How to form a “sweat the details” high performing board.

1. POST RESTRUCTURED COMPANIES
T
here are unique challenges when
governing companies post re-
structuring, as newly appointed
directors — often unfamiliar with
the business and unacquainted
with one another — meet for the first
time to reverse the fortunes of a troubled
business. Usually selected on the basis of
familiarity with the restructuring com-
munity, these board members may lack
operating experience, industry knowledge
or relationships critical to addressing the
root causes that brought about the com-
pany’s distress.
Rather than rely on financial advisors
or lawyers to look after governance after
the restructuring process, investors should
take the helm to seat a board that will both
sweat the details and bring much needed
competencies. Such investors should:
• ensure that board members are prop-
erly qualified and aligned with the inter-
ests of investors,
How to form a “sweat
the details” board.
By Jon Weber
Governing the
Post Restructured
Company
®

2. POST RESTRUCTURED COMPANIES
• establish high standards for director
engagement and accountability,
• establish processes that allow boards
to have a significant positive impact on
business,
• protect the board’s independence and
prevent conflicts of interest and
• make sure the board remains account-
able to shareholders.
To build the post-restructured company
board, investors should balance industri-
al and functional qualifications against a
track record of representing investors in
similar situations and circumstance. Pref-
erably one or more director designees
should bring experience as a private eq-
uity investor with prior success in improv-
ing operationally challenged investments.
For candidates who predominantly
offer skills that can be readily obtained
from professional service providers (e.g.,
lawyers, bankers or consultants), investors
should consider whether such services
can more efficiently be obtained a la carte
or whether a service provider-orientation
is compatible with the governance role.
Board size and composition
Boards consisting of more than seven
members tend to be cumbersome, more
readily swayed by management and gen-
erally less effective at encouraging deep
engagement by individual board mem-
bers. Conversely, smaller boards require
less internal coordination and can afford
to effectively compensate highly qualified
candidates, while keeping overall board
costs under control.Accordingly,investors
may be better served through a compact,
highly compensated board of five to seven
members.
If the post-restructured company board
exceeds nine members, investors may
wish to form an executive committee or
other governing body within the board to
maintain more frequent and regular inter-
action with management than is practica-
ble with a large board.
Individual board members should bring
a diverse set of distinct skills and experi-
ences, including:
• industry-specific expertise sufficient
to form authoritative opinions and con-
structively challenge and engage with
management,
• functional knowledge (e.g., manufac-
turing, finance, talent management) rele-
vant to the specific challenges facing the
business,
• high value external relationships of im-
portance to the business (e.g., customers,
suppliers, regulators, key influencers) and
• prior private equity background (e.g.,
sweating details,making capital allocation,
exit and financing decisions) with an ori-
entation toward dedicating significantly
more time than average board members
could.
In addition, all board members should
be free from unresolvable conflicts of
interest and be willing to dedicate ade-
quate time to participate in, and contrib-
ute substantively to,discussions relating to
the business. Preferably, board members
should reside in, or travel often to, loca-
tions near enough to the company’s head-
quarters, customers or facilities to afford
frequent interaction with management or
customers.
Investors should avoid hiring board
members (including employees of inves-
tors) who:
• may be stretched too thin to dedi-
cate at least 200 hours per year to board
service,
• are non-CEO members of manage-
ment or are beholden to management
(even if technically “independent”) as a
Boards
consisting
of more than
seven members
tend to be
cumbersome,
more readily
swayed by
management.

3. POST RESTRUCTURED COMPANIES
result of long-standing personal or indus-
try relationships,
• have demanding full-time roles or
many other board roles inhibiting sched-
uling flexibility and/or
• contribute only “name” recognition,
but do not have a demonstrated track re-
cord of adding value in a similar board or
management capacity.
Large investors should provide over-
sight or monitoring by having employ-
ees participate as board observers.These
observers should be assured access to
the board and related materials under
the applicable investment agreement. At
times, however, investors may prefer to
rely upon informal observer rights when
there is reasonable certainty that those
rights will be respected.
Selection process
Company boards post restructure are often
selected by assigning designation rights to
shareholders with specified levels of own-
ership.Where possible, investors who ex-
pect to remain aligned through exit should
seek the right to appoint a majority of the
board.The quality of the board and inves-
tor alignment may be enhanced through a
consensual process or formal search to seat
board members based on pre-agreed cri-
teria.The engagement of a retained search
firm can better support a selection process
based upon candidate qualifications and
counterbalance investors’ parochial aim to
seat their “own” candidates on the board.
Where designation rights have been grant-
ed, the process may nonetheless be im-
proved by consensual selection to ensure
qualifications, fit and existence of required
competencies.
Whenever an investor has the ability to
choose board members not well known to
it, either by designation rights or through
participation in a selection process, can-
didate selection should be subject to an
independent reference checker (that is,not
relying solely on a search firm to vet its
own candidates), background checks and
completion of a D&O questionnaire.
Where possible, investors should care-
fully assess before appointing their own
employees to boards.Boards may also wish
to consider whether director fees should
be offered only to non-investor employee
designees.
Care should be taken to organize boards
to deter entrenchment and make directors
subject to election and removal by a
majority of shareholders at any time, un-
less they remain subject to removal and
replacement by a specific investor(s).To
that end:
• avoid the threshold of “cause” as a
precondition for removal. Board members
should always be subject to removal for
any reason.
• shareholders should have the ability to
remove board members by written con-
sent in lieu of a meeting authorized by a
requisite number of holders (generally a
majority), without need for advance no-
tice or a formal shareholder meeting,
• board members should be reelected
annually — there should be no staggered
board or multi-year appointments,
• consider majority rule vs.appointment
right by designated percentage to replace
designees, and
• where there is a large or diffuse num-
ber of shareholders that may be restrained
from acting in concert, appoint a nomi-
nating and governance committee likely
to select replacement board members sat-
isfactory to shareholders.
Board compensation
Company boards post restructure should
be compensated competitively to attract
All board
members should
be free from
unresolvable
conflicts of
interest.

4. POST RESTRUCTURED COMPANIES
and retain high-caliber directors. For top
quality board members, expect to pay
compensation at or above the top quartile
for publicly-traded peers with additional
premiums paid where extraordinary time
commitments are expected.
Seek to maximize the portion of board
compensation paid in the form of equi-
ty as opposed to cash, to align pay with
shareholder interests.As a rule of thumb,
equity compensation should be no less
than half and preferably two-thirds of
total board remuneration. Investors
should avoid paying either meeting or
consulting fees that erode independence
and reward time spent rather than value
creation.
Here are some additional suggestions
for post-restructured company board
compensation:
• adopt the same form of equity com-
pensation as management or, alternatively,
restricted stock for board and options for
management,
• provide up-front equity grants with
cliff vesting each year through a likely
monetization event,
• avoid performance vesting other than
on the basis of valuation as the board itself
may have to determine whether perfor-
mance criteria have been satisfied and
• consult shareholders about compen-
sation, though board generally oversees it.
Board members may have multiple-year
contracts or be granted up-front equity in
anticipation of several years of board ser-
vice that may result in costs associated with
premature removal, but that should not
impair the shareholders’ ability to remove
them at any time with or without cause.
Post restructured company board mem-
bers are expected to roll up their sleeves
and take on specific projects within their
areas of expertise. In addition to the con-
ventional board duties of setting strategy,
managing risk,assessing CEO performance
and succession planning, board members
may be asked to:
• serve as an external advocate for the
business,
• bring specific domain expertise to the
company,
• open doors and further key relationships,
• bring constructive ideas or transac-
tion opportunities to improve the business
and/or
• be available to provide advice to, and
handle inquiries from, management.
Board members of post-restructure
companies may be expected to dedicate
significantly more time to the job than
a “normal” board.These board members
should expect to meet monthly, possibly
with intermittent calls to review results
and key performance indicators. ■
Jon Weber is head of Portfolio Company Management at BlueMountain Capital Management, where he works with
management and boards of companies where the firm is an influential investor. Prior to joining BlueMountain, Jon
headed groups at Anchorage Capital Group, Goldman Sachs Special Situations Group and Icahn Enterprises, where
he was responsible for operational oversight, governance and value enhancement of portfolio companies. In those
capacities, he acted as board chair or member, senior executive, or board-level advisor for dozens of companies
including: President of Icahn Enterprises, L.P. (NYSE-IEP), CEO of Philip Services Corporation and Viskase Companies,
and board member of American Railcar Industries, Crescent Communities, Martinrea Honsel, National Energy Group,
WestPoint International, WIND Hellas, Xenith Bankshares and XO Communications.
Reprinted from Directors & Boards Second Quarter 2017 © MLR Holdings LLC. • 1845 Walnut Street, Suite 900 • Philadelphia, PA 19103-4710 • (215) 567-3200 • www.directorsandboards.com