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How Attorneys Can Save A Troubled Client

By Peter Tourtellot, CTP and Douglas Swanson, CTP

Regardless of the economy's overall health, the number of business failures and Chapter 11 filings has continued at a surprising clip. Business failures apparently know no season. The truth is that executives with poor management skills pose a much greater danger to a business than a sluggish economy.

The attorney should be aware that many of these failures can be avoided if a company recognizes its problems early and acts on them in time. Indeed no one may be in a better position to help save such a business than the lawyer. As both an objective outsider and trusted advisor, the attorney is the one person who can convince management to face up to a company's troubles and take necessary action.

Consider the attorney's unique position. This professional is more than a legal advisor. He or she serves as a confidante, someone with a first hand yet objective view of the business. When discussing sensitive corporate problems, top management has no safer choice than the attorney. Other top company officials may seem a logical choice but they could lose confidence in the company and prepare to abandon ship. The banker? This is a person who holds the loan and the source to future capital. As business problems mount, an owner is more and more reluctant to communicate with the bank.

Because of the privileged attorney - client relationship, the attorney may well be one of the few people who have management's ear. Though not an employee or stockholder, this professional is still part of the management team. The attorney's timely intervention could well mean the difference between saving a company and liquidating it.

Other counselors operating outside the company may enjoy the same relationship with the client, so that while this article is aimed primarily at attorneys, many of the points presented in the next few pages might also apply to other counselors as well. Working with the Beleaguered CEO of a Publicly Held Corporation.

While the financial problems for a large publicly held corporation can be quite similar to a smaller, privately held company, the power dynamics inside the company are often very different.

When a CEO begins to falter, this once successful leader suddenly finds himself confused and out of sync with the needs of the organization. At first he may refuse to admit that anything is seriously wrong. Dealing with a CEO at this time in his career can prove a real challenge. Here's what to expect:

• Frequent clashes with the Chief Financial Officer -- The CEO and the CFO often have very different personalities and points of view. The CEO must concentrate on the big picture and have the vision to think abstractly. The CFO, on the other hand, is a hard-nosed pragmatist who presents a stark, objective portrait of the company's financial status. The CFO may push for unpopular but necessary actions such as shutting down a division or trimming jobs while the CEO must face the political consequences.
• Over-Optimism -- While the CEO is expected to be upbeat and positive, the struggling CEO tends to cross the line that divides healthy optimism with outright denial. William Agee repeatedly downplayed disappointing earning reports and chided the board for worrying too much. Paul Lego, former Westinghouse CEO, kept telling everyone 1992 would be a "year of recovery" when, in fact, nothing close to a recovery plan was in place.
• The troubled CEO gravitates more and more to help from insiders and loyalists while shutting out all critics. This can be especially true when the corporate culture has become petrified. When IBM fell on hard times, CEO John Akers didn't seek fresh minds for his management shakeup. Instead he called on the help of old guard executives who were already retired. It is at this point, when the CEO seems most isolated, that an outside voice from from an objective yet friendly source can be extremely valuable.
• Resistance To Succession Planning -- Ego usually persuades the CEO that he is not replaceable. On the very day of his fall from power CEO James Robinson of American Express announced to his board that his hand-picked successor was progressing nicely but was "not quite ripe for the job." By tradition, succession planning has been handled in the executive suite rather than the board room. But today more and more corporate boards are taking an active role in selecting a successor so that the next generation of leadership is not a carbon copy of the old one.

Working With The Privately Held Business

Privately held businesses, which make up the very backbone of the private enterprise system, face special challenges. Many of them are family owned. Not only must these firms meet the monthly payroll, stay ahead of the competition, and worry about cash flow, they must also balance the demands of the business against those of the family. Today less than one-third of successful family businesses make it through the third generation and less than half of those survive. In working with the family-run business, the attorney should be especially aware of the following problems:

• Nepotism -- When nepotism is blatant, it drives away bright, skillful managers who aren't in the family. If a company keeps losing valuable employees while retaining incompetent ones who have the right bloodline, then nepotism has become a curse. Nepotism can also mask serious company problems. That's because outsiders are reluctant to confront the boss with news that a son-in-law or favorite nephew is falling behind on a crucial project or abusing drugs on the job.
• Sibling Rivalry -- Power struggles sometimes can erupt within a family business due to jealous siblings. The company which the parent or grandparent so carefully built can be wrecked by squabbling heirs who refuse to cooperate with each other or strive to make the other look bad. A good succession plan suggested by the attorney could avert these problems.
• Succession planning addresses another potential problem -- the untimely illness, injury, or death of the owner. Every year companies are devastated by such an event. Almost overnight they go from a successful business to a candidate for Chapter 11. Therefore, smart management will want to tackle this problem early -- before a crisis precipitates it. Here the attorney can play a key role in finding creative ways to ease the burden of estate taxes.
• Stale Ideas -- The tight-knit family business can not only keep outsiders from gaining power, they can lock out fresh ideas as well. The best protection against stagnation is the formation of an outside board. Again, no person is better suited to suggest this idea than the attorney. Admittedly, this is a tough sell but the potential benefits make it worth the effort. An outside board of directors can bring a fresh perspective to a business, sharpen its focus, and create objective feedback. It can even serve as an arbitrator for touchy internal disputes. In the early stages such a process will undoubtedly cause pain to some family members. But it can bring some much-needed discipline to a business and remove much of the emotion from the decision-making process.

Providing Counsel

No one enjoys being the bearer of bad news. Serving as a confidante and advisor is one thing; convincing a hard-headed owner to seek help is another. For many CEOs, seeking help may be tantamount to admitting failure and delivering a painful blow to the psyche. So, at this point, the attorney doesn't want to risk losing the account just to be a good Samaritan. However, one hard fact remains: if the business is already headed for the rocks, the account may well be eventually lost anyway.

Once an attorney recognizes the serious problems that beset a business, the really tough task is counseling the client. A law degree hardly qualifies one as a management or financial expert, so the attorney's true role is to call attention to the problem and to point the client in the right direction. The best strategy, therefore, lies not so much in slapping the owner with a cold dose of reality as in offering some positive alternatives and solutions. In this manner the attorney can position himself or herself as a valuable source of solutions, not a corporate meddler.

Here's how this might be accomplished in a tactful manner: First, express concern over the problem or problems that you've observed first-hand. Show that you have the client's best interest at heart and to ignore it any longer would be less than honest on your part. Then empathize with the client. Closing a plant, discontinuing a product, firing long-time employees -- these are hard decisions that create a great deal of pain and cause many sleepless nights. Finally, offer the client positive solutions. Move quickly from the negative to the positive so that the client can gain perspective and see rays of hope. The suggested solutions could take several forms.

Options For The Troubled Business

• Present Management/New Direction -- Here, management agrees to necessary changes and executes them quickly and efficiently, assuming it has a firm grasp of the situation and a clear idea of what needs to be done. This is the least likely to succeed and should be offered only if management truly has the will to act decisively.
• Present Management with Consultant -- The client is referred to an expert or group of experts who can provide objective analysis and innovative solutions. Some consulting firms specialize in working with troubled companies. Because the consultant is free of any emotional attachment to the firm, he can cut straight to the heart of the problem. The right plan offered at the right time can literally save a company millions of dollars.
• Interim Management -- If the problems have escalated into a crisis and the company is teetering on the brink of ruin, then the best course of action is probably an interim management team. Turnaround managers can take the reins of company, resolve the crucial issues and restore the firm to profitability. The time required can range from a few months to a few years, depending on the extent of the problem. The turnaround professional acts like a corporate paramedic to stabilize then begin treating a sick business. A reputable turnaround manager can bring to a business not only a wide variety of management skill but the credibility to restore good relations with the bank and creditors.

The Attorney As Hero

Helping an owner confront company problems and develop a recovery plan is a pivotal act on the part of the attorney, representing legal professionalism at its very best. When this occurs, the attorney does more than just save a client. Jobs may well be secured and family paychecks preserved. Suppliers retain a customer and the community keeps a valuable contributor to the local economy. In the end, the ripple effect of a successful turnaround can touch many lives.