commitment of time required for one
of its partners to take on such a role?
A company also may decide to bypass
engaging interim leadership and
instead hire a new permanent CEO
or management team to take charge.
Many turnaround specialists say a
new CEO is required, regardless of
how talented the previous CEO was.
Whatever the case, the new leader or
team must be committed to full-time
engagement because change must
occur exponentially faster in a distressed
environment than would be required in
a non-distressed situation. A new CEO
cannot simply parachute in but must be
on the ground at least five days a week.
Except in very few instances, many firms
do not employ such a strategy with their
turnaround investments. Although many
of them are intimately involved with
their portfolio companies’ operations,
they prefer to play instrumental
roles in developing turnaround and
value-creation blueprints and then
hand off tactical execution of the
plans to trusted leadership teams.
Changing personnel, while it often
proves delicate, is essential when
warranted and must be done quickly
and decisively. Bad leaders can kill an
organization. That’s why the incumbent
CEO and other very senior leaders
are sometimes replaced to start fresh
with executives who can introduce
change quickly. No justification exists
for leaving an ineffective executive
in place in a critical position.
Obviously, investors should assess
their senior management teams
continuously. And, for the most
part, they should look for common
characteristics. For instance, strong
management teams are very
execution-oriented. They set priorities
and execute them without delay.
As for the type of well-qualified
permanent CEO to appoint, an executive
with previous turnaround experience
is preferable to an executive who just
has knowledge of the industry. A skilled
turnaround CEO typically is a strong
general manager who can work across
many industries. This leader’s immediate
task is to restore stakeholders’ confidence
by communicating and achieving a
sense of purpose and direction within
all facets of the organization. Those
with turnaround management stripes
have done so in the past. Industry
experience is important, especially
in industries with unique dynamics,
such as energy or aviation, but
turnaround experience is imperative.
Too often, managers can do everything
pretty well, but they don’t focus enough
on setting priorities and concentrate
on critical issues. As a result, they can
get completely buried. And distressed
companies solve problems using small,
senior, cross-functional teams. Because
there is so much to do in a turnaround,
it’s often not the time for management
to divide projects functionally.
There may be other roles inside an
organization for problem managers
that don’t involve running the business.
Perhaps they are valuable to the morale
of the customer base, so placing them
in certain external-facing functions
may be beneficial. Elevating them
to the board or to advisory positions
is also an option. Still, in distressed
situations, having out-of-place
executives depart is usually preferable
to transferring them to other roles.
There also are drawbacks to an
independent director or an investment
firm’s operating partner playing an
active role in the turnaround. While
directors play an important role and
can provide strategic direction and
guide strategy, they can be viewed
as tainted because they were on
the board when the company got
into trouble in the first place.
Being decisive is vital. At a struggling
company, management simply can’t
suffer paralysis through analysis. A
portfolio company investment may
possess the best strategy in the world,
but it becomes worthless if it cannot
be achieved within a tight time frame.
The 80/20 rule is good to follow. Strong
leaders spend 20 percent of their time on
80 percent of the decisions they make;
they spend 80 percent of their time on
20 percent of the decisions they make.
Hands-on investors seek to be
highly in tune with management
situations, but assessing an existing
management team may sometimes
require assistance. Consultants and
advisors can provide independent
counsel on what is working and what
is not with specific management team
members and the team as a whole.
For investors, continuously assessing
their own decisions and action
plans is as vital to their success as is
assessing those of leadership teams.
The Investor’s Role
A distressed investment, like a sick
patient, requires extra care and
observation. Private investors making
a distressed investment should be
prepared to roll up their sleeves and
look closely into the business.
Firms that invest in distressed or troubled
companies often seek board seats for
outside directors and principals from
the firm so they can make sure that the
board pushes the management team
on strategic direction and initiatives.
Management must execute, but the
board of directors’ role in providing
direction and guidance is equally
important in a turnaround investment.
Effective management teams also
bubble up and synthesize issues and
get stakeholders on board about the key
strategic issues facing the company.
At times, a firm may acquire a distressed
business whose management team
is not in place or needs to be replaced
immediately. The hands-on experience
gained by an investment firm through
running the business onsite day-to-day for an interim period can provide
valuable perspectives, not only as
investors but also as managers. It can
also provide a firsthand view of the skill
sets required in strong management
teams for that particular situation.
A decision to appoint a partner of an
investment firm to lead a portfolio
company through a turnaround
requires consideration of several
key questions. Do other partners or
lenders back such a plan? What do
customers say? Can the firm afford the
Collegiality is also critical to turning
around a sick operation. The leadership
team is in a foxhole, and everyone
must be comfortable with the others
in that bunker. If a certain chemistry
doesn’t exist, management will burn
up lots of time on unnecessary matters,
including simply being unable to
get out of each other’s way. Time is
critical; if management is not fast
and efficient in executing its action
plan, the world can change quickly.
For instance, because of the expedience
required for making the investment,
an investment firm ran a distressed
hospitality business for about three
months after purchasing it out of