The Right Balance
by Ronald F. Stengel, October 10, 2003
The Daily Deal
A chief restructuring officer often must walk a fine line between acting as manager and adviser. Emphasizing the latter is usually more productive.
A company in need of restructuring often starts out as a team in search of a leader, and that leader is typically the CEO or CFO. In recent years, creditor constituents have pressured companies to retain a chief restructuring officer — a CRO — both to allow the CEO and senior management team to better focus on the business and to supplement the management team with hands-on restructuring expertise. More often, by the time the need for a restructuring has become evident, the senior lenders have become so frustrated with senior management that they demand changes to the management team before agreeing to entertain a restructuring process.
In this case, the CRO can play a very important role by directing the restructuring process and providing impetus for much-needed change. In fact, hiring a CRO is now so widely used that it often occurs early in a workout, preceded only by the retention of investment bankers and legal counsel.
Because the CRO role is still relatively new in the restructuring arena, the responsibilities vary dramatically according to the complexity of the case and the expectations of the constituencies.
In its purest form, the CRO serves in an advisory role: He or she leads the company’s internal financial restructuring activities and functions as the principal interface in the information flow between the company and creditor bodies.
The CRO guides the restructuring process by ensuring the stabilization of the operating environment, understanding creditor expectations and organizing the company’s resources for maximum efficiency.
At the other end of the spectrum is the CRO with the authority and responsibility for managing the day-to-day business in addition to managing the restructuring process. Originally, the idea of marrying the roles of CRO and chief operating officer was thought to be an efficient way to ensure that the operational and financial restructurings could proceed on parallel paths. This concept remains valid, and many restructurings conclude successfully using this model.
But reality can prove different in complex cases, where business operations require significant attention to achieve the necessary operational overhaul required to support the financial restructuring. In these cases, instead of being on a parallel path, the financial restructuring can become serial to the operational restructuring, potentially prolonging the timeline. Most CROs find themselves somewhere in between the adviser and manager poles, and virtually every CRO walks this tightrope during an assignment.
The key is finding a way to keep one’s balance; this is usually easier to accomplish when the role leans to the advisory side, where the responsibilities are primarily confined to the financial restructuring process. Separating the CRO’s functions from operations can fulfill the basic needs of a company and its constituencies. The CEO can take the lead position with customers and vendors, while the CRO functions behind the scenes to further negotiations between the company and its creditors and effect a timely restructuring.
So how does a CRO — and ultimately the company and lender constituencies — establish the right operating framework? Start on day one in the selection process. Experienced CROs will show their mettle by how well they understand the expectations of senior management, the company’s board, senior lenders and other creditor constituencies, and how they define and separate responsibilities and reach agreement on the role and attendant authority. After all, the restructuring process is essentially a series of negotiations, and it starts when the prospective CRO first meets with the parties involved. The retention process should illuminate how well a CRO will function by virtue of how the prospective CRO defines his or her mission. That mission should be clearly spelled out, both verbally and in writing. An engagement letter that does not define the scope of responsibilities and corresponding authority, including specific resources, timelines and reporting structure, is a recipe for disappointment.
A CRO should be retained directly by the company and report to the board of directors. Separating the CRO role from day-to-day management of the business can promote a fast, smooth restructuring. When additional management is necessary, look to a CRO with a team of professionals who can provide the necessary support. But keep the CRO in an advisory capacity where he or she can best perform and not be distracted by daily operating issues that other members of management should address.