Risk of collapse multiplies when companies hire dud directors

Research from credit firm Dun & Bradstreet reveals that the risk of a business venture failing doubles for companies with a director who has been on the board of another failed company.

Want to know whether a company might succeed or fail? Have a look at the history of its company directors.

Research from credit firm Dun & Bradstreet reveals that the risk of a business venture failing doubles for companies with a director who has been on the board of another failed company.

It also found that a company is 11 times more likely to fail if it has a court action against it and is eight times more likely to fail if one of its directors has a court action against them.

If the double whammy occurs – a director court action – the business is 8.3 times more likely to fail, with the dollar value of that action having a significant impact on the risk of failure. The likelihood of failure increases by 33% for court actions valued at more than $10,000.

“Already 4800 Australian companies have collapsed this year,” says D&B’s CEO Christine Christian. That’s an 11% increase on the same period last year, she says.

“Businesses can’t afford to ignore any signs that indicate a customer or supplier could find themselves facing financial distress.”

Other signs of company failure creditor petitions to wind the company up and collection activities.

Examination of court actions in company failures for 2007 shows that 5.2% of companies that had one court action against them failed. Younger companies were also a higher risk with 9% of companies with at least one court action against them failed. This fell to 3.8% of companies in the 10 to 19 year old age group.

Christian says businesses that want an accurate insight into customers’ financial health and paying behaviour should include a thorough examination of the history of directors and court actions.