A pivotal role for a nonexecutive chairman: to succeed in a restructuring situation, there is a strong case to be made for engaging an outside chairman.

• Author: Daum, Julie H.
• Position: Spencer Stuart - Governance Letter

FOR COMPANIES working to get back on track following a restructuring, there is a vast menu of complex issues to deal with: internal issues that relate to employees and the day-to-day business as well as external issues that relate to creditors, investors, and public perception and confidence in the new entity. With a wide range of practical issues and constituencies to deal with, the responsibilities may as a practical matter be too much for one person to handle. In addition, creditors and investors may express a preference for having a separate individual to monitor their interests.

In view of all of these factors, companies that are going through a restructuring may choose to deviate from the typical American corporate model, in which CEO and chairman responsibilities are vested in the same individual, and instead opt for a separate CEO and chairman.

It may or may not be appropriate for a company to retain its CEO after restructuring; the decision will rest primarily on how the company got into difficulty to begin with. This is the first critical issue to be tackled by creditors charged with getting the company back on its feet and assembling the new board. Are the company's troubles identified with poor management and the leadership of the CEO? In this case, a fresh start with a new CEO is likely in order. Conversely, have fortunes shifted because of changing markets, which cannot reasonably be perceived as anyone's fault? Here, assuming a capable CEO is already in place, it may be wise to retain the CEO, particularly if he or she can inspire the confidence of various constituencies -- management, creditors, and investors -- going forward.

Good reasons

Regardless of whether the CEO stays or goes, however, it may make good sense to engage an outside chairman, for several reasons:

* Too much too handle -- Being the CEO of a stable company is demanding enough. Add to the routine responsibilities of managing the day-to-day business the special duties of managing a restructuring and it is not hard to see how difficult it may be for one person to handle everything.

* Leading the way -- If the board decides to replace the CEO, the chairman can step in as an interim leader during the search process.

* A clear signal -- Perceptions are critical, particularly in a company trying to rebuild its business and its reputation. Installing an outside chairman is a way of announcing to the world that the restructuring will be carried out diligently.

* Quick start -- An experienced outside chairman can focus on rapidly pulling the new board together and implementing needed structure and processes to promote efficient functioning.

* Another perspective -- Assuming the CEO wants every resource at his or her disposal to restart the company, a knowledgeable, experienced...