When investing in a distressed or turnaround situation, the quality of a company’s management
team and leadership often proves to be
the most critical factor to the success
of the investment. Although this may
sound obvious, distressed investors
simply cannot minimize the importance
of management in a turnaround.
decisions? What role does the
board of directors play? What must
directors and/or the investment
firm do differently in a particular
distressed situation to achieve
is often a day-to-day consideration that
can trigger anxiety among employees,
lenders, investors, and customers. He or
she can have a critical impact on how
the company fares by concentrating on
generating internal liquidity quickly.
This article examines these essential
questions and issues.
Without fail, the abilities of the
management team of a sick or wounded
company make or break a sound
investment thesis. The issue of good
management is far more complex and
complicated than it may seem on the
surface, and with ineffective or poor
leadership, investors can lose their shirts.
To clarify, a distressed organization
is one that confronts a turnaround
imperative to survive. Distress occurs
whenever a company’s financial
performance indicates it will fail in
the near future unless short-term
corrective action is taken. Investors
focused on finding value in distressed
situations encounter companies
facing such scenarios all the time.
and Their Roles
Leadership of distressed companies
can fit several models. The captain at
the helm may be an interim turnaround
professional; new management; a
representative from the investment firm,
board of directors, or a lead director;
or even the current management.
In some instances, a triumvirate or
co-CEOs are put in charge, although
such arrangements rarely succeed.
Several years ago, a strong turnaround
professional was engaged to transform
a distressed manufacturing company.
Most of its sales team was gone, and
the turnaround professional had fired
several others to cut costs. When he
addressed more than 100 employees in a
staff meeting, several complained about
their time off and wondered aloud if they
were going to get to keep their sick days.
As for the quality of management in
such situations, several questions arise
that must be addressed both before
and after making an investment:
Familiarity with and experimentation
involving all of these types of leadership
have demonstrated that there is no
one-size-fits-all solution. Leadership
requirements during an investment
horizon may evolve, and one should
be prepared to recognize the needs
and shortcomings in the organization
as the turnaround unfolds.
The turnaround professional responded
that sick days weren’t atop his priority
list at that moment. Further, he said
bluntly that if the company didn’t
develop profitable new business—and
quickly—most of the 100 employees
wouldn’t be there the following week.
He asked pointedly if anyone disagreed
with keeping the focus on that objective.
Not one hand rose and from then
on employees concentrated on
producing quality products. Labor
efficiency improved dramatically
during the turnaround professional’s
tenure with the company.
1 How is the quality of the management team gauged?
An interim CEO or chief restructuring
officer (CRO) may provide the best
option, at least initially, because
incumbent management teams almost
always experience some degree of
paralysis in making decisions. In
addition, the management skills required
of a temporary leader usually differ from
those necessary when a company is
thriving. Running and fixing a broken
company require a very different skill
set than managing a healthy business.
2 What qualities should be favored for the team striving to turn around
a sick company? Should the team
be comprised of professionals who
are well-rounded, or should it be
populated with specialists in areas
critical to turnaround situations?
How important are chemistry,
collegiality, and a management
team’s ability to mesh, or is a strong
autocrat who can move swiftly to
make tough decisions and act on
Actions of an interim leader are usually
quick and decisive, especially if he
or she actually has revived a troubled
business in the past. This specialist
usually brings little or no baggage to the
role and can provide a fresh perspective
and move swiftly to grasp the situation
and make decisions. An interim CEO
is usually task-oriented and benefits
by recognizing that his or her tenure
at the company likely will be limited to
the time required to resolve the crisis.
To be sure, there are shortcomings to
an interim CEO position. The fact that
the position is short-term in nature
can make it difficult to get buy-in
from longer-term professionals within
the organization. It may also prove
expensive to attract a top-notch interim
executive. However, a troubled company
usually concludes it cannot afford not
to retain a talented interim leader.
Because most distressed situations
call for some leadership changes,
who must be replaced? Sometimes
turnaround professionals must
conclude that the status quo is not
an option, so how can leaders
change behaviors within a broken
company to drive positive results?
Some troubled businesses consider
simply retaining their current CEOs
and management teams, blaming bad
economic times or a particular issue
beyond their control rather than a lack
of managerial talents for triggering
their companies’ distress. However,
the CEO and certain other senior
leaders who managed the company
into trouble almost always have too
much baggage to return it to good
health. Why add another element of
risk to an already risky landscape?
4 What about the qualities of those making the key management
Typically, an interim CEO or CRO
immediately focuses on managing
finances very closely because liquidity
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