We live in a volatile world in which the business climate is as changeable as the weather. And, like weather patterns, today’s business climate is more intense than ever.
iven that, it should come as no surprise that many businesses and investors are seeking to plant new seeds in more fertile soil, constructing new business models (while de-constructing old ones) on the fly, embracing more risk, and operating in ways designed to wrest survival, if not profit, from market volatility.
It also should come as no surprise that some businesses are less successful than others in doing so. These businesses, disrupted by new competitors and confronting market shifts often outside their control and influence, underperform and face existential crises. At that point, they are increasingly looking for outside assistance in the form of transformation officers – a role that has been growing and expanding in lockstep with our increasingly turbulent business world.
Dealing with a Price Flux
Price volatility is not unusual in commodities, but a greater-than 50 percent drop in price within a single year will have consequences, particularly for companies that have failed to prepare adequately.
One such company, an Australian company in the agricultural industry involved in marketing, warehousing and shipping products was in serious trouble.
The company's shares had crashed 65 percent. Prior to the crash in share price the company had been in breach of its financial covenants for many months. At one point, it owed its lenders more than USD$400 million, based on mark-to-market positions.
The company's shareholders were understandably concerned, in their view, the company’s board and management had not fully communicated the extent of its difficulties. In fact, management had locked the company into now-unprofitable trading positions (given the depressed price of the commodity) that extended for years.
The board blamed market volatility for the company’s troubles and expressed confidence that once the price rebounded – as in their experience it always had and always would – everything would be fine. The lenders, however, were less optimistic. They were concerned that, if the company was forced to liquidate its market positions, they would suffer hundreds of millions in losses, retrieving, at best, cents on the dollar.
Management had explored various liquidity and investment options, but had come up emptyhanded. Many stakeholders had been calling for changes to the board, even though that might have only exacerbated the perception of the company's difficulties and therefore made it harder to preserve value.
Fortunately, the business had not exhausted all its options. Following a review process, and at the request of its lenders, the company engaged the services of a Chief Restructuring Officer (CRO), or, as it is increasingly being called outside the United States and Europe, a Transformation Officer (TO).
The CRO Role Spreads as Global Business Tills New Soil
A CRO is engaged as an interim manager reporting to the board to advise, manage and operate an underperforming business, helping implement a recapitalization effort with or without external funding.
In the United States, the CRO is most often installed as part of a bankruptcy filingto lead the enterprise through the proceedings and the resulting restructuring effort. This type of role has not yet gained great traction in the rest of the world due, in part, to more creditor-aligned political and legislative environments.
That is now changing.
A 2015 Fidelity report notes that less than half of the world’s largest economies are growing. Importantly, this “weakness is centered in emerging-market economies, where China’s downturn and the resulting plunge in commodity prices have led to a 26 percent year-over-year decline in the value of global exports.” This means that more companies (especially in the commodities-dominated Asia-Pacific region) are experiencing more frequent downturns, headwinds and, consequently, operating losses. And shareholders, worried about their investments, increasingly demand immediate (and sometimes precipitous) action.
This confluence of challenges demands a specific financial and operational expertise that most companies – such as this commodities firm – do not possess internally. And why should they? After all, most businesses are built with an eye toward growth. No company ever shrank to greatness.
This is where a CRO comes in: to provide that expertise and work with a company’s stakeholders as an independent experienced broker to preserve and promote a business’ value.
The role and function of the CRO primarily is to bring credibility (in the eyes of lenders and external stakeholders), experience and objectivity (in the eyes of the board, management and employees) to the restructuring (or transformation) process. The CRO creates breathing room for a company to revisit and critique its strategy and business model while conducting ongoing operations in an orderly fashion. In this way, the CRO helps create stability throughout the transformation process by acting as a trusted broker between involved parties, both internal and external. Ideally, the CRO drives consensus among all stakeholders regarding the direction of the transformation, the goal of which is always to preserve as much value and financial and human capital as possible.
Finally, where feasible, the CRO implements business improvement strategies intended to restore a viable business to operational health and place it on a sound financial footing.
But as the position of the CRO crosses borders, the title is changing.
Restructuring, for example, is a charged word that can promote panic among employees who may fear that they will be restructured out of their jobs.
What’s in a Name? A Lot
As CROs become more widely accepted outside of the United States and Europe, the name of the position is changing.
Restructuring, for example, is a charged word that can promote panic among employees who may fear they will be restructured out of their jobs.
Chief is also charged, as it may cause business leaders to question their own positions; that is, they may wonder, “If a chief is being brought in, what am I and what is my role?”
Transformation is less threatening than restructuring, and although a CRO can do just about anything, dependent upon the parameters established in his or her mandate, the title “chief” is not necessary to communicate authority. And that’s why a TO (not a CRO) joined the executive team.
How the Transformation Officer Succeeded
At the lenders’ request, a TO was appointed by the board to protect their investment and preserve the intrinsic value they believed still existed within the company.
Working alongside the CEO and CFO (which allowed them to continue their primary role of running the company without becoming overwhelmed by the details of rescuing it), the TO helped address and prioritize critical facets of the company’s operations and recapitalization needs. With the TO moving forward, external stakeholders gained confidence that the company’s core competencies, key business drivers and risk management strategies were being preserved and improved.
Internally, the TO, by being industry agnostic, and in conjunction with other external advisors, convinced the board – which had experienced ups and downs in stock prices for decades – that this time it did not have the balance sheet to survive the current market volatility. Therefore, it would need to restructure the company's operations and adopt a more corporate approach while at the same time preserving its legacy and corporate DNA (a key board requirement).
Pursuing this strategy, the company was split into a process and manufacturing division and a marketing division. The marketing division, which was essentially a trading book, was not saleable, and, by itself, the process and manufacturing division was not large enough to service considerable debt. Therefore, the TO, with the assistance of various skilled advisors, helped run a global sale process, finding parties with interest in the enterprise.
Ultimately, a long-established global enterprise involved in agriculture, food processing, shipping and finance took a near 50 percent equity stake in the marketing business and a smaller minority stake in the whole company, while assuming a board role. With this capital infusion and a well-executed trade-out of the business's marketing positions over time, the company could pay back its lenders 100 cents on the dollar. This enabled the company to refinance with alternative financial institutions, which now were confident in the company's long-term viability. The company then settled with all its banks in full, and a potential USD$400 million loss was contained to about USD$76 million – not ideal, but not a disaster.
In this way, the business weathered the storm and emerged better prepared and positioned for the next one, which will assuredly come. The firm's board and management team are now more attuned to the risk management imperatives and corporate governance processes required in a volatile, globalized commodities market.
Readings from the TO’s Book
Every good TO knows that taking quick, timely action is critical to preserving value in a company in distress:
- When a company is confronting trouble, early interventions create options;
- The longer market underperformance or a cash crisis persists, the more swiftly a company’s options narrow, and the more vulnerable it becomes to competitors;
- The longer creditors are forced to wait, the more impatient they become and the less willing to compromise;
- The longer management and employees must operate under stress, the worse their performance becomes; and
- The longer a company appears weak in its market, the more its customers will lose patience, or the more those customers will try to take advantage of the company’s weakness.
And every good TO also knows:
- If a company’s problems are addressed as soon as they appear, stakeholder confidence in the business can be preserved;
- Confidence makes all parties more amenable to the compromises that will preserve the value they saw when they first lent money, bought stock or signed a contract to become a supplier or customer; and
- No change and no solution works forever; companies (and TOs) must remain open to adjusting strategies to address disruptions and shifting market circumstances.
Management, and even boards, typically have deep sector expertise that can convince them that a new situation is just like an old one. Because of that, executives will tend to fight the old war, not the current one.
It is critical for a TO to work with the board and alongside the management team, and it takes time to earn their trust.
The TO does not have these corporate memories and his or her expertise may not be sector specific. However, this independent position allows the TO the freedom to develop new strategies to address critical problems.
Empirical evidence supports the effectiveness of the TO role. A 2014 study by a global consulting firm reported that share prices for European companies recovered after approximately 11 months of restructuring when a TO had been hired. It took 26 months when a TO was not. As noted, time is never a company’s friend in a crisis.
But that doesn’t mean a TO can or should act hastily. It is critical for a TO to work with the board and alongside the management team, and it takes time to earn their trust. Simply replacing top corporate officers en masse is rarely an effective strategy, as it is hard to replace their knowledge of the company’s strengths.
Clear, simple and honest communication – both inside and outside the company – is of paramount importance in a crisis. The TO must communicate what is going on, who is responsible and accountable for what, his or her objectives, and the time horizon for achieving results. The trust of the employees is what the TO most needs to achieve restructure success. And trust is earned when the TO demonstrates positive and sustainable outcomes quickly.
Anyone who looks at the world today can see that the global business environment is not going to become less complex or less volatile anytime soon. Consequently, the need for TOs will only grow, and any company, in any sector, should consider that option when confronted with building headwinds and evolving markets.