New CEO or Interim CRO: What's the Better Solution?

When a sports team loses too often, the typical reaction is to fire the coach. Similarly, when a company is performing poorly, the board of directors often elects to fire the CEO. Regardless, the action is intended to convey that those in charge are addressing the problem.

As often as not, however, the coach or CEO turns out to have been a scapegoat. The losses continue when the replacement is on board.

For businesses, there’s another course of action that frequently works out better for the organization and for all stakeholders. That is to bring in an expert in crisis management, a turnaround management professional. This individual does not act as a consultant, because companies in distress don’t need recommendations nearly as much as they need prompt decisive action. The crisis manager works on site, with full authority to make changes, in an interim executive position. He or she is frequently given the title of Chief Restructuring Officer (CRO).

Here are some advantages to bringing in interim crisis management:

• Crisis managers have their eyes wide open. Denial is the biggest killer of companies. If the board of directors or the company owners wait for the CEO and the management team to decide the situation is drastic enough to warrant intervention, it can be too late to save the company. Owners and managers will find all sorts of reasons and excuses for the poor performance and see it as a stroke of bad luck and a passing phenomenon. Often they are the last people in the organization to acknowledge that there are real, systemic and potentially fatal problems.
• Crisis managers know things that most business leaders don’t know—and can’t be expected to know. More often than not, the CEO has a history of being a leader in successful companies. The turnaround professional, on the other hand, has had a long and varied career in working with troubled companies. He or she knows how to analyze the situation quickly and to take action swiftly in key areas, including accounts payable and inventory.
• The interim CRO carries no baggage. This executive has no attachment to “the way we’ve always done it,” and no staff members he is determined to preserve and protect. He brings a fresh set of eyes to the situation, a truly objective perspective.
• The CRO has credibility with lenders and creditors. Experienced turnaround professionals know how to negotiate with the people and institutions the company owes. More often than not they will analyze what will happen if the company is brought into bankruptcy, what the expenses will be and what will be available to creditors versus what will happen if the company doesn’t go into bankruptcy. Creditors then may see that it is in their best interests for the company to restructure outside of bankruptcy. CROs know this environment, which is often terra incognita to members of the management team.
• Turnaround managers bring something better than industry knowledge. More often than not, when replacing a CEO, boards of directors look first for executives with extensive experience in the particular industry. But if industry knowledge was what it took to reverse the fortunes of a troubled company, the company would no longer be in trouble. Most companies have all the industry knowledge they need. What will often turn the tide is borrowing ideas and practices from other industries. As a simple and specific example, one company that shipped live animals to research laboratories and schools had a costly problem in that too many of these animals were DOA. The turnaround manager suggested getting advice from suppliers of tropical fish and Maine lobsters, and that problem was solved.
• The CRO usually sees more options. Just as turnaround professionals typically draw on best practices from a wide range of industries, they also tend to be aware of a much broader range of options for solving problems. It’s quite common for CROs to find different markets, alternative uses for production capacity, and new distribution channels, as well as to negotiate agreements with lenders, suppliers and customers that would never have occurred to the entrenched management.
• CROs typically have formal training in crisis management. Knowledge of how to lead in desperate times doesn’t come with an MBA, but it does come with the Certified Turnaround Professional (CTP) designation, which many interim turnaround executives have. The standards for this professional certification are rigorous, including, among other requirements, a lengthy examination, a minimum of five years of turnaround experience, and a minimum of 50 hours of continuing education every two years. Some turnaround professionals have additional valuable certifications—in fraud examination, distressed business valuation, or insolvency and restructuring advising. All these certifications place an emphasis on ethical behavior.

One owner of a business that engaged an interim CRO put it succinctly: You don’t pull your own teeth. Sometimes you need a specialist. Turnaround management has been recognized as a professional specialty for 20 years, yet most directors and executives have had no experience with it, and understandably have questions and qualms.

To be sure of a successful engagement, the board or the company owners must communicate to the management team that bringing in external expertise is in the best interests of everyone. If the downward spiral continues and the company fails, everybody loses—the shareholders, the CEO and the management team, the employees, the customers, the suppliers, the lenders, sometimes even the municipality where the company is located. All these stakeholders stand to gain if doing something different can restore the company to health.

Turnaround professionals know that they are walking into an atmosphere of fear and apprehension. They are skilled at listening and involving people in solving problems. Far from being the dreaded hatchet man, the CRO understands fully that creating sustainable change is not a solo act. The culture has to change, and the people have to understand and embrace the reasons for not continuing to do the same old same old.

Fairly early on, the CRO has to assess whether the CEO and other members of the management team can get on board with a new direction or whether any of them they are likely to subvert change. Those who are unable to adapt will be an impediment to the decisive action that is needed to reverse the downward spiral, and the CRO must have the authority to dismiss them. Although the CEO may be widely perceived as the cause of the problems and therefore significantly handicapped in the ability to lead, the interim executive isn’t invested in the grapevine’s assessment or the need for a scapegoat. Many, many times the CEO survives the restructuring and emerges as a stronger leader.

While change is frightening and uncomfortable for many people, interim managers are good at assuaging fear because they know the pattern of revitalization. Having worked through many crises, they understand the stages and are able to assure the troops that the recovery is on course. The fact is that when a company has a fire, everybody knows it. Employees are not so resistant to making changes that will save the business, and their jobs, as many managers imagine.

Turnarounds don’t happen overnight. The turnaround process of stopping the bleeding, steadying the ship and starting to grow again most often requires 18 months to two years.

It is all too common to wait until there is a five-alarm fire before interim management is considered. A fire sale may then be about the only option. But when a CRO is brought in while there is still something to save, the track record is good. Companies that were on the path of decline and death recover and flourish.

The route of firing and replacing the CEO has murkier results. Of course there are high-profile examples of outstanding success. More common, perhaps, are situations that deteriorate while the search for a new leader is conducted, and the company is a rudderless ship. And 40% of CEOs last less than two years—less time than it takes to make a real and sustainable course correction.

Firing the coach plays to the grandstands, but it may not be the best move for building a championship team. Far from being wary of an interim crisis management, executives would do well to consider the CRO as potentially their strongest ally and best strategy for job security.

About the Author(s)

Peter Tourtellot is the managing director and a cofounder of Anderson, Bauman, Tourtellot Vos & Co., a leading turnaround management firm. He has been a pioneer in the corporate revitalization industry, having served as president and chairman of the Turnaround Management Association and in the development of professional standards for the industry and is currently chairman of the TMA’s Certification Oversight Committee. For more information, visit www.abtv.com