TRANSITION: the business doctor turns surgeon

Published: En Voyage May/June 2015
Stuart Place, Director, KRyS Global Guernsey

The Scenario: You have just attended the sixth quarterly board meeting in a row as non-executive director for a fund that is clearly in decline. The advisers have been producing ever longer reports to explain the illiquidity of the assets and that shareholders just need to be patient and wait for “the market to come back around.” You and your fellow directors have no choice other than to persist.

Most directors today are well schooled in good governance principles and one of the natural instincts of a director is to gather data to defend decisions. The provision and processing of data is what your adviser does; but a dependence on analysis can lead to stagnation. There is, after all, an internal bias to how an investment manager looks at the world, which is why your fund is in the doldrums.

In a situation like this, where a fund’s performance is deteriorating and the advisor fails to acknowledge the fact, there is a limited number of possible actions. Being proactive, you could try to appoint a new advisor. This is disruptive for many reasons. Your existing advisor came up with the idea for the fund in the first place; they hold the client relationships and know the assets intimately. A better solution may be to bring in a trouble shooter who is not associated with the company’s history and is focused entirely on turnaround.

In recent years distressed companies have moved towards a new practice – the implementation of a Chief Restructuring Officer (“CRO”), or alternatively Chief Transition Officer.  This role is frequently used in the United States during pre-bankruptcy work out or Chapter 11 bankruptcy situations. Although the role is not rigidly defined in the U.S. Bankruptcy Code, or anywhere else for that matter, the idea is that the CRO takes over all “distressed” aspects of the business.. This allows the regular management, which probably has limited experience in distressed situations, to focus on actually running the business and provides the board with a point of contact and also a target to whom they can deflect sensitive, “distressed” issues.

A medical analogy can be made to fit the situation fairly well: the distressed company or fund is like a sick patient that has failed to respond to the standard treatments applied. The management, directors, and traditional consultants are like a group of generalist doctors, poking, prodding, and taking voluminous notes as the patient continue to deteriorate. The CRO is the specialist surgeon that comes in, identifies the issues, and goes to work. The surgeon’s invasive approach can be disruptive in the early stages, but it is the only way to get to the source of the problem and cure it. Like a surgeon, CROs are used to high-pressure, high stakes decision making. If the patient dies, the generalists can always fall back on the fact that they acted, brought in a specialist, and did the most they possibly could to remedy the situation.

At the end of the day, the question for directors and managers of distressed companies or funds is simple: are you going to stand around reviewing increasingly negative reports, talk about how the situation might possibly right itself in the future, and essentially do nothing until shareholders are forced to take action – or are you going to be proactive and bring in a difference maker who will shield you from shareholder blowback who could be the catalyst for the recovery of your fund or company?

Based on its experience of initiating change, KRyS Global has rolled out a service to the fiduciary and funds sectors, called Transition, to provide experts with a track record of acting as CRO. Details can be found here.