Transparency, accountability, humility: Guiding your company through a successful restructuring

In this podcast, Heidrick & Struggles’ Liz Hayes speaks with Yvette Austin Smith, principal and director of The Brattle Group, a global economics and financial consulting firm that provides expertise in litigation and regulatory matters. Smith, who specializes in M&A and bankruptcy disputes, explains some of the finance market trends she’s seeing as well as how litigation and contested bankruptcies are different now compared to the Great Recession. She also explains the three key leadership skills she focuses on—transparency, accountability, and humility—and offers some advice for boards as they look to guide companies through a successful restructuring and turnaround.

Some questions answered in this episode include the following:

• (1:06) Transaction and financial markets are under pressure at the moment. What kinds of calls are you getting today?
• (2:48) What will be the fallout of the pressure we're feeling in the financing markets right now?
• (5:13) How might litigation or even contested bankruptcies differ now compared to the Great Recession of 2008?
• (7:26) What kind of leaders should boards be looking for and what advice would you have for boards as they look to guide companies through restructuring and turnaround?
• (11:00) What advice do you have for leaders as they think about diversity and inclusion efforts, especially as they add value to their business?

Below is a full transcript of the episode, which has been edited for clarity.

Welcome to the Heidrick & Struggles Leadership Podcast, the premier provider of leadership consulting, culture shaping, and senior-level executive search services. Every day, we’re privileged to talk with fascinating people who are shaping the future through their leadership and vision. In each episode, you’ll hear a different perspective from thought leaders and innovators. Thanks for listening to the Heidrick & Struggles Leadership Podcast.

Liz Hayes: Hi, I’m Liz Hayes, principal at Heidrick & Struggles and a member of the Global Technology and Services Practice. In today’s podcast, I’m speaking with Yvette Austin Smith, principal and director of The Brattle Group. The Brattle Group is a global economics and financial consulting firm that provides expertise in litigation and regulatory matters. Yvette specializes in M&A and bankruptcy disputes. Prior to joining The Brattle Group, she provided investment banking advisory services. Yvette, welcome and thank you for taking the time to speak with us today.

Yvette Austin Smith: Thank you for having me, Liz.

Liz Hayes: Of course. Yvette, transaction and financial markets are under pressure at the moment—obviously, during the COVID-19 crisis. What kind of calls are you getting today?

Yvette Austin Smith: The most frequent calls today are M&A and financing busted transactions; these are deals that are either stalled or cancelled. For some subset of those calls, one or more of the transaction parties are looking at a restructuring or possibly even a bankruptcy. Many of these deals were simply rescue transactions.

The deals themselves actually fall into a few categories. The first is deals that were, or arguably were, in trouble pre-COVID, and COVID is certainly being blamed as the last leg or the last straw. The second involves companies in industries that were struggling pre-COVID. Retail is probably the best example of this—we’re starting to see a wave or retail bankruptcies. In the third category of deals are largely businesses in the travel and leisure section, and interestingly many of those companies were actually doing quite well pre-COVID and are likely to rebound post-COVID, assuming that they can survive the downturn. An interesting example of this may be Hertz Corporation. The car rental company filed for bankruptcy on May 22, but [now] the company’s stock is up some 800%, and so investors do seem to be betting that Hertz is going to rebound.

Liz Hayes: What will be the fallout of these busted deals or, overall, the pressure we’re feeling in the financing markets?

Yvette Austin Smith: Some of this is still evolving, but I can tell you the trends we’re seeing now. The first and probably most obvious one is price renegotiation, where the deals haven’t just completely fallen apart. You have acquirers putting downward pressure on the price and that’s often combined with increasing the contingency of some of the considerations—so, larger escrows, milestone payments, and the like.

A second trend we’re seeing is what’s referred to as over-equitizing, and that is decreasing the financing leverage in the deals and replacing that loan or that leverage with a larger equity cheque. What we anticipate is that some of the acquirers will actually seek to refinance these transactions, hopefully in more stable markets, and that will likely return some of the leverage back to the financing structure.

A few other things we’re seeing: the use of covenant holidays or relaxation of loan covenants and additional EBITDA add-backs, which allow a company to maintain a covenant in a loan agreement. Most of these are of a limited duration. The idea is to provide the operating company with just a little bit more financial flexibility through the end of the COVID downturn.

The fourth trend I’ll mention is a real uptick in material adverse change (MAC) or material adverse effect (sometimes known as MAE litigation), and what’s called ordinary course litigation. There are some acquirers who are testing these mechanisms as escape hatches from deals. It’s interesting to note, notwithstanding the real uptick in this litigation, historically very few of these lawsuits have resulted in an affirmative finding for a MAC or an MAE. The ordinary course litigation has a little bit less of a history to it, so we’ll have to see how that develops.

Liz Hayes: How might litigation or even contested bankruptcies differ now compared to the Great Recession of 2008?

Yvette Austin Smith: There are a couple notable differences. One is that the current downturn developed much quicker than the Great Recession. This will likely impact what is [later] said to be “known or knowable” on the eve of the COVID-19 crisis. With hindsight, shareholders and other investors will be asking whether certain transaction decisions were, in fact, reasonable. A lot of future litigation is going to turn on this question.

There’s also a notable difference in governmental support. If you compare today’s crisis to the Great Recession, on one hand, governmental support [now] has been much more diffused as compared to the Great Recession. When I was working on Lehman Brothers, the question that was being asked contemporaneously was, is the government going to save Lehman? Or perhaps, is the government going to save the banking sector? 

Now, people are asking, which of millions of businesses and individuals will receive a smaller individual government payout and will it be enough? On the other hand, the current government support has been deployed in a less uniform fashion, and so all of this is creating greater uncertainty surrounding the amount and the timing of government support. It is this uncertainty that we think is going to fuel subsequent litigation. To put it more simply, there will be many different interpretations of the likelihood of governmental support and related questions as to whether governmental support was expected to replace or augment private-sector financing.

Liz Hayes: With that, what’s your point of view on leadership? What kind of leaders should boards be looking for? What advice would you have for a board as they look to guide companies through restructuring and turnaround right now?

Yvette Austin Smith: I sit on two boards, one for-profit and one not-for-profit, and I think my advice is the following: First, you have to empower management to make tough decisions expeditiously. Difficult and often politically charged decisions will be required regarding the company’s current and future investments, and while the decisions certainly shouldn’t be made recklessly, they will often need to be made quickly and decisively. In restructuring, time is either your friend or it’s your enemy; it’s rarely a neutral factor, and in the first phase, in most instances, time is your enemy. The second [piece of] advice I have for companies going through or facing a restructuring is to shift management’s focus from revenue and expenses to cash flow. A successful restructuring is going to depend on being able to reasonably predict and manage liquidity, and by that, I mean the amount and the timing of future cash flows—cash inflows and outflows.

Liz Hayes: What kind of leadership skills are most important for leaders at companies facing disruption?

Yvette Austin Smith: During the current disruption, I’ve tried to focus on three key skills: transparency, accountability, and humility. If you want buy-in from stakeholders, the stakeholders need to know not only what the decision was but how the decision was made—for example, who had input to the process and what were the trade-offs considered. Accountability is necessary because it builds trust and it also allows the company to move from decision to execution. Finally, I’ll mention humility. Leaders should not forget humility. Many great ideas come from outside the ranks of traditional leadership, and I’ve certainly seen that at The Brattle Group as the firm has developed our response to the current civil unrest.

Liz Hayes: How has your firm responded?

Yvette Austin Smith: We’ve undergone a couple of different efforts. We had internal town hall meetings that allowed employees at all levels of the organization to express how they were feeling, which was really important. We had a number of different employees who were impacted in different ways, and, for those that wanted the opportunity, this was a great opportunity to express some of that. The second purpose of the town halls was to develop a strategy around how the firm was going to respond. Employees throughout the firm, from our first-year research associates up to the board members, were all on the same call, [and we] really had an opportunity to help propose the strategy. The Brattle Group [has issued] both a public statement regarding our position and also announced our decisions relative to some charitable investments.

Liz Hayes: That’s fantastic. What advice do you have for other leaders as they think about diversity and inclusion efforts, especially as they add value to their business?

Yvette Austin Smith: As both a board member and an African American woman, I can confirm that full incorporation of diversity and inclusion efforts has to be a board-level priority if the goal is really to promote meaningful organizational change. And it’s worth the effort, because it does add tremendous value to a company.

I’ll give two examples. First, diversity and inclusion attracts talent to your organization. Yes, minority talent, but also all talent, [and] it also promotes retention of the firm’s existing talent. The smart, creative, and collaborative employees who you want to be part of your company care about diversity.

The second thing I’ll mention is that diversity and inclusion allow a company to better serve its clients. Our clients are diverse. Sometimes they are individually identified as diverse, but equally or with greater frequency the individuals with whom we interact have incredible diversity in their own lives. Their spouses and partners, their children, and the communities in which they live represent the world’s diversity. Companies simply cannot afford to operate in a way that is out of touch with our clients.

Liz Hayes: That’s fantastic, and I think you’ll see more and more people agree with that and act on that, especially considering the current climate. My final question is what do you think will come out of this current downturn?

Yvette Austin Smith: I think we have an opportunity as a society to do even better with inclusion efforts. Over the past few months, we’ve all been working remotely, we’ve been working in different ways, we’ve been using different technology. I’ve seen many of my colleagues do fantastic work while juggling the responsibilities of a family and personal commitments. These are aspects that affect all of our lives all of the time, and if we have begun to prove to ourselves that we can work efficiently in a way that allows an individual to give priority both to their work and their life outside of work, that is only going to improve the inclusion we’re able to demonstrate for all our employees. I hope that’s one of the lessons that we take away from this.

Liz Hayes: Absolutely. Yvette, thank you so much for making the time to speak with us today and for sharing your thoughts.

Yvette Austin Smith: Thank you for having me. I really appreciate it.

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