Governance of Distressed Companies FAQ

Q: How can a board be most effective in responding to financial distress?

A: Financial distress can occur in the life of any company, despite the best efforts of management and boards to prevent it through prescient planning and strong financial oversight. (For an NACD guide to financial oversight, see John Fletcher, Getting Behind the Numbers.)

In the case of financial distress, the board can expect to be meeting more often with management (the CEO, chief financial officer, and others), along with outside advisors, in order to assess the situation, make any necessary disclosures, and then consider next steps. These steps could range from changing the business plan to restructuring finances to moving to the “last resort” of filing for protection from creditors under the bankruptcy code.

This memo will address the board’s role in detecting and responding to financial distress and insolvency in the following sections:

1. Fulfilling Fiduciary Duties in the “Zone of Insolvency”

2. Assessing the Gravity of Financial Distress

3. Ensuring Proper Financial Disclosures

4. The Role of Board Committees

5. Weighing Strategic Options for Recovery

In conclusion, this memo offers a summary of guidance, along with questions for directors to ask and suggested resources.