Broken promises: The role of contract breaches in turnaround situations

Abstract

This chapter explores the role of contract breaches in firm turnarounds. Drawing from the turnaround and contract literatures, this chapter proposes that implicit and explicit contract breaches provide substantial resources to firms in turnaround situations during their retrenchment phase. It is asserted that the turnover of top management, the threat of bankruptcy, and the severe time compression of the turnaround situation will facilitate contract breaches. These contract breaches will, however, cripple the firm's ability to accomplish the goals of the reorientation phase, particularly if they choose to pursue a “return to growth” strategy. To avoid these crippling effects, it is proposed that the management of the firm will utilize the uncertainty inherent to the turnaround situation to provide accounts of why the contract breaches were necessary. Through these accounts, management will lower the perceived losses of the violated parties and will maintain their commitment during the firm's reorientation phase.