E. Pihl & Søn A/S from a management perspective

Developed by Stephanie Salling

For many years, E. Pihl & Søn A/S was one of the most international and well-known contractors in the world. In its 126 years of existence, the company completed projects in more than 60 countries as it developed from being a small masonry company in Copenhagen, Denmark to a multi-national contractor with a turnover of 6.5 billion Danish kroner (1 billion USD). The long history and great productivity of the company were some of the reasons that it took most people in the industry by a surprise, when E. Pihl & Søn A/S on the 26th of August 2013 was declared bankrupt .

To provide an insight on the significance of the case of E. Pihl & Søn A/S in the aspect of project and portfolio management in construction, this study will briefly go through the history of the company, including the great expansions in the later years, since these had a big impact on the downturn of the company. The management strategies will be elaborated and analyzed to clarify the challenges the company faced through the years and how they were handled, and finally a conclusion summarizing the reasons for E. Pihl & Søn A/S’ bankruptcy will be presented together with implications from the case that can hopefully contribute to other companies not suffering the same fate.

The main source for the information used in this article is the acknowledged book “Sørens Saga” written by journalist Poul Høegh Østergaard and published in 2014.

History of E. Pihl & Søn A/S

Early years

In 1887, bricklayer Lauritz Emil Pihl founded his business. In 1918, his son, Carl Pihl, entered the company, and E. Pihl & Søn was established. After World War II, the business was not going well: Lauritz Emil Pihl was dead, Carl Pihl was seriously ill, and the once extensive client base had dwindled significantly.

From Pihl and son to Langvad and son

May 23rd 1947 civil engineer Kay Langvad bought his way into E. Pihl & Søn. At that time the company consisted of 15 people including the owners Kay Langvad and Carl Pihl.

In 1950, the renewed company landed its first big contract in Denmark for the client Carlsberg and also their first contract abroad; construction of a hydroelectric power plant in Iceland. To be able to bid on the latter, E. Pihl & Søn formed a joint venture with two Swedish companies, a collaboration form the company would later exercise for numerous other projects.

With the civil works on the hydroelectric power plant in Iceland, the foundation of a new path for E. Pihl & Søn was laid to become a contractor rather than a masonry company. This direction was manifested even further during the following years with more hydroelectric power plant projects on Iceland and many other civil work projects in Denmark.

From 1950 and onwards, Søren Langvad, Kay Langvad’s oldest son, was also working in E. Pihl & Søn.

International development

In the beginning of 1971, Søren Langvad officially took over the role as CEO of E. Pihl & Søn from his father. At the same time the company got listed and became E. Pihl & Søn A/S as which it remained until it ceased to exist in 2013. Soon after receiving the title of CEO, Søren Langvad also came to own the majority of the company and later all of it.

Through the 80s, the amount of tenders Pihl was prequalified to rose significantly. In 1987, the turnover was around three quarters of a billion Danish kroner (around 115 million USD), of which three quarters was created outside the Danish borders. The equity also grew and approached 50 million Danish kroner (around 7.7 million USD).

By the end of the 1980s, E. Pihl & Søn A/S was represented in several African and Middle East countries besides the ongoing businesses in Iceland, the Faroe Islands and Greenland. The company reached 1,000 employees stationed around the world. Despite the significant growth in staff, no HR department was established.

The great international expansion continued through the 90s, especially in Africa. When the Danish market began to evolve at the end of the 90s, Pihl managed to land several notable contracts here as well, and by the end of the millennium the company had a turnover of more than 2 billion Danish kroner (around 300 million USD). The profit was not more than a couple of percent, but enough to make the equity grow, and everything pointed towards a continued progress.

Tietgenkollegiet.

Some of the most well-known Danish projects that Pihl has been involved in:

• The Royal Danish Theater
• The National Gallery of Denmark
• The significant round dormitory Tietgenkollegiet
• Several inner harbor bridges in Copenhagen
• The Great Belt Bridge (the East Bridge)
• The Øresund Bridge (the tunnel)

From 1996 to 2008, E. Pihl & Søn A/S increased their turnover tenfold from 600 million to 6.5 billion Danish kroner (which corresponds roughly to going from 100 million to 1 billion USD) and became the second largest contractor in Denmark. Søren Langvad was not afraid of giving himself credit for this great expansion, but other reasons such as other contractors going bankrupt or being taken over and Pihl delivering satisfying work on time were definitely also part of the considerable success. At this time, the growth of the company seemed natural and healthy in spite of its abnormal scale, and though the great increase in turnover strained the equity of the company, the bank did not have any concern extending the line of credit to the successful company.

Financial crisis and the last years

When the financial crisis stroke in 2008 , E. Pihl & Søn A/S suffered together with the rest of the industry, when they (among other things) had to depreciate half of their equity in Iceland due to drastically changing exchange rates (for elaboration see “Portfolio management” later in this article).

From 2008, the company’s equity situation only got worse, and in addition several of the biggest projects abroad were exceeding their budgets. In 2011, the market was changing and the competition was getting harder. Furthermore the contract terms were undergoing a change as well; more and more often the contract involved designing and calculating the statics for the project as well as the actual construction (Design and build contract), which made it radically more time demanding and thereby expensive to calculate a bid. Also Danske Bank, the company's bank connection, now wanted to look through and approve all bids that E. Pihl & Søn A/S calculated before they entered the tendering process, which resulted in the company several times using time and money on calculating a bid that was then discarded by the bank.

In the fall of 2011, the economic situation in E. Pihl & Søn A/S continued to heat up. Employees were getting anxious and suspicious, but no one doubted that the 124 years old company would pull through. Søren Langvad finally decided that it was time to pass on the torch, and so he inserted Halldór Ragnarsson, who had been a trusted employee since the 1980s, as CEO taking effect on the 1st of April, 2012.

In April 2012, Birgit Nørgaard was inserted as chairman of the board in E. Pihl & Søn A/S at the behest of Danske Bank, who had actually had controlling influence in the company since 2010, when Søren Langvad had to give up his shares to extent the line of credit in the bank. Birgit Nørgaard's purpose in Pihl was to gain an overview of cost overruns and streamline the organization. At her request, work groups were being set up with the purpose of formulating common procedures within vital areas such as calculation and bidding. The majority of the staff welcomed it when for the first time procedures for working routines were being written down for everyone to follow. In May, the first organization chart was being sent out together with other new regulations.

Through the year 2012, all problematic projects were being investigated, which led to the findings that the economic situation in the company was even worse than predicted. E. Pihl & Søn A/S had claimed substantial claims from third parties as income and severely underestimated the costs of completion of numerous projects. Even the write-downs that were made on these underestimated budgets proved to be insufficient. New bank agreements were made and money was transferred from several holding companies to increase the equity of E. Pihl & Søn A/S, but it was not enough, and the company ended up with an annual report for 2012 showing a loss of 473 million Danish kroner (73 million USD) .

In the beginning of 2013, Birgit Nørgaard fired CEO Halldór Ragnarsson in a last attempt to save the company. However, despite all the efforts made by her, the executive managers and Danske Bank the bankruptcy was inevitable, and on the 26th of August 2013 it became a reality .

Management in E. Pihl & Søn A/S

Organizational structure

From the very beginning of Søren Langvad’s leadership in Pihl, the hierarchy was clear and not to be discussed; all correspondence in and out of the office went by him – no exceptions – and he had the last say in all matters regardless if the concerning project was in Denmark or abroad and if it was a harbor, dam, housing building etc.

Besides from the autocratic leadership, the organizational structure in Pihl was always very flat. From the beginning, Kay Langvad gave his employees the freedom to make decisions and take action on their own. When they were in trouble, he would help them, but he expected them to be able to solve most problems themselves. This wide-ranging trust (almost to the extent of anarchy, as some employees have later stated) in project leaders and other employees was maintained by Søren Langvad as a fundamental value in the company. Furthermore, he always showed his trusted employees loyalty and gave them second chances had they made a mistake rather than fired them, which was otherwise quite common in the industry. Many employees found their way into the company through this loyalty, as Søren Langvad often hired people on the ground that they were relatives to other employees.

Up until 2012, the board of directors in E. Pihl & Søn A/S consisted of four people; three equal executive officers with the responsibility for activities in Denmark, “Near Abroad” and “Far Abroad” respectively, and Søren Langvad as the CEO (as shown in the organization chart). However, most people were of the opinion that there was only one real executive officer; the CEO, and the others were looked upon more as head project leaders. This opinion was created by the way Søren Langvad treated his executive officers and persisted in keeping the organization flat.

The organizational structure. The Executive Officers did not actually have more power than the Project Managers, despite what the organization indicates.

While this flat organization, with the only layers of management being the project managers and the CEO scared away some employees very fast, the most common reaction from new employees was to embrace the freedom and feel stimulated and motivated by the challenges and wide-ranging responsibilities . For decades, this organizational structure was a big success for the company and did what it was supposed to do; namely to maintain a high level of productivity . It also turned both workers and managers into proud and loyal “Pihl-people”, who worked in the company for decades. The loyalty was expected from Søren Langvad in exchange for the trust and responsibility, and also he expected every employee to do their utmost and not spare themselves any exertion.

Another characteristic of the business strategy in E. Pihl & Søn A/S was – up until the last couple of years – that there was no written report to explain the strategy: It was simply to see the possibilities when they occurred and seize them.

Project management

From the first noteworthy sized projects in the early 1950s, a clear strategy for project execution was laid by both Kay and Søren Langvad. The “Hit & run” strategy as it was called involved careful planning, active leadership and a quick take off to set a tough cadence to be followed throughout the project.

"There are no obstacles that cannot be overcome by hard work and a strong will. And no excuse to lower the bar". Søren Langvad in the front row, second from the left.

As for the staffing, Kay Langvad was of the opinion that it is better to have a project slightly understaffed with stand-by reserves who can be sent in if necessary than to overstaff a construction site from the beginning, arguing that the latter will be used as a measurement for the whole period resulting in people not giving their best and most.

E. Pihl & Søn A/S often did not have the necessary financial power to take on the big projects they wished to themselves, and so they repeatedly formed joint ventures with other, larger companies with a greater equity, who could provide the demanded guarantees.

“He shoots at everything that moves” is an often used comment to describe how Søren Langvad chose the projects for E. Pihl & Søn A/S to get involved in. The economic benefit would always come in second to the constructional challenges he saw in a potential project. This has probably been the key to the initial success of Pihl, who has won numerous contracts by offering a lower price than the competitors and bidding on projects too risky or challenging for anybody else to want to take on. These risky projects – often situated in secluded areas of less developed countries – were carried out by local craftsmen but with engineers, foremen and machine operators from Denmark. The project management team would control the project in close collaboration with the head office back in Lyngby as so to avoid the need for further local representation.

Portfolio management

Risk-taking and decisive are keywords when describing the portfolio management strategy in E. Pihl & Søn A/S.

Ever since Kay and later Søren Langvad took over E. Pihl & Søn, the company has been managed with a tight liquidity. Already in the 1960s, when the expansion of the portfolio of the firm became noticeable, making ends meet in the company’s accounting was a challenge, since the guarantee sums held back by the clients until final deliveries with errors and omissions rectified would often amount to more than the profit. The overdraft facilities E. Pihl & Søn had in the bank did not at all meet the needs, but in spite of this the company continued in taking on bigger contracts that it often did not actually have sufficient funds to carry out.

The international focus in the portfolio management mentioned earlier in this article has saved E. Pihl & Søn A/S more than once. In the 1970s, the company survived the massive oil crisis in Denmark by taking on numerous projects in the Faroe Islands and also starting up business in Africa.

The subsidiary Ístak in Iceland contributed substantially to the earnings of Pihl for around four decades, and due to unfavorable exchange rates a fairly large share of the companies’ equity was tied in Icelandic investments. When the financial crisis hit in 2008, the Icelandic krone went down to about half of its previous value which resulted in a massive loss for E. Pihl & Søn A/S who had to depreciate their equity significantly.

Tuesday meetings

To keep track of the progress of all ongoing projects, a meeting was held in the head office every Tuesday with participation of the owners (later owner), directors and senior employees. As the business expanded through time, the meetings would cycle through focusing on projects in Denmark, “Near Abroad” and “Far Abroad” and every fourth week the meeting would be only for the top directors and the owner discussing the overall business. As in every other aspect of managing E. Pihl & Søn A/S, the focus on the Tuesday meetings was on the constructional challenges and details in different projects rather than the financial and schedule-related situation.

The Tuesday meetings did not have an official agenda. Søren Langvad had a pile of paper with subjects he wanted to go through, and as one employee expressed it “You were not discussing with Søren, you were told what to do”.

Implications

• The wide-ranging trust in the project managers might in some situations have been too wide-ranging: Newly employed managers were given the authority to make million-kroner decisions, which they did not have the prerequisites to make. Some of the budget overruns on the abroad projects in the last years were possibly a result of this .

• The leadership in Pihl was criticized on more points; it was never visionary and did not point out a direction for the future of the company, and also it never communicated its decisions to the employees. This is the exact opposite of what is supposed to be one of the benefits of having a flat organization . Also the opinion was that the members of the board were to detail-orientated and wanted to dig into every aspect of all projects instead of focusing on the big picture and provide general management. As a side note it should be mentioned that none of the executive managers had a MBA or any other education within management or leadership; they were all practical people who were promoted to directors because they had done well as project leaders for Pihl for many years. This lack of management skills within the board probably contributed to irrational decisions being made and the management of the company being unstable.

• The leadership style of having a combined owner/CEO made it possible to make decisions fast, which probably was another contributing factor in E. Pihl & Søn A/S going from being the insignificant masonry company that it was to being a worldwide recognized and large contracting firm. However, as the company grew it became clear that this type of leadership also led to what some have called an “enlightened despotism” that suppressed any other opinions on the management style than the one of the owner/CEO himself. Since the owner/CEO in this case, Søren Langvad, did not see the need of any changes it was not possible for the board of directors (however much they wanted to) to go through with even the slightest change in management style. And when a company goes from 15 to 1500 employees and increase the turnover more than tenfold in a decade, management changes are necessary, as this case evidents. Outside sources also point to that a flat organizational structure is best applicable in smaller companies .

• Not having any written rules and procedures can contribute to more creative solutions, which can be beneficial, but for a company the size of E. Pihl & Søn A/S it leads to chaos instead.

• When E. Pihl & Søn A/S went bankrupt in August 2013 the board of directors gave a statement, trying to explain the reasons for the bankruptcy. With regards to the extensive international expansion it was stated that “The expansion took place without sufficient balance in the contract terms, and without having sufficiently verified the credit quality of the foreign customers and subcontractors, and without making sure that the qualities of the work processes and the risk management procedures were sufficient to support the increase in activity level.". This statement sums up the reasons in a clear and precise way.

Conclusion

Many people who knew Søren Langvad and worked with him through the years agree on that he was an engineer first and a business man second. His interest in the business aspect of running and managing the company was almost non-existent in comparison to his interest in the construction details and challenges of ongoing and potential projects. The greater the risks, the greater his fascination and desire to land the contract of the project. As previously mentioned, as much as this attitude undoubtedly contributed to the success of E. Pihl & Søn A/S as it was working its way onto the big scene in the construction industry, it also resulted in great losses through the years and especially during and following the financial crisis in the late 00s.

Through the last 15-20 years of E. Pihl & Søn A/S’ existence, several leading employees and directors made appeals to Søren Langvad to change and streamline the organization and delegate more responsibility to the other executive officers. But as Søren Langvad did not want to pass on any consequential responsibilities, the changes in the project and portfolio management and business strategy therefore did not happen before the bank intervened and put Birgit Nørgaard as chairman of the board in 2012. Had she been put in that position just five years earlier – or maybe even just two years earlier, before the financial figures went red – things might have turned out differently.

Annotated Bibliography

Cover from the Book "Sørens Saga".

Østergaard, Poul Høegh (2014); Sørens Saga. Copenhagen, Denmark: Gyldendal Business.

The book “Sørens Saga” (284 pages) is written by journalist within the construction sector Poul Høegh Østergaard, who since the 1980s has been working as a reporter and communicator in the industry and thus possesses a unique knowledge in this field. “Sørens Saga” was initially meant to be a biography of the owner and CEO of E. Pihl & Søn A/S for 42 years Søren Langvad, but with the crisis in the company and Søren’s death, Poul Høegh Østergaard changed the focus so that it became a more general story about the history and management of Pihl. The book was given good reviews when it was published in 2014. In one review, the reviewer (another journalist in the construction field) is claiming that the book contains enough insights and reflections on the construction industry and the management hereof that it should be mandatory in the curriculum for all civil engineering educations .