In the world of business, most discussions revolve around the actions and decisions of CEOs and other members of the c-suite, but equally important is the role of a company’s board of directors. Beyond its standard responsibilities and prerogatives–establishing a firm’s overall strategy, appointing a CEO, and so on–a board takes on added significance when a company enters a distressed situation. While distressed situations can provide boards with opportunities to strengthen their respective companies, they also require boards to dedicate much more time and energy to the firm’s activities as well as exposing board members to new risks. As a result, boards of distressed companies–and especially directors–should be aware of several factors.
First, in distressed situations, it helps considerably if the board is well rounded and features a diverse set of skills and experiences that are applicable to the situation at hand. Of course, a board with a wide range of expertise is always desirable, but it is especially helpful when the firm is in the midst of a restructuring, Chapter 11 bankruptcy, and so on. Furthermore, boards whose members have a variety of skills can also mitigate the impact of any one member’s resignation, although there are certain skills that are always necessary–for example, if the chairman of the audit committee on a board of seven members resigns, then that skill set will need to be replaced.
Board members also need to recognize the additional time commitment distressed situations represent. Members of a board may find themselves meeting once a month instead of once every quarter or even more often during distressed situations. This can be difficult, especially considering the fact that board members generally have other professional obligations, so tending to distressed situations may require more time than they are in a position to give.
Distressed situations also present new forms of risk for board members. Boards have become easy targets for class action shareholder lawsuits, so members need to weigh this concern as they decide whether or not to join or remain a member of the board of a public company during distressed situations. At the same time, if restructuring efforts encounter a setback or problems, board members may face reputational hazards as well.
Serving on or leading a board during a distressed situation is like walking a tightrope: It’s a balancing act. The board needs to balance between different sets of skills and knowledge, the time constraints of its various members, the risks of litigation or tarnished reputations, and balance between the interests of a company’s various stakeholders. But for boards that appreciate the risks of distressed situations and act accordingly, it’s possible to make it across the tightrope without a fall.