When creditors take control of a debtor, they count on a newly appointed board to achieve their investment objectives, but, overwhelmingly, these boards fail to meet creditors’ expectations. In our over 20 years of work on behalf of creditors, we observe that the overwhelming majority of post-restructured boards do not add significant value, are misaligned with creditors’ objectives, or result in investors having to dedicate more time than desired. Creditors often comment that many such boards lack credibility, place heavy demands that demotivate management, and prove to be a distraction.
Common causes for poor board performance cited by creditors include lack of preparation for a thorough search, conflicting objectives among post-reorg shareholders, inadequate definition of required skills and experience, insufficient vetting of candidates, and inertia in replacing under-performing directors. With many post-reorg boards, recurring sins specific to restructuring appointments, lower the prospect of an optimal outcome, when left unaddressed.
1. Insufficient Time: Post-reorg company boards present challenges requiring more time than typical boards to assess and mentor management, provide expertise, and drive change. Typically, board members do not dig in deep enough to be effective in post-reorg situations. Worse yet, post-reorg boards may attract over-boarded directors, given that private company appointments are not tracked by proxy advisor firms such as Institutional Shareholder Services or Glass Lewis.
When evaluating board candidates, creditors should be explicit about time commitments and ask detailed questions to understand candidates’ competing commitments. Creditors should ascertain how many other boards a candidate serves on, and how much time they spend on each board, inclusive of preparation, engagement between board meetings, and staying current on the industry. As a rule, active engagement on the board of a post-restructured company requires at least 50% more time than the average 200 hours per year that directors report spending on board service according to an NACD Public Company Governance Survey. Approach with caution candidates who are sitting CEOs or have demanding executive roles or other commitments.
2. Conflict: Post-reorg board members may find themselves relitigating restructuring-related disputes no longer relevant to company performance, sometimes with the encouragement of creditors. Lingering resentments may undermine the board’s effectiveness and prejudice a fair assessment of management. For example, creditors may adversely influence incoming board member views, based on management’s lack of sophistication during the restructuring, or for having advanced interests of former equity owners adverse to creditors. Creditors should select a board consensually to drive key objectives and avoid appointments that will be seen as driving an agenda not shared by other board members or management. As part of that consensual process, structuring effective board leadership is essential to maintaining the board’s focus squarely on the corporate strategy and management’s ability to execute.
3. No Roadmap: To select a high performing board, creditors should have a well-informed working hypothesis on levers to drive value enhancement and an understanding of where talent gaps may exist in management. Board members with neither relevant nor current expertise who are unprepared to hit the ground running often prove incapable of making timely, informed decisions required to guide management. Common pitfalls include ignoring changes to the competitive landscape or the after-effects of draconian cost cuts or actions taken in anticipation of restructuring.
Directions from new owners to reduce headcount, cut costs, or grow revenue must be informed by a realistic appreciation of required investments, as well as available resources and expertise. A fit-for-purpose board with proper planning and onboarding can effectively address the business’s challenges from day one.
4. Low Expectations: Absent clear, effective direction, post-reorg boards may fall into the habit of prizing collegiality and process over outcomes or performatively playing tough with management. In practice, many board members may not be able to articulate a single accomplishment or decision they had driven during their tenure. To avert this outcome, creditors should appoint members with demonstrable record of impact, clearly define and communicate roles to each board member, and hold board members accountable through periodic external assessment. When expectations are not met, creditors should not hesitate to replace ineffective directors.
5. Misaligned Loyalties: Though charged with advancing the interests of creditors as new equity, board members face competing temptations including relationships with advisors and other vendors, entertainment and other benefits obtained through close affinity with management, and a desire to perpetuate a board role rather than drive to an exit. Though qualified board members ought to leverage their network for the benefit of the company and its shareholders, too often board members use their positions to earn or pay back favors.
Creditors should insist on exhaustive vetting to understand how board candidates behave and to whom loyalties are owed by dedicating time to conduct thorough background checks and off-list references or engaging a third party to do so. Non-CEO members of management serving as board members should be a non-starter. In addition, boards should adopt stringent rules requiring disclosure and approval of related party transactions and entertainment of board members.
6. Celebrity Board Members: Some prospective board members contribute only name recognition, but do not have a demonstrated track record of adding value in an analogous board or management capacity. Others, applauded for past success, pontificate based on dated experience, telling war stories instead of listening and adapting. Creditors should seek board candidates with a learning mindset who can demonstrate active engagement and interest in problem solving.
7. Kicking the Can: Restructured companies rarely suffer from balance sheet issues alone. Too often, creditors delay critical decisions hoping the new board will figure it out. However, post-reorg boards can take a year or more to learn the business and begin to form consensus around decisions that would have been better made immediately following restructuring. Fearful of upsetting the status quo, boards delay decisions that may subsequently seem obvious, with the benefit of hindsight. As new owners, creditors and their board designees should quickly address time sensitive decisions on talent, strategy, and cost-take out rather than procrastinating, even if based on imperfect information. A qualified post-reorg board should have a bias toward constructive engagement and change when merited.
Appointing a high-performing board with an effective balance between prescriptive oversight and constructive support of management is critical to operational value enhancement post restructuring. The ideal time to begin planning for a post-reorg board is as soon as creditors believe they will become controlling shareholders—delaying this process can only increase the risk of value erosion. This planning should include designing an appropriate board search and vetting process that identifies required skills and experience matrices aligned with business value-drivers.
Further, board roles are not tenured sinecures. Ongoing board assessments are critically important to continuing to shape an effective board and creditors should expeditiously replace underperforming directors as required. Creditors lacking the bandwidth or operational expertise to timely focus on planning for and overseeing a post-reorg board should seek assistance from external resources with demonstrable expertise in distressed asset operational value enhancement.
ABOUT THE AUTHORS
ABOUT JON F. WEBER
Jon F. Weber leads Jon F Weber & Co., an advisory firm that supports creditors in operationally intensive restructurings. Previously, he created and led operating partner groups for over 20 years at institutional investors, including Goldman Sachs, Icahn Enterprises, and Elliott Investment Management. He has impacted dozens of portfolio companies in a broad range of industries through operational engagement, talent management, and effective oversight in partnership with management driving change as a board member, senior executive, and board-level advisor for companies in the Americas and Europe.
ABOUT ALVARO J. AGUIRRE
Alvaro J. Aguirre has over 30 years of experience as a board member and a finance and operating executive. He has demonstrable expertise in adeptly representing financial sponsors in their portfolio companies, while developing effective counseling and oversight relationships with senior management. Alvaro has extensive experience with post-restructured businesses, including Advanstar Communications, Select Staffing/EmployBridge, JCrew Group, and Avianca Airlines.