The odds are stacked against companies coming out of Chapter 11. Some of this is due to noise created by arbitrary performance projections; some to industry issues. Many, though, suffer from the difficulty of making good and timely decisions, which is a function of leadership, and most particularly, the board of directors.
Whether new management is in place or the old group has survived, effective oversight is critical to success. Yet often the board is ineffective, demanding disproportionate attention from management, directors, and counsel alike.
Post reorg boards are rarely well thought through from the point of view of what will make them successful at safeguarding the welfare of the enterprise, participating in development and monitoring execution of strategy, supporting management while holding them accountable, and building the decision-making framework needed for consistent performance.
Why is this? Those assembling the board fail to understand or respect the work of the board. Boards bear some responsibility for this, as they have often been treated like mushrooms, kept in the dark, and they have allowed that.
Attorneys often contribute to the mess as they recommend poor candidates–folks who represent a majority fallacy, inoffensive but lacking the depth to contribute, or, worse, celebrities. Former senators or think tank leaders are mostly worse than useless as they demand way too much attention and generally deliver little in the way of substance.
Search firms are wonderful at finding skill sets, but focus on industry expertise as the simplest measure of fit, without knowing the particular challenges of the early days of the new company’s operations. They have a much harder time understanding and thus finding the folks who know how to work in that environment.
The money interests are busy horse-trading to garner votes for a confirmable plan. Frequently lacking perspective on board function, they tend to prefer folks who have money at stake, or put their lackeys forward, expecting them to follow instructions. Their perception that only those who have significant holdings can be effective muddies the water, as those folks frequently have trouble thinking objectively about building value, and think their voices carry more weight than others. The result is often a mishmash of people who may not know the first thing about board service and how they are to perform. Once the plan of reorganization is approved, they are often left alone to fight their way forward in the dark. They frequently have legacy counsel at least at the outset, and have trouble perceiving that counsel, while always appearing to have the answers, may also not really know how to help the board do its job well.
What to do? The first step is to think about the board, not the POR, and identify what it needs to do. Is the company well capitalized but in a dying industry? Is there an old management team in place due to horse-trading? Where are the most critical challenges to the new company’s viability?
Next, given that the board will be comprised of folks selected through a less than optimal process, influenced by the factors outlined above, develop a serious on-boarding process: training in company matters, industry dynamics, board and committee function, fiduciary function, bylaws and indemnification. Once seated, their first loyalty is to the enterprise.
Finally, look for folks comfortable in changing situations, who listen closely, with experience in governance and corporate success, and who can create a functioning team capable of serving as the stewards they are intended to be. This person, and not the CEO, needs to serve as board chairman.
Deborah Midanek Bailey
Deborah is a corporate director and long time restructuring professional.
Deborah has been directly involved in much of the extraordinary innovation that has taken place on Wall Street over the last few decades, and in handling the consequences of its excess. With solid knowledge of capital markets from all points of view and a long record of success in building and rebuilding companies from the bottom up, Deborah focuses relentlessly on defining transitions as positive processes. Not interested in merely preserving companies, organizations and jobs, instead she works to drive them to levels previously unimagined. She has led turnaround teams for diverse companies including Parmalat USA, Mississippi Chemical, and FINOVA. Earlier, she served as CEO of United Companies Financial Corporation and Standard Brands Paint.