Energy Board Experts Issue Guidelines To Help Energy Companies and Creditors Clear One of Chapter 11’s Biggest Challenges.
HOUSTON – October 18, 2016 – With oil continuing to languish below $50 a barrel, the energy industry is girding for a protracted slump—and the continuation of a wave of bankruptcies as companies across the value chain are pushed up against debt covenant restrictions. For companies that enter Chapter 11, the structuring of the new board of directors is a powerful factor in determining the company’s ability to return to long-term financial health.
Steve Goodman and Trent Aulbaugh, consultants at global executive search and leadership assessment firm Egon Zehnder, have compiled a set of guidelines on board selection and structuring for energy firms in bankruptcy, based on their extensive work with dozens of energy boards operating in a range of conditions. “It’s tempting to see putting together a new board as just one more box to check on the way to getting approval from a bankruptcy judge,” said Goodman, “but an effective board is critical to deliver value and certain best practices should not be overlooked to ensure success.”
sets out four specific things that companies, creditors and their advisors must do when forming a new board:
Understand the range of agendas around the table. The company is likely to favor “nameplate” directors whose endorsement will send a strong public message. Secured creditors will be thinking about an exit strategy, and thus will favor directors with financial and turnaround experience. Unsecured creditors, on the other hand, tend to push for board members with operational and strategic experience to increase the value of the business. And then there are the director candidates themselves, who will closely scrutinize everything from the company’s pre-bankruptcy reputation to the exit strategies of the investors on the board.
“Sensitivity to everyone’s perspectives up front will make it easier for all parties to work together and agree on a first-rate board, and then to attract director candidates who have plenty of other options,” noted Aulbaugh.
Choose directors with the right experience, judgment and temperament. “The board is going to be hit from day one with knotty, high-stakes challenges, from continued evaluation of the CEO to evaluating optionality for potential business combinations,” says Goodman. “This is not time for on-the-job training. Directors need to represent an array of relevant technical knowledge, impeccable business judgement and a temperament that thrives in uncertainty.” In other words, the goal is for the board to be a high-functioning, agile team rather than a star-studded panel.
Have a strong foundation at the top. Many if not all of the directors on a board formed in bankruptcy will have never worked together before. The extent and speed with which a group of individuals can come together as a team will be determined by the board chair. The ideal board chair will establish a board culture characterized by open debate, rigorous decision making, and a focus on strategy and risk assessment rather than short-term implementation details. Strong leadership at the committee level is also critical.
Closely monitor board dynamics. Boards of companies emerging from bankruptcy don’t have the luxury of learning and then unlearning bad habits. As a result, the board chair needs to establish a near real- time mechanism for taking the temperature of the board. The guidelines provide an example of a short questionnaire chairs can use to get a quick sense of board culture so that necessary adjustments can be made before small issues become full-scale derailers.
“Creating a board for an energy company emerging from bankruptcy may look like a daunting challenge, but it is also a rare opportunity to rebuild from scratch, unencumbered by legacy constraints,” said Goodman. “Our hope is that this set of guidelines will be useful to companies, their lenders and stakeholders as they work to maximize company performance and enhance the company’s attractiveness in capital markets.”
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About Egon Zehnder
Since 1964, Egon Zehnder has been at the forefront of defining great leadership in the face of changing economic conditions, emerging opportunities and evolving business goals. With more than 400 consultants in 69 offices and 41 countries around the globe, we work closely with public and private corporations, family-owned enterprises and nonprofit and government agencies to provide board advisory services, CEO and leadership succession planning, executive search and assessment, and leadership development. For more information, visit www.egonzehnder.com and follow us on LinkedIn and Twitter.
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