'The line could have gone flat.' (reorganization of General Development Corp.)

• Author: Rutherford, J. Larry

The journey of one CEO and three boards through a complex reorganization - and its useful governance lessons even for those in less-distressed situations.

It was September 5, 1990, the third day on my new job as executive vice president of General Development Corp. The only thing that was sunny on this particular day was the weather. As I peered out the window of the company's Coconut Grove board room, looking toward Key Biscayne, I couldn't help noticing the large arm of a crane operating immediately before me. It was removing the name of the company from the building. Even the landlord didn't want to be associated with GDC any more.

Who could blame him? GDC had entered bankruptcy a few months before, with $5.8 billion in filed claims - a big number (which we would subsequently pare to just over $1 billion). It was one of the largest; most complex bankruptcies in history, and restoring the company to health promised to be a tough struggle. The name itself had become anathema throughout Florida and in many of the Northern communities from which GDC had drawn buyers for its overpriced lots and homes.

Escalating charges of aggressive and misleading sales practices had brought the company down and led to wholesale resignations from the GDC board. I and a new board of directors, one appointed by the debtor-in-possession, the first of two boards with which I would work directly, were responsible for drafting a plan of reorganization and convincing 90,000 rancorous claim-holders that it was in their best interests. Hopefully, there would still be a company when we were done.

This is the story of how we did just that, emerging from bankruptcy in March 1992 as Atlantic Gulf Communities Corp.

I had been named president in December 1990 and remain CEO today. Now, Atlantic Gulf Communities has a clear new vision, a detailed business plan, and some tangible accomplishments in which to take legitimate pride. We also have 2,270 fewer employees, and a very different board from the one that hired me.

Lessons Took Many Forms

None of it was easy. We shared many triumphs and, frankly, we made some mistakes.We learned valuable lessons along the way; perhaps they may be useful to directors of less-distressed organizations. These lessons took many forms, but they all point to the need for continuity in board composition. GDC/AGC has had 3 1/2 boards over the past five years: that is a lot of learning curves to climb in a fast-moving business like ours.

The lessons also underline the need for board/management incentives that leave no ambiguity about whose interests the directors represent. As our new, post-reorganization stock moved from creditors to institutional investors, some of the latter expressed concern about who we saw as our primary constituency. They threatened a proxy fight to elect their own representatives. We could have tempered these concerns by moving earlier to compensate directors with options.

Failed Oversight

And our experience demonstrates how even well-intended individuals of considerable skill can fail to exercise proper oversight, certainly the case with GDC's last board.

As GDC's problems mounted, its board (board #1) had desperately sought a solution. This board was composed largely of appointees of GDC's former parent company, City Investing, whose former general counsel had served as GDC's chairman. Other members of the board included a former governor of Florida and a senior official of a major money center bank, among others. This board was widely criticized for failing in its responsibility to properly monitor management, and to recognize the company's deteriorating condition, even as it spiralled out of control.

To understand the lessons we learned - many of them the...