The workout board member: why every company should have a turnaround expert on its board.

• Author: Hopgood, Suzanne
• Position: Rules of a workout specialist

A "WORKOUT" PROFESSIONAL--an executive-level person experienced in cleaning up corporate nightmares--belongs on every major corporate board.

Most business crises don't happen overnight. They are a result of a series of bad decisions that cascade into a crisis. If the defective decision making announced itself with bugles and drums--if the looming crisis sent out invitations to the show--then even a mediocre board could respond appropriately. But problems tend to build incrementally, and the parties involved become accustomed to the signals that should prompt concern and dramatic action.

As a rule, the workout specialist on the board is a discomforting presence--a glass-half-empty, gloomy soul who presumes and assumes the nightmarish potential of every business scenario. The board psychology, by its nature, assumes a certain status quo, a certain prettying up of existing business management at the margin. There is nothing necessarily incorrect in that approach. But the presence of a workout personality prepares for an alternative approach, a different sense of urgency, and a worthwhile safety valve in case of serious trouble.

Topping the list of concerns

A workout professional focuses on several key criteria when evaluating where a company is in its history. At any stage along the way, the comfort of the moment can shield signs of trouble, which the workout mind is inclined to seek out and clean up.

The first and most important criterion is the company's financial performance and cash flow. The cash flow statement indicates whether the company is generating positive, free and clear, cash flow--and whether that cash flow is coming from company operations or from outside sources such as floating debt or equity.

The second screen is the trend for revenue, profit, and cash flow from the past five years. If the performance is declining in these areas, the company is in trouble--the kind of trouble that needs more than a bit of tinkering. The workout professional is inclined to be less in love with the company's overall industry environment if the enthusiasm isn't justified. The "we're much smarter than anyone else in our business" philosophy dominates many boards--and it can lead to catastrophe if you linger too long in a dying industry. Monitoring overall industry performance is essential; businesses cannot prosper in the long term if the industry in which they compete is declining. There is no level of superb management that is going to bring...