The role of the board & the executive team during a restructuring
In the corporate sense, 'restructuring' is a generic word that refers to major changes in a company. It's generally associated with financial troubles. When the best-laid plans just aren't working, boards and managers have no choice but to go back to the drawing board and make the tough decisions about how they can modify the company's structure or operations so the company can move forward in the best way possible.
Restructuring can mean downsizing the company or laying off some number of employees. It can also mean refinancing debt, reducing operations or selling off a part of the company. Restructuring can be a risky venture, but when it's been done well, it can improve things drastically, and even save a company.
While final plans for restructuring often bring a sigh of relief to worried board directors and executives, it can cause major unrest among the general employee population. Restructuring brings with it the uncertainty of job security, which takes a toll on the employees' morale. There are steps that corporate leaders can take before, during and after a layoff that will help the transition go smoothly. Corporations that have prepared their employees well for a corporate restructuring and have followed through with their plans have demonstrated that restructuring not only improved their financial outlook, it actually improved their corporate culture at the same time.
The Role of the Board and Executive Team During a Restructuring
Boards and executives are expected to fulfill all their regular duties as they go through the restructuring process. In addition, the management team's major focus needs to be on pulling out all the stops to keep the company going through the restructuring. If the restructuring includes divestitures, managers are responsible for keeping the divested pieces as viable as possible so that another company has something to work with to make them profitable. Transitions are never easy, and the manager's role requires distinct and thoughtful execution during this unsteady time.
The board's role during a reconstruction is primarily visionary. They may call in external legal or financial experts to assist and advise in negotiations or complete transactions when necessary. Another option that boards sometimes choose is to replace the CEO to refresh the company and give it a fresh start.
Reasons for Corporate Restructuring
There are a variety of reasons and situations that might trigger corporate restructuring. The board may decide that it's best to sell some of its assets to accommodate a change in their strategy. They may also pursue selling assets for the purpose of focusing more intently on more profitable assets, which is often referred to as reverse synergy. A third reason for selling assets is simply to increase cash flow or reduce debt. Restructuring may also be sparked by low earnings for one or more quarters, combined with a poor outlook.
Divestitures can take various forms, including direct sales, equity carve-outs, spinoffs, split-offs or complete liquidation. Liquidation is often equated with bankruptcies.
Examples of Corporate Restructuring that Improved Companies' Outlook
Restructuring can take many forms. Each board and management team has to be creative and consider how their company can improve the current circumstances. Following is a summary of three companies that have stood the test of time after a major restructuring. Each company had a different approach to restructuring, but the one thing they had in common was a shift in the organization's mission and values as they proceeded through the process.
Microsoft
Microsoft made a big splash early in the tech industry with its releases of Windows and Office. Shortly after that, they succumbed to problems due to strong internal competition, which manifested into a toxic work environment and low morale. Google and Apple continued bringing new products to market and Microsoft struggled to keep pace.
The board decided to take a strong step to refresh the company by appointing Satya Nadella as CEO. After working with the board to assess the problems that were hindering the company, Nadella restructured the company by eliminating the separation of products to get rid of the unhealthy competition that was bringing morale down. He also merged with other groups, including Bing and Cortana, to create a new AI and research group that's responsible for innovating AI across their lines of business.
In addition, he developed and communicated common goals for the entire company to aspire to and changed the mission to, 'To empower every person and every organization on the planet to achieve more.' Microsoft continues to undergo change, and they're doing it with an improved sense of morale, greater engagement and a clearer sense of purpose.
Alphabet (Google)
Google produced its search engine in 1998 and it became an overnight sensation. Moving forward, Google developed numerous products and projects ' so many that Co-founder Larry Page became concerned that they were doing so many things at once, it would be difficult to do all of them well. Before any one of their products hit a downturn, he decided to restructure the company by separating each of them into their own companies. Each company has its own CEO and goals and they all fall under the umbrella of the mother company, which is Alphabet. These changes gave employees the freedom to concentrate more productively on their own products without regard to others inhibiting their progress. Essentially, the restructuring made innovative efforts more meaningful.
British Airways
The oil crisis in the 1980s shrunk the customer base for British Airways, forcing the board to make some tough, urgent decisions. It wasn't long before the airline company was facing major financial losses and a bad reputation. The board brought Lord King on as chairperson. King assessed the company and came to the conclusion that the company was operating inefficiently and was wasting valuable resources.
King moved quickly to restructure the company by laying off 20,000 employees, eliminating unprofitable routes, modernizing the company's fleet and bringing in a new marketing expert. The board and management communicated their reasons for the changes before the layoffs occurred and they communicated changes honestly and frequently to their employees along the way. Within 20 years, the company has turned things around and now they have the highest profits in the industry, at $284 million.
We can also look at 3M, which is going through the restructuring process. 3M is facing a host of problems, including poor returns, trade problems with China and the coronavirus outbreak. These issues, combined with a strong dollar in the United States, joined forces to create the perfect storm for restructuring.
After 3M's earnings dropped in the fourth quarter of 2019, which earned them the distinction of being dubbed the worst-performing company on the Dow, the board determined to lay off 1,500 of their 96,000 employees. 3M also makes facemasks, and they're increasing production to meet the demand due to the coronavirus outbreak. The company hopes to realize pretax savings of $40 million-$50 million this year.
Overall, restructuring allows a company to continue operating while they make plans to improve their financial outlook. The duties of boards and managers amp up during the restructuring process. Times of restructuring can be an exciting time for a company, as well as an unsettling time for employees. When communication about the changes includes employees from all levels, it can make a big difference in bringing them onboard with a newer and better shared vision.
