How can boards help their companies navigate distress—before it’s too late?
Any company could face financial distress at some point. In a worst-case scenario, those pressures could be serious enough to put it out of business.
Boards should be prepared to deal with rapidly deteriorating circumstances that could push a company into insolvency. Directors who know the warning signs can help their companies head off bankruptcy—or at least be in a better position to emerge successfully.
Report highlights
- Knowing the early warning signs
- Assessing the situation and developing a plan
- Working through a restructuring
- The human element in restructuring
- Navigating the zone of insolvency
Knowing the early warning signs
Early warning signs are not always obvious. It’s also challenging to diagnose problems that could mushroom into major issues. But early identification of issues can help a company refocus its strategy and give it a better chance to stabilize operations and preserve value.
Realistically, how can boards diagnose symptoms of trouble—especially when directors aren’t at the company every day?
Assessing the situation and developing a plan
Directors should encourage management to do a holistic review of the business. This includes evaluating recent financial performance, the business plan and financial forecasts, management team capabilities, short- and medium-term liquidity needs and the capacity to access capital markets. Once management has analyzed the situation, it’s much better positioned to help assess options and recommend a plan.
Directors should review this plan with a critical eye as management will tend to have a rosier lens that may not reflect reality.
Working through a restructuring
If initial turnaround actions on revenue enhancements, cost reductions and/or liquidity improvements don’t right the ship, then the board may have to consider additional alternatives. This can mean a financial restructuring of the company—either out of court or reorganizing through a Chapter 11 bankruptcy.
In evaluating restructuring alternatives, a board should consider not only the degree of the company’s problems but also how those problems can influence the path ahead.
The human element in restructuring
During a restructuring, directors and management are focused on the many hurdles to reorganizing, including assessing strategic alternatives, consummating transactions, resolving contracts and dealing with the various groups of stakeholders.
Amid all this, they can’t lose sight of how the process affects the company’s employees.
Navigating the zone of insolvency
When is a company considered to be in the zone of insolvency? When the sum of its debts is greater than its assets and it has no reasonable prospect of maintaining its current operations. Or when it can’t pay its debts as they come due in the ordinary course of business.
When a financially distressed company enters the zone of insolvency, a board’s obligations may change.
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