Five Tips for Directors Whose Managements Face Big Repair Jobs in 2011

As 2011 began, The Wall Street Journal ran an article about the number of CEOs of well-known corporations – from Chrysler Group and Eastman Kodak to Johnson & Johnson, Nokia and Yahoo – who face stiff management challenges this year.  But it’s not only senior leadership that must confront these major hurdles.  It’s also their corporate directors.

Here are five pieces of advice for directors of challenged companies as they strive to understand what’s really happening at the companies whose stockholders they serve.

  1. Gain an up-close-and-personal understanding of the company’s critical issues: Truly grasp the situation. As soon as management suggests a headache or challenge looms, zero in on it. Now is not the time to be timid. If you don’t speak up, no one will hear you. If a CEO can’t (or won’t) answer questions adequately at a board meeting, ask that another senior leader – the CFO, an operations chief, an R&D director, etc. – brief you  Yahoo CEO Carol Bartz, for instance, must convince directors that the company’s turnaround is on track while it’s also battling rivals Google and Facebook. Directors should make sure they get all their questions answered.
  2. Be vigilant about protecting the “business judgment rule” of corporate law. Under it, directors should act in good faith, in the best interests of the corporation and on an informed basis while also not being wasteful or involved in self-interest. Those were elements of a test constructed in a 1988 court opinion to serve as a guideline for satisfying the rule.
  3. If a restructuring is involved, make sure you know its objectives. These include its plan, process, liquidity, interest expense/ratio, and business Performa, among other things.  Also work to develop a strong business model – before, during and after restructuring.  Often, directors assume that the CEO is on top of all restructuring issues. But that can prove false as senior leaders often are so pained by what has happened – they’re suffering from NOMW (not on my watch) Syndrome – that they become ineffective reorganizers and shrink from really taking charge.
  4. If a restructuring begins, find out everything about the advisors.  Know their fees, their track record and why they’re the best selection for the problem. Determine that they have a clear process to assess valuation and appropriate debt structure from the market’s perspective. In addition, make sure you and other directors get a schedule for restructuring updates and decisions.
  5. Be sure that a restructuring/reorganization expert is on the board.  That’s because in a restructuring, creditor committees are not you friends, they can be highly emotional, they can be intimidating and they don’t respond to scenarios that separate them from their investment.  A director who has restructuring knowledge not only can assist management, but through experience and skills can help dull the roar of creditors and others.

As a company director, follow the simple leadership maxim: Hope for the best, but plan for the worst. That way, you probably won’t be caught unawares or unprepared or disappointed when a major challenge or road block emerges.