946, in Halifax
Master rebuilder of troubled companies, bankruptcy expert.

1968: Graduates from University of Windsor in commerce; becomes CA in 1970, goes to France to work for Peat Marwick (now KPMG).

1972: Joins Clarkson Gordon (now Ernst & Young); becomes involved in insolvency work; makes partner in 1977.

1992: Oversees first insolvency of Algoma Steel. Later notable overhauls include Dylex, Beatrice Foods and Olympia & York.

1997: Handles first restructuring of Eaton's; becomes its CFO until retailer again files for bankruptcy protection two years later.

1999: Starts Stonecrest Capital. Took Algoma out of second protection filing in 2001; now overseeing Stelco's reorganization.