Delicate state: Board selection in bankruptcy.

• Author: DAUM, JULIE H.

A company still reeling from bankruptcy needs the right board to get back on its feet. Here are some guidelines for building a strong board to lead the comeback.

A company coming back from bankruptcy is not unlike someone who has suffered a severe heart attack. The individual may be on the mend, may even be back at work, but there are still a number of precautions and different stratagems that must be followed to ensure survival and a return to the peak of health. To extend the metaphor just a little, for a company on the mend, a board of directors is somewhat akin to a team of doctors in whose care the organization's future rests. This calls for directors who are often specialists in areas that will be critical to a turnaround, who have the judgment and expertise needed, and the time to devote.

The recruiting challenge

Recruiting good directors has become more difficult for all boards. In the case of a post-bankruptcy board, there are distinct challenges. Before even dealing with the issue of whom to recruit, there is an initial hurdle to get over: finding a way to shift the focus of the group choosing directors away from the narrow interest of each party to the bankruptcy to a broader focus that will serve the company's short- and longer-term interests.

This is not your normal selection committee. Most often, the individuals choosing the next board will be the lenders, bondholders (those who have purchased at par and the debt traders who may have purchased at prices in the teens), and even the trade creditors. These are the groups that will comprise the ownership of the new equity of the emerging company, and they often have divergent, even conflicting, goals.

For example, the traditional bank lender may want to continue to lend money to the post-bankrupt entity, but on a very tight leash. The lender may, therefore, want substantial input into the operations of the company going forward. The trade vendors will want a company that has a lot of liquidity and room for aggressive growth so they can continue to buy goods and services at an expanding rate. The bondholders, especially those who have bought in at low prices, have a very short-term perspective. Their goal will be to have debt and equity that will trade at par upon emergence from bankruptcy, enabling them to sell out of their positions within a very short time.

These sorts of differing perspectives and attendant agendas make the creation of an effective board that can help the company succeed and will serve everyone's interests -- creditors, shareholders, management and employees -- a somewhat daunting task.

A process that builds consensus

While it is not possible for every constituent's separate interest to be represented on the board, it is important that all parties -- secured and unsecured creditors, equity holders, and management -- have an opportunity to provide input on the design of a process that will be fair to everyone. Starting from the perspective of what will best serve the entire company's interests, participants will help to shape the new board before the first director is even recruited. Most groups find it useful to have a subcommittee charged with all parts of the board selection process.

It is critical that all groups feel that they have had the opportunity to provide input. The subcommittee...