Gaining Independent Perspective on the COVID-19 Crisis: The Benefits of a New Independent Director During the Pandemic

April 21, 2020  |  By Phoenix Management  |  3 Minute Read

Directorship is no longer an honorary position — it is a profession. Experienced directors must demonstrate that they are keeping on top of the emerging issues and trends impacting financial performance, disrupting business models, and changing the competitive landscape.

-National Association of Corporate Directors

The world faces an unprecedented time, where a global pandemic has shaken the very bedrock of consumer confidence and strained businesses across the globe. As cash flow concerns lead to distress, many companies that were historically in the black have unexpectedly entered insolvency or the zone of insolvency, challenging boards to navigate a situation for which they likely were unprepared. Not only are boards being faced with existential questions of survival of the business, they are also determining their responsibilities regarding the safety of their employees, customers, and other constituents.

Operating in, and coming out of, the current COVID-19 crisis presents a set of challenges that very few management teams and Boards of Directors have the full set of talents and experience to address. These are challenging circumstances to be a board member; particularly if no one on the board or management team have the experience to deal with them; especially at the pace these issues are coming. 

In this unprecedented time, boards should consider the appointment of a new independent director who can assist in governing the company during the turnaround.

Benefits to Appointing a New Independent Director During the Current Crisis

1. Credibility

Knowing that outside constituents may ‘blame’ management or the board, the independent director provides credibility to decision making. In fact, merely engaging an independent director often immediately improves the relationship with strained third parties.  Here are a few areas where oversight by independent directors can be the key to securing creditor support:

• Sale of Assets – In most distressed cases that involve a sale process, an investment bank is engaged to manage the sale of the assets or potentially of the company. In these cases, a new independent director or special committee comprised of new independent directors can bring much needed credibility to the sale process. It is even more critical to have an independent director lead the discussion on the sale if insiders are planning to bid for the company’s assets.

• The Creation and Approval of Incentive Plans – While bonuses may not currently be top-of-mind, boards should be thinking about how to keep high performing senior managers on board now and in the pivotal time period following the crisis where businesses will be adjusting to a new normal in the post-pandemic world. With leadership often sitting on boards that decide their own bonuses, incentive plans can appear self-serving to creditors. An independent director alleviates that concern by providing unbiased oversight as incentive plans take shape.

• The Approval of the Turnaround Plan – While absolutely essential in these cases, the appointment of a financial advisor or CRO does not necessarily convince creditors that the plan presented to them is credible as the lenders may not trust the board to which the CRO reports.  The appointment of an independent director when combined with the engagement of a turnround firm can help to convince creditors that the plan is credible.

2. Outside Perspective

Unlike the existing insiders and pre-crisis independent directors, a new independent director is unburdened by the past. This can be essential to helping the directors get out of the fish bowl of their existing board dynamics to see the situation that they are in from the outside. The perspective of a new independent director can help existing directors to understand and accept the new reality of board governance during the crisis.

3. Risk Mitigation

The appointment of a new independent director with expertise in turnaround management can stave off litigation or, in chapter 11 cases, protect the company from the appointment of a trustee.  This is even more the case when the independent director or a special committee comprised of post distress independent directors is put in charge of decisions where other directors may be conflicted (e.g. sale of assets, creation of an incentive plan, etc., as discussed above).

Board Governance and Phoenix

When selecting an independent director in today’s climate, it is critical to consider the insight you need them to bring to the company. For instance, industry-specific knowledge is not as relevant in the current economic reality as it is normally; the COVID-19 pandemic isn’t industry-specific, but rather has had an unparalleled impact on all industries and sectors. Instead, turnaround management proves invaluable as professionals can leverage practical experience operating in distressed situations to provide additional insight and a diverse perspective to board discussion.

At Phoenix, we believe that to make it through the COVID-19 pandemic, businesses cannot take a ‘wait-it-out’ approach; rather, they must take actionable steps to ensure solvency. This crisis has created an urgent need for both independence and turnaround skill in the board room. Speak to a member of our team to tap into our extensive experience in corporate governance and board service.

For over 35+ years, Phoenix has provided smarter, operationally focused solutions for middle market companies in transition. Phoenix Management Services® provides turnaround, crisis and interim management, specialized advisory and operational implementation services for both distressed and growth-oriented companies. Phoenix Transaction Advisory Services® provides quality of earnings, management/organizational review, business integration, sell-side business preparation and other transaction related support. Phoenix Capital Resources® provides seamless investment banking solutions including M&A advisory, complex restructurings and capital placements. Phoenix Capital Resources is a U.S. registered broker-dealer and member of FINRA and SIPC. Proven. Results.®

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