When it's time to say, 'stop this bus!': directors must track problems and take action at an early stage. Here are warning signs that should make you question whether the company is going in the right direction.

Author:Koch, Al

CORPORATE BOARD MEMBERS sit in stewardship roles with responsibility to hire and oversee management. For their part, management is charged with generating shareholder value and conducting themselves in compliance with a myriad of laws and regulations. If things do not work as planned, there is sure to be an after-the-fact examination challenging what role the directors played, whether it was appropriate, and whether losses occurred as a result of errors made or the board's failure to act soon enough.

AlixPartners has more than 20 years of experience in dealing with underperforming and troubled companies. It gives us a unique perspective because often we are hired into situations that are either in bankruptcy or perilously close to it. As a result, we have observed failure from the inside out and can often see where a board's lack of action effectively squandered an opportunity to avoid major loss of shareholders' value. Our experience is drawn from working in failures--or near failures--such as Kmart, WorldCom, Service Merchandise, and hundreds of other restructurings.

Here we share what we have observed over the past few years--the danger signs that can help board members track problems at the early stages. We will also make suggestions on how a board might more effectively deal with these situations and, importantly, when action is needed. Those who take action when it is too late are always well-intentioned, but when the horse has left the barn it's usually too late to get it back.

Common themes

It is a common misperception that a major failure must be the result of a derelict board. It simply isn't true. In fact, situations involving significant corporate failures or near failures are not limited to boards that were derelict or non-responsive.

More times than not, these problems or crises happen with directors at the helm who are smart, well-qualified, and not afraid to ask tough questions or demand answers. In reality, these situations almost always include directors who would not trade their integrity or reputations for anything. Period. No exceptions. In other words, these board members include serious, dedicated people, just like all of us.

But we have observed that boards often do wait too long to act. The difference between success and a train wreck can often be delineated by whether the directors took action while there was still time to avoid disaster.

Avoiding the morass

Directors are governance and not management. When there are problems, boards sometimes confuse their role and begin to meddle in management. Unfortunately, this usually creates more problems than it solves. The board gets so wrapped up in trying to solve problems or prevent new ones from occurring that it creates a distraction for its management. While well-meaning,...

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