Who’s To Blame?
Lenders may seek to replace or diminish the role of one or more members of the “C suite” in order to shift blame and to demonstrate up the chain of command that they have taken appropriate action. One solution is to require the appointment of a chief restructuring officer as a condition to their cooperation in the bankruptcy case–including providing financing.
Board members should anticipate allegations of being negligent for allowing management to become misdirected. Demand for appointment of an independent director has become common–which is a slap in the face to existing directors. The independent board member also may be charged with investigating prior acts of management and of other board members. This requirement and appointment of a Chief Restructuring Officer (“CRO”) are examples of external control exercised over the debtor as a condition to a non-litigious (and, therefore, less expensive and less risky) reorganization.
The Arrival of a CRO
A CRO is a combination of part CEO, CFO and COO. They report directly to the board and, perhaps most importantly, typically have a direct line of communication to creditors and to the debtor’s professional advisors, often outside the presence of senior management and the board. The stated role of the CRO is to conduct the chapter 11 case to enable management to do what it supposedly does best–run the company. However, inevitably the CRO’s duties overlap with those of C suite members and, when in doubt, the CRO is the victor.
The CRO may prepare and submit financial projections to the Court and to creditors, identify and implement expense reductions, conduct asset and business dispositions, make personnel decisions, do financial reporting, obtain “DIP” financing for operations, assist investment bankers with securing exit financing from bankruptcy, negotiate with creditors respecting a plan of reorganization, assist in investigating the business and financial affairs of the debtor, and perform such other tasks as may be assigned to the CRO or that creditors may ask of the CRO.
As a result, the CFO is in a position of having their job diminished by the CRO and then even more so by additional members of the CRO’s team. (The CRO’s firm makes more money by staffing additional team members on the engagement.)
Protecting the Role of the CFO
Which brings us to two questions: How does a CFO make themselves indispensable to the chapter 11 process and to the CRO? How does the CFO avoid being the target of creditors seeking to lay blame?
- The first key is to demonstrate and to be perceived as having in depth knowledge of business and financial information that better enables to CRO to perform their duties without overshadowing the CRO. Be the number one resource for everything that the CRO every needs to do their job.
- Make the CRO look good even if it is at your expense. All information requested by the CRO should funnel up through and be vetted by the CFO. Never delegate the task and never enable a junior to report directly to the CRO. The errors of the junior will be attributed to the CFO.
- The board is vulnerable even if it is unaware of it. Even if it denies it. Always protect the board. The board may think that the CRO is an ally. But it is wrong. The CRO will always be circumspect about the board. The CRO will sacrifice the board if doing so makes the CRO look better to the people who may be in a position to give the CRO their next engagement (or give them the “cover” that they need to explain why the investment or claim went sour). The board should never be surprised by new facts coming to light. It should be aware of every path that is being taken by the bankruptcy professionals- including the CRO. Be fully transparent with the board. If the board does not demand that of the CFO, it is to the peril of the board. The board should know that you are their eyes and ears and that you seek to protect them. Establish a relationship of trust. Admit mistakes. Do not overpromise. Do not hide behind other professionals.
- Speak directly to the financial advisors to the creditors committee, secured lenders, bondholders and equity holders. “Schmooze” with them. Build a relationship. Regularly take their temperature. Listen to their concerns about what you and the CRO have said or have submitted to them. Communicate this information to the CRO. Never allow yourself to learn for the first time at an important meeting of a complaint by the other side. Have pre-meetings or pre-conference calls before every main conference call or big event.
- Make sure that you are regularly reporting to the CRO. The CRO should know that you are relationship-building in a way that makes CRO look in control and look better to the board. Treat the CRO as a potential employer.
When an investor or creditor suffers a loss, they look for someone to blame. Management is the first target. Allegations of mismanagement by the CEO and COO and allegations of improper financial reporting by the CFO are common.
Reprinted with permission from the February 11, 2021, issue of Global Banking & Finance Review. © 2021 GBAF Publications Ltd. All Rights Reserved.Click here to view the full article