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Structuring Effective Governance For Companies Post-Restructuring

By Spodek Law Group | February 20, 2024

Structuring Effective Governance For Companies Post-Restructuring

Establishing a Transition Governance Model

During the restructuring process, companies often operate under a “transition governance model” focused on crisis management rather than long-term strategy. This involves creating special board committees, appointing a Chief Restructuring Officer (CRO), and making other temporary leadership changes.

Once restructuring concludes, the transition model needs to evolve towards regular governance operations. Steps companies can take include:

  • Reconstitute the board – Assess which directors have the skills to oversee the post-restructuring company and recruit new members as needed. Prioritize expertise in the company’s revamped operational areas.
  • Work with the CRO – The CRO was hired to manage the restructuring, but they can provide value going forward through a phased handover process. Agree on a transition plan where the CRO gradually transfers responsibilities to the new management team.
  • Sunset transition committees – Transition committees like the Restructuring Committee and M&A Committee played vital roles guiding the restructuring process. As operations stabilize, phase out these committees and shift oversight abilities back to standing board committees.

Updating Governance Policies and Documents

With major changes to the business, governance documents need review and updates to align with the company’s new reality. Key areas to address include:

Mission and vision statements – If restructuring involved pivots to the business model, the company needs new mission and vision statements reflecting its go-forward focus. Revise these documents in alignment with the post-restructuring strategy.

Risk management policies – The risk profile of a restructured company looks very different. Review all risk management policies around areas like financial controls, compliance, credit extension, safety, and security. Update according to the new operating environment.

Compensation programs – With a recapitalized balance sheet and potentially new business lines, ensure incentive compensation programs align with desired behaviors and performance goals post-restructuring. Tie metrics to strategic priorities for the newly reorganized business.

Corporate bylaws – If restructuring resulted in a major change like converting from a public to a private company, review bylaws to ensure they provide appropriate governance for the new corporate structure.

Prioritizing Critical Governance Focus Areas

While governance touches every aspect of company oversight, boards of post-restructuring companies need to prioritize a few critical areas:

1. Financial Performance

With an overhauled capital structure and operating model, scrutiny of financial performance is vital. Boards should focus extensive attention on:

  • Forecasts vs actuals – Require frequent variance analysis on operating budgets and financial projections. Ensure the board has visibility to understand deviations.
  • Covenants – Since restructured companies often carry high debt burdens, ensure compliance with loan covenants through rigorous reporting requirements. Watch for early warning signs of potential issues.
  • Cash management – With limited access to new capital, keep an intense focus on cash balances and sources/uses. Require approvals for major outlays to safeguard liquidity.

2. Stakeholder Alignment

Post-restructuring, the stakeholder roster likely looks very different than before. New emphasis must be placed on active engagement and alignment. This includes more frequent touchpoints with:

  • Lenders – With restructured debt and new covenants, lender relationships become vital. Establish regular communication channels for covenant reporting and forecast updates.
  • Major customers – If customers played a financing role and now hold warrants or board seats, formalize regular business reviews and strategic planning sessions.
  • Activist investors – Activists often gain influence through restructurings. Prioritize shareholder engagement and demonstrate how governance changes address their concerns.

3. Leadership Oversight

Finally, boards have a critical role overseeing the executive team guiding the post-restructuring company:

  • Set clear mandates – Define precise expectations and success metrics for the management team based on rebuilding stability in the first 1-2 years.
  • Assess bandwidth – Determine if the leadership team has the capacity and skill sets needed to operate the restructured business. Recruit new executives to fill capability gaps.
  • Compensate appropriately – Structure executive compensation plans to incentivize and retain qualified leaders to steer the company post-restructuring. Benchmark packages for the situation at hand.

Through a focus on financials, stakeholders, and leadership, boards can best position the company for a successful new chapter.

Leveraging External Expertise

Given the complexity of governance post-restructuring, boards often benefit from engaging outside experts for advice and perspective:

  • Restructuring consultants – Advisors who led the restructuring process bring valuable knowledge regarding changes to the business and how governance should adapt accordingly.
  • Industry veterans – Directors from other companies that have undergone restructuring can offer first-hand experience on governance challenges and emerging best practices.
  • Governance specialists – Firms like McKinsey, EY, and PwC have experts focused specifically on governance approaches for situations like post-restructuring companies.

By complementing internal governance capabilities with external expertise, boards can create a support network to provide guidance unique to the situation at hand.

Conclusion

Restructuring represents a transformational moment for companies. With major operational, financial, and leadership changes, approaches to governance need realignment to provide effective oversight for the reorganized business. By establishing a clear transition governance model, updating foundational governance documents, prioritizing critical focus areas, and leveraging outside experts, boards can structurally position the company for stability and success post-restructuring.

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