Originally circulated 21 June 2019
Dear Ruminants
This week I did receive some inspiration from a fellow ruminant for submission for Ruminant Pink ™ Friday related to the global phenomenon of slowing productivity and the potential role of zombie companies in this phenomenon. Firstly I will briefly describe some of the metrics used to define zombie companies and then a very brief discussion on company cultural characteristics sometimes evident at aspirant zombie companies.
Here is an interesting reference on this topic. https://www.intheblack.com/articles/2018/03/01/global-phenomenon-slowing-productivity. An additional reference analyses zombie firms and provides some interesting metrics and definitions regarding what constitutes a zombie firm. https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf
The reference suggests that two financial metrics are important in terms of defining a zombie company. Firstly interest cover ratio (ICR) and Tobin’s q. ICR is defined as the ratio of operating income (EBIT) to interest expense. If the ICR is too low interest costs start crowding out expenditure on the business. If ICR is 1.5 or below the company is defined as a zombie company and you are in the red zone. The referenced research shows that non zombie firms generally have an ICR > 4.
The orange or danger zone is defined as when ICR is less than 2.5.
The second metric is Tobin’s q being less than the median of firms in this sector stated as follows:
We now have definitions that accountants can relate to but of course accounting does not deal with the why. Here I will provide some very interesting ruminations and a reference relating to culture at some zombie firms. https://www.forbes.com/sites/sydneyfinkelstein/2012/02/14/how-to-spot-a-zombie-company/#54f9a9ff174f. This article is worth reading in its entirety but I will just pull out one interesting quote for ruminant reflection.
A final sign of a zombie company is a relentlessly positive attitude that shuts out critical information from outside the company. While a positive attitude helps to keep everyone happy—no one, least of all the executives, wants to disrupt the resulting positive atmosphere by being negative—it also encourages employees at all levels to do whatever the company asks.
Please keep the submission ideas flowing!
Regards
Bruce
Ruminant Pink Friday 