They are being recruited through company executives and investor networks. Law firms and investment banks are being tapped as well. And, of course, executive search firms are putting together slates of potential candidates.
With so many companies being pushed into bankruptcy because of the pandemic, firms are scrambling to find board directors for when they emerge. So much so, in fact, that it isn’t an exaggeration to say the pandemic could birth an entirely new generation of directors, with more openings to fill at any one time than in at least a decade and perhaps not since the Great Depression
According to Epiq AACER, a legal service that tracks bankruptcy court data, through the first half of this year, commercial Chapter 11 bankruptcy filings are up 26% over last year to more than 3,600, though many filings are from small businesses that aren’t publicly traded and don’t have a board of directors. So far this year, 29 retailers alone have filed for bankruptcy protection, more than the 22 that filed through August of last year and approaching the record of 48 that sought Chapter 11 protection after the recession in 2008.
With the average bankruptcy lasting between four and 18 months, Shane Goodwin, associate dean of Southern Methodist University’s Cox School of Business, says it’s likely that many companies in the same sector will emerge at the same time, straining the pipeline of available directors in those industries. “Is the pool of qualified, experienced, independent directors that have the time to properly carry out their fiduciary duties large enough? I suspect not,” says Goodwin of the number of new directors that will be needed.
Putting together a bankrupt company’s board isn’t simply a matter of filling one or two vacant seats. In most cases, it requires turning over the entire board, replacing previous directors with new ones that represent the wide and disparate interests of the company’s new owners, which can include private equity funds, activist investors, debt holders, and more. In fact, Robert Hallagan, a Korn Ferry vice chairman and co-leader of board services for the firm, says one of the biggest challenges that directors of companies coming out of bankruptcy face is aligning stakeholder interests.
Hallagan, who has helped rebuild boards at many of the biggest filings over the years, says most companies that file for bankruptcy aren’t looking to be liquidated. Chapter 11 protection allows companies to negotiate with creditors on a debt-restructuring plan to emerge from bankruptcy as a going concern with the goal of repaying as quickly as possible, often through a sale, merger, or initial public offering.
That takes a lot of work over a short period of time, which is another issue bankrupt organizations face when trying to recruit directors. Unlike public companies, where the board’s remit is to provide oversight and strategic guidance, directors on the boards of companies coming out of bankruptcy are more actively engaged in running the business. The workload is heavier than that of a director at a solvent company, with more meetings, phone calls, outside networking, and involvement with running the business.
“There’s really no learning curve,” says Hallagan, who helped build the board of investment bank Lehman Bros. when it came out of bankruptcy after the financial collapse of 2008. “Companies emerging from bankruptcy need directors who can dig in very quickly drive shareholder value for the new owner.” Typically, these directors serve shorter tenures, usually between three and five years, but are well rewarded for their work.
For companies currently in bankruptcy, Hallagan says the battle to attract directors with the skills and experience they’ll need upon emerging is highly competitive. “You want executives with successful track records in the sectors of the company coming out of bankruptcy, usually recently retired and willing to be highly engaged,” says Hallagan, “this turns out to be a limited pool.”