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"Crisis? What Crisis?" is a question faithful SNC-Lavalin Group Inc. investors can now smugly ask. A year ago, the engineering and construction company was heading into a tailspin. A slew of senior executives, including CEO Pierre Duhaime (who this week was charged with fraud) were shown the door, the company reported a massive profit shortfall and an internal investigation revealed there were tens of millions of dollars in missing funds. Nobody could say for sure how deep the problems ran.
Such a crisis can destroy a company, and yet SNC stock has recovered almost all of its losses in the past year. There's a sense that the worst is behind the company. Investors who stuck by it – or bought at the depths of the crisis – have been rewarded for their patience.
But how can investors know whether to hold or bail when crisis hits? Many companies haven't survived their scandals, such as Sino-Forest Corp., Nortel Networks Corp. and Hollinger Inc., and every set of circumstances is different. With hindsight, however, the SNC saga offers several lessons for investors to determine whether the firm would recover.
Tone from the top: From the start, the SNC board, led by chairman Gwyn Morgan, made it clear that it was committed to getting to the bottom of the company's issues as well as to cleaning house. The firm has since provided regular updates on efforts to root out and fix weaknesses in its processes and controls. A prompt, calm and decisive response from an aligned board provided assurance that SNC's chicanery was finished, and helped establish order.
The scandal was contained: In some companies, a crisis seems to engulf the leadership, taking away its focus and ability to successfully operate its business. SNC seemed to effectively sequester the scandal and within six months had hired a credible outsider as permanent CEO (well-regarded industry veteran Robert Card). SNC has also weeded out former senior executives associated with the old regime – without impacting its multitude of projects underway around the world.
The ex-CEO didn't define the company: When a crisis leads to a CEO's ouster, investors should ask if the business could survive without him or her. Mr. Duhaime wasn't a company founder or a dominating entrepreneur, but a professional who rose up through the ranks. He seemed easily replaceable, and he was.
A sturdy balance sheet: In any corporate crisis, investors should ask if the company has the financial strength to shield it from fallout. SNC did: It had $1.2-billion in cash and equivalents at the end of 2011 as well as several valuable infrastructure assets it could have sold off if needed.
The nature of the problem: Investors should ask how an unfolding crisis might imperil the business. Is it an accounting issue, where reported profits melt away to reveal losses and cash problems, or a situation where questionable assets are worth much less than believed? Is it a consumer safety issue that could prompt them to stop buying the product? In the case of SNC, it was apparent early on that the scandal centred around mystery payments to secure contracts. But that didn't result in a wave of cancellations of existing contracts by customers, and didn't hinder its ability to go out and get new business. By the third quarter, investors could take comfort in the fact that the company's backlog, at $9.9-billion of revenues, was 6 per cent higher than the year before – a key indicator the core business was doing well. While risks – such as the continued fallout from police investigations and regulatory actions – remain, investors have started asking different questions, like how much value can the new CEO create? If that's what passes for a crisis at SNC these days, management and the board should be feeling very fortunate.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
Sean Silcoff