NATIONAL ASSOCIATION OF CORPORATE DIRECTORS

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NATIONAL ASSOCIATION OF CORPORATE DIRECTORS
A Boards Role in a Crisis Managements
Perspective November 9, 2004
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Topics of Discussion
Credentials Past Management and Board
Experiences Imperial Sugar
Board Characteristics Board Characteristics -
Good and Bad Warning Signs Traditional and
Non-Traditional How these characteristics should
change or not in a crisis The changing
relationship with the CEO
Sarbanes Oxley Provocative Conclusions
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Fundamental Themes
Dont Wait For Trouble To Insure Good Board
Performance A Board Should Not Change How It
Functions In A Crisis A Boards Performance
Should Be The Same Before the Crisis If Not, The
Board Is A Contributing Factor To The Crisis
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Credentials - Management

• 1972-1986 Normal Big Company Financial
  Management
• 1986-2002 Internal Crisis Management
• 3 CFO Positions
• 6 Chairman or CEO Positions
• 3 Chapter 11s (the good, the good and the ugly)
• One successful pre-pack (TWA 2)
• One successful 363 sale (FoxMeyer)
• (with Alixpartners and Weil Gotschal)
• One unsuccessful liquidation (Western Pacific)
• 2002 Present Imperial Sugar President and CEO
• (escaping the nether world of
  distress)

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Credentials Board Seats

• Current
• Pinnacle Airlines (Memphis)
• Kitty Hawk (Dallas) Post
  Chapter 11
• Prior
• Phar-Mor (Youngstown, OH)
  Post Chapter 11
• Ascent Assurance (Ft. Worth) Post Chapter
  11
• Microware, Inc. (Des Moines)

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Imperial Sugar Company

• 1 bn refiner/marketer of sugar products
• Chapter 11 Emergence (2001) Too Quick
• Over-leveraged Angry Lenders
• Commodity Product
• No Industry Innovation
• Two Strong Brands
• Heavy Private Label Penetration
• No Management Accountability

• Four-Pronged Strategy
• Financial Stability
• Basic Blocking and Tackling
• Closer Relationship with Grower Suppliers
• Sales and Marketing Innovation

Tangible Results to Date Financial Stability
300mm Debt To Zero Sales and Marketing New
Packaging Profits higher in seven of last eight
quarters Stock moved from low of 1.05 (11/02) to
gt 16
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Board Characteristics - Good

• Functions well as a group Good chemistry
• Challenging, Critical, Involved
• Yet Supportive and Encouraging
• Recognizes that a Board cannot manage even in
  bad times
• Its role is oversight, guidance and management
  motivation/evaluation/change
• Must recognize leadership (as distinguished from
  management) characteristics in a CEO
• Must recognize divisive cultural patterns in a
  company

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Board Characteristics - Bad

• Look-a-like same functional areas of expertise
• No operating experience overabundance of
  finance types
• No industry experience could lead to fear of
  making mistakes
• No Diversity
• Diversity creates different perspectives
• Diversity encourages and motivates those inside
  the company
• Micro Management
• Out of touch or not in synch with external auditor

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Board Characteristics Bad Bookends

• Too Big
• Dominant Personalities
• Strong Silent Opinions
• CEO Dominates
• Board Afraid to Challenge CEO
• Out of Touch With Other Management
• Too Much Committee Delegation

• Too Small
• No Strong Leader
• Discordant Opinions
• CEO Too Submissive
• Board is Overly Challenging
• Too Close to Other Management
• Insufficient Committee Delegation

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Bad Boards The Traditional Stuff

• The Do-Nothing Board
• The Stacked Board
• The Cozy Board
• The Ignorant Board
• The Self-Interested Board
• The Nepotistic Board
• The Gullible Board

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Bad Boards Non-Traditional Stuff

• The Panicky Board Fear of Being Sued
• The Gutless Board Fear of Firing CEO
• Information Freak Buried in Minutia
  Forgetting the Big Picture
• The Furtive Board Afraid or embarrassed to
  ask
• The Battling Board Either Among Members or
  with Management

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Warning Signs - Traditional

• Leading Indicators
• Loss of Sales in the Marketplace due to
• Rumors
• Stale Product Line
• Unmotivated Sales Force
• Product Quality/Customer Deductions
• Reaching for Profits Cuts in RD/Marketing
• Increasing Repair and Maintenance Requirements
• Management Turnover

• Cash is obvious indicator
• Bank Relationship (covenants borrowing base)
• Deteriorating Working Capital
• Vendor Complaints

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Warning Signs - Traditional

• Leading Indicators
• Cash is obvious indicator

With the exception of balance sheet issues and
bank covenants, Boards generally do not see most
of these signals
Consequently, they need to rely on some
non-traditional cautions
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Warning Signs Non Traditional

• Autocratic management
• Speculative Investments
• Aggressive Financial Positions (e.g. leveraged
  derivatives)
• Hazardous processes or products
• Lack of formal delegation of authority
• Lack of adequate succession planning
• Pushing out future plans
• Repeated executional failures
• Inadequate prior information to Board and
  short-notice requests
• Too much management focus on compensation

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How Should A Board Change Or Not In Times of
Financial Trouble

• Lets Look At The Bad Characteristics Previously
  Discussed

Correct Before Correct Before Correct
Before Correct Before Correct Before Correct
Before Change, if necessary

• Micro-Management
• Relationship With Other Management
• Committee Delegation
• Discordant or Strong Silent Opinions
• No Strong Leader
• Relationship with Auditor
• Challenge To CEO

The Board Should Operate The Same Before Trouble
Is Apparent
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When Should a CEO Be Fired

• First when should he/she NOT be fired
• Industry Deterioration
• Singular Events that have caused the problems
• Product Failures
• Execution
• Poor Forecasting
• Management Turnover

In Other Words, Events That He/She Is Best
Positioned To Fix
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When Should a CEO Be Fired

• Repeated Events Just Described
• Denial
• Corporate In-Fighting
• Personality Change
• Too Autocratic/Domineering
• Excessive Risk Taking to Make Up For Past
  Failings
• Passive Aggressive Behavior

• Note That None of This Relates to Company
  Performance
• It All Relates to Executive Performance

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Should An Outside Consulting Firm Be Hired

• Only if there is no one on the Board who has the
  time and industry expertise to provide the same
  function
• Only with the strong supervision of the Board
• Only if there is continual denial on the part of
  management
• Only if it is recognized that this is the first
  step towards replacing management

• Dont Believe That An Outside Consultant Is A
  Panacea
• Dont Use An Outside Consultant To Shirk Board
  Responsibility

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Conclusions

• There Are Many Characteristics That Distinguish
  Good Boards From Bad
• A Boards Self-Evaluation Process Is Critical
  Before Trouble Arrives
• If Properly Run, There Is No Reason For A Board
  To Change In A Crisis
• The Firing of the CEO Should Be Related To
  His/Her Performance Only
• This Means There Must Be A Good Evaluation
  Process of the CEO
• Oftentimes, That Same CEO Is Best Positioned To
  Fix Problems
• IF He/She Is
• Not In Denial
• Retains The Respect of the Organization
• Is Not Frozen
• IF NOT The Board Needs To
• Be Decisive and FirmBut At The Same Time
• Fill the Cultural Void Inside The Company

Can There Be Any Better Reason To Split The
Chairman and CEO Functions?
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Sarbannes Oxley Provocative Conclusions

• The Chairman and CEO function should be split
• The Best Audit Committee Chairman is a CPA
• The Financial Expert Designation is too broad
• The Fear of God has enhanced audit firm
  independence Not the elimination of
  consultative services
• Audit Firms Should Be Rotated Every Five Years
  Not just the partner within the same firm
• Will keep current firm on its toes
• The new firm will look for stuff
• Clearly costly, but no worse than the current 404
  experience

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