Communicating with Stakeholders in a Crisis

Michael J. Epstein, Director and Shareholder, TRG

Successful business turnarounds depend largely on two elements (and perhaps a bit of luck): Dramatic change in the operating economics of the business and communicating, through every phase of the turnaround, how these changes will improve the position of all constituencies. In good times, a company owes its primary responsibility to its shareholders. However in troubled and potentially insolvent times, management’s primary responsibility shifts to the interests of all stakeholders, including banks, bondholders, trade vendors, employees, customers, and sometimes even government agencies. Management will need the support of all of these constituencies to make a turnaround successful.

In times of trouble, stakeholder communication becomes a critical step on the road to a company’s continued survival. However, the company must first develop a coherent and comprehensive plan to fix its problems, including all operational, strategic, financial and transactional elements. This plan is the blueprint for survival and management must go to the mountaintop and tell the world – “WE HAVE A PLAN, WE”RE GOING TO SHARE IT WITH YOU AND WE’RE GOING TO SHOW YOU HOW IT WORKS FOR YOU”. The communications aspects of this plan are a means to an end, the end being a resolution to the crisis. The guideposts below are intended to help steer you through the rocky shoals of communicating with your stakeholders in this crisis.

Open up the lines of communication to include all stakeholders, stick close to the truth and be consistent

In a crisis, the natural reaction of most executives is to hunker down and limit contact with the outside world. We find this is usually counterproductive: limiting information confirms the worst suspicions of creditors, lenders and investors. The first step in this process is to communicate proactively to limit surprises and build credibility and trust.

The second step is to develop a consistent story line for all stakeholders that eliminate variations from one group to the other. Sticking close to the truth is critical. This does not necessarily mean that you must disclose everything, but that the generalities must be credible and consistent. These points are critical to remember as they govern all actions in every phase of stakeholder communication.

Involve employees and customers in the communications effort.

There are few limits to what you can share when in the midst of a turnaround and are fighting for one’s corporate life. Your employees, as representatives of the company, are an important, first line of defense with customers. A well thought-out and executed communication plan helps convey the notion that a company in crisis is not necessarily in a death spiral. We advise clients to give employees a succinct portrait of the situation, let them know you have a plan and they are part of the solution.

In virtually every business, and especially in retail and service businesses, most employees serve as the customer service staff as well. They work with customers to locate merchandise, determine the optimum configuration for an application or modify engineering drawings for subsequent development issues, to name a few. If employees sense financial problems, their concerns over their careers and their benefits may understandably block their ability to effectively and enthusiastically do their jobs. In fact, those employees most sensitive to financial stress are the ones most likely to speak to competition.

Employee communications should include a frank outline of the company’s situation, the steps being taken to address financial and operational issues, and a positive view of the company’s potential, if possible. Answer some of their personal concerns in advance to help them focus on their jobs and eliminate inaccurate rumors or bankruptcy-mongering. The goal is to address the specific issues that affect the employees’ personal interest as well as to provide answers to questions that customers are most likely to ask.

Let your employees disseminate information that would normally be read between the lines of a press release. Give them enough information to deal with customer service issues, vendor non-payment, and sales decreases. While they cannot and should not answer every inquiry, they can be your first line of defense. Give them a clear story line, and provide a corporate contact for customers seeking greater detail.

Share financial data with senior lenders.

Clear and regular communications with senior lenders is critical in a crisis. They can be allies in troubled situations and usually have first order priority in an insolvent situation. While you can’t give up your rights and must protect all stakeholder interests, senior lenders’ decisions will most often dictate a company’s primary actions in a crisis. Give them information that helps them analyze your position and come to a consensual conclusion that works for the company and its lenders.

This doesn’t mean the company has to roll over and beg. On the contrary, a management team that takes charge of a situation, develops proactive solutions and moves to implement them has nothing to fear from its senior lenders. Senior creditors will always view a going-concern solution more favorably. Providing lenders with a current, accurate and detailed financial data will engender support, even if the data do not portray a rosy picture in the short term.

This is not the time to take loan documents literally.

Withholding information because the loan documents don’t require its disclosure is a fatal flaw. Lenders perceive this as hiding something or worse. Don’t assume they will hold off foreclosure efforts. At the end of the day, a workout officer will not be criticized for liquidating your company, even if you are forced to file for bankruptcy in order to defend against such actions. He will be criticized for not being informed or for not making decisions based on timely information.

One of our clients, a company that provides professional training services, recently tried to hide behind the literal requirements of their loan documents and withheld non-critical financial reporting data from its banks. Having lost faith in management’s ability to affect change, their bank syndicate insisted that the company hire a Chief Restructuring Officer. We arrived at the company and found a reclusive corporate management team with very little knowledge about or control over field operations and cash flow.

Providing data would have alleviated some concern because it might have suggested that management was on top of the situation. Instead, the CFO chose to withhold the information in an effort to control the situation, believing his primary duty was to his management team and to shareholders. In fact, the banks had a right to information and the lack of it only enflamed the situation. The company was running out of cash; without immediate intervention and the support of lenders, the company would implode.

Once we gained access to financial information, we immediately provided the banks with all the information they had requested and a plan for improving short term liquidity. In exchange, we asked for potential payroll support as the liquidity had been exhausted. The banks agreed to each request and pledged additional funds if necessary. The company was able to de-leverage the balance sheet through asset sales and position itself for sale or recapitalization – an outcome that created significantly greater value to shareholders than would have been possible previously.

Creditors with similar rights to each other should be treated consistently

Similar types of creditors would likely be in the same class if a bankruptcy ensued, so treat them that way now. Creditors will remember everything you told them and the order in which you told them, and they will compare what you told them with what you told their peers. Always assume that creditors will talk to each other; whatever you tell one will be known by all. Industry groups and the Internet provide an open forum and make information ubiquitous.

For a recent client, we had successfully opened lines of communication between our client (the company) and its dissident creditors. These creditors were former owners of certain business units of the company and were still owed significant amounts of money. The company was in default of their obligations and the creditors had become emotionally unsettled over the matter very quickly. We were able to get the two largest creditors to forbear, but our initial work was weakened when one of the Directors of the Board, after fielding a call from one of the creditors, upped the ante and made an additional commitment to that creditor only.

Soon thereafter, as we had expected, we were prepared to get sign off from both creditors on their agreement to suspend their notes for nearly nine months. At the last minute, one creditor (the one whose offer to forbear was not sweetened by the Director) made as a condition of signing that they should see the terms and conditions of the other creditor’s agreement. The slight, but obvious, disparity in treatment jeopardized nearly all the goodwill amassed to that point and nearly caused the collapse of the deal through a threatened bankruptcy filing (the irate creditor actually had three notes aggregating millions of dollars). Eventually, working with the support of the same Director above, the company was able to reign in the itinerant creditor and avoid precipitous action.

Provide financial transparency.

In public companies, there may appear be limits on disclosure without confidentiality agreements. Keep in mind that the company is fighting for its life and disclosure to all constituencies is paramount in building credibility with one’s stakeholders. Remember that while in the zone of insolvency, management’s responsibility is first to the creditors. You must offer sufficient information to let stakeholders validate your current operating troubles, rather than feel they are being ‘stared down’ with press releases and statements. Release of certain financial data, such as cash flow projections with sufficient detail (keeping an eye on SEC regulations), will help eliminate the isolationism many companies practice in a crisis. In addition, certain large creditors who are vital to consensus-building should be let under the tent after having signed confidentiality agreements and agreements not to trade on confidential data. Co-opting the creditors into the process is the best way to build consensus, establish credibility and develop a solution without judicial intervention.

A public client of ours in IT technology services found itself with cash on the balance sheet and sharply deteriorating revenues. All previous payment deals with creditors were stopped until we could develop an operating solution. Some creditors were simultaneously large customers, who needed to be convinced of the company’s viability in order to maintain a critical revenue stream. IT solutions rely upon customers’ perception of current viability to deliver solutions as well as longer term viability to support the solutions once implemented.

One such vendor-customer was in the midst of a significant systems upgrade and on-line initiative, with both significant outstanding receivables and, to a lesser degree, payables. A high level meeting was set up to explain the situation and why we needed timely payment of their invoices – without remitting timely payment to them. We knew incoming payments might stop until they were paid and pressure would be exerted to finish the development work. We were not without influence, however: we retained source code and intellectual property rights. Our mutual needs became the foundation for discussions.

We laid out the situation analytically and unemotionally while providing a project plan to timely completion of the deliverables. In addition, we had an asset in the source code and non-exclusive rights to the deliverable that were valuable to our customer. We agreed to provide a delivery schedule with defaults and access to source code should we not keep our promise. Our client received a schedule for completion and product delivery along with additional support at a time when switching providers would have been disastrous. While the client had few alternatives (in fact they had none), we did not exploit this fact. Our transparency was a critical tool in providing credibility, building trust and reaching a mutually acceptable solution.

Share the bad news along with the good.

Managing expectations is probably the most difficult component of the communication process. Human nature is to make hay of good news, using it as an opportunity to sell the company’s wares. In times of difficulty, however, rumors are rife and even good news is subject to skepticism. When the company fails to address the kernel of truth within a rumor, stakeholders will often assume the rumor, or worse, is true – while competitors and others will use it to their advantage. Confronting negative rumors with key suppliers and creditors in general is a priority. Establish a credible line of defense and do not be afraid to go beyond the prepared press release.

Take the case of a large specialty retailer. December was a poor season for most retailing companies and our client was no exception. Heading into December, normally the best month of the year, we started to see erosion in sales and the month was shaping up to be a poor performer. We were on track with our lenders up to that point and had a strong relationship based on clear and transparent communications throughout the previous eight months.

We could have allowed the financial results to be reported weekly to the bank group and fielded responses to their inquiries. Instead, a meeting was convened early in the month. The company explained the negative trend to the banks and some measures we would take to mitigate the softness in advance. Bankers, more so than most stakeholders, do not like surprises and they clearly appreciated the candor. They were a constructive ally throughout the month and were supportive to the extent possible. Entering the fourth week of the month, with double digit sales decreases compared to plan (in the strongest month of the year), the trend whipsawed and sales spiked for the last two weeks. Ultimately, sales were down approximately 2.5% for the month, which was significantly better than reported results for competition and retail in general. Our bankers were pleased to have been made aware of the situation, which engendered more goodwill and credibility and furthered their opinion of management.

Use communications to manage vendor relationships.

When a company is in trauma, executives will avoid vendors because their accounts are past due and they don’t know what to tell them. We advise our clients to return every call from all stakeholders, especially trade creditors.

Begin by outlining the actions taken to address the financial and operational issues and the status of the planning process. Tell them you expect to provide an outline of a plan in 2-4 weeks and that, in the interim, their situation will not worsen. Such a statement will, of course, require you to have first validated the state of the company’s operating cash flow. Reassure them that this process will make the company a stronger, better customer in the future.

We implemented this approach with a client that was fast running out of cash in an otherwise reasonable economy. When we arrived on the scene, we discovered that the CEO had divorced himself from economic reality, the CFO had been fired, the chief accounting officer had been asked to step into the senior financial position (for which he was overmatched), and the voice message box for the Finance department was full of unanswered calls.

While many vendors were looking for payment, initially most had only been looking for assurance that the company was viable and would continue to be so. As messages went unreturned, vendors began to shut off shipments. To keep shipments flowing, the purchasing staff began to commit to pay vendors $2 for every $1 of material shipped – all without knowledge of the company’s cash flow or its ability to meet these commitments.

Our first step was to develop an operating strategy for the company and a communications process for creditors. In the absence of a strong, cohesive company voice, vendors will often demand onerous terms. We held conference calls with each major vendor and explained that the company would go out of business and leave them unpaid and without a revenue stream if the current arrangement continued. Vendors were informed that we would hold regular trade discussions, they would receive equivalent value (COD) for all shipments, and any vendor was welcome meet face-to-face with senior management and have access to key financial information. In response to the company’s new sense of purpose and control, only one vendor opted to visit the company, and all continued to ship.

The second phase of our plan was to deliver a Board-supported operating plan to vendors within four weeks of our original conference call. The plan detailed actions already taken to restructure the company, significantly reduce fixed costs and improve operations. These efforts were successful at halting the cash drain and restoring the chain to positive cash flow.

Maintain regular communications throughout the turnaround.

Convene periodic meetings and prepare communications pieces for the stakeholders to keep them current on the progress the company makes over time. The first phase of any process is to gain acceptance of a solution for the current crisis and time to fix operational problems. Once support has been received, continue to communicate progress over time, until every group is satisfied and the company is on more solid financial footing. Let them know if the company is on or ahead of its financial forecasts and whether the efforts are bearing fruit. Provide regular reporting and variance analysis to reinforce the stakeholders’ decision to allow the company time to restructure. Look for reasons to talk with the creditors, reiterating that they are part of the solution. Ultimately, the company belongs to all stakeholders in order of priority at a time of crisis; management must earn back the right to run the company for the shareholders.

Retain people with crisis experience.

Finally, turn to people who have experience in dealing with stakeholders of companies under siege. Get help in developing a plan that is focused on the needs of the stakeholders. Find resources that can help management to advocate the turnaround plan to the world and can act as an ‘honest broker’, eliciting the cooperation of private equity sponsors and lenders simultaneously. You cannot go it alone. While management may be capable of managing the daily operating dynamics of the company, the necessary skills to manage a crisis are quite different. These issues are a full time job and require experience developing consensus, working diligently and with purpose in the face of adversity and possessing operating insight into potential options, including bankruptcy (and how to avoid it). Rumors and innuendo appeal to the most basic of human concerns – fear of the unknown. Clear concise and calculated communication help take the guesswork out of managing financial distress.

Michael J. Epstein is a Director and shareholder of TRG, a leading turnaround and crisis management firm based in Boston, with offices in New York and Charlotte. He advises companies in a wide range of industries, including high technology, manufacturing and distribution, retail, and financial services, and has served as Crisis COO, CFO and Chief Restructuring Officer, and as financial advisor to bank syndicates and creditors’ committees. He has developed and implemented operational and financial restructuring plans both out of court and in Chapter 11 cases and has served on boards of Directors (both public and private). Michael received an MBA from the Wharton School at the University of Pennsylvania and a degree in Mechanical Engineering from Tufts University. For additional information on TRG, please go to www.trgusa.com.