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The Ethics of Turnaround: Are Too Many Shades of Gray Affecting the Industry?

Jan 24, 2017

Originally Published: November/December 2016 by ABF Journal 

A strong sense of right and wrong is critical to restructuring a company in a way that benefits all stakeholders. Yet turnaround professional Robert Katz sees “shades of gray” becoming more prevalent and having a negative impact on the industry. He shares examples of these unsavory situations and points out ethical paths to avoid them.

In the turnaround arena, working in a transparent and open environment is critical for success. However, as a turnaround professional, are you noticing more blurred lines and shades of gray surrounding transactions? Are you being offered cases on a contingency basis when there’s a good chance a turnaround is not a strong possibility? Are people conducting enough due diligence before beginning a new project?

What is the impact of taking on these weak situations during a time of slowing restructuring work? Is this becoming the new “normal” because we are seeing it so often? Here are just a few examples of situations that have left me shaking my head.

Just recently, I was reading court papers with a Chapter 11 petition and first day motions filed by a debtor and its affiliated entities. I had encountered the debtor and its management team previously. What I was reading seemed inconsistent with my recollection and previous understanding of the situation and driving forces.

In another case, I was working as the interim chief financial officer for a generic pharmaceutical company in Chapter 11. I had discovered that the vice president of sales, an executive at one of our largest vendors, had recently received an equity position in a new company directly competing with his employer. In essence, he was moonlighting for the competition. When I called the president of our vendor, he was unnerved to hear the news. Still he appreciated my call as he had planned to promote this person.

Cautionary Tales

I was astonished to read that Phil Mickelson, a potential hall-of-fame golfer, was being investigated for insider trading from a stock tip. Why would a person of his stature try to gain an inside/illegal advantage in the stock market?

I recently judged submissions for an organization that awards recognition for Turnaround of the Year, Transactions of the Year, Contributors of the Year, 40 under 40 and so forth. As I read one, I thought, “Wow that was a lot to accomplish in one year. Did this person really do all that?”

In a cautionary tale, after having some ups and downs, a prominent professional moved to a new company run by industry leaders and visionaries.

While not positive, the conversations among the leaders of the new company may have gone something like this: “The person coming on board can do great things and has a huge knack for developing opportunities and business, no question. But keep him/her focused within a very, very narrow box. If he/she strays a little bit…”

Anonymity is another factor that makes interpreting facts more difficult. Not long ago, if you made a comment regarding a person or a situation, you had to attach your name to it. Today, social media enables people to comment anonymously and without responsibility if the comment proves to be untrue.

The Other Side of the Spectrum

On the other hand, I have seen refreshing honesty in certain cases I have been involved with.

After a lackluster first quarter, the president of a lender’s ABL division asked a CEO why the company’s first quarter’s performance was worse than budgeted. The owner replied, “We took our eye off the ball and let our competitor take two of our slots. However, we corrected that in the second quarter, positioned ourselves better with new products and are in the process of regaining those slots.” He later asked me how I thought the meeting went. I told him he probably said some things that I might not have, but it was impossible not to respect him because he always said what actually happened, good and bad.

In another situation, very shortly after a company closed on new financing with a new lender, one of its main cooking ovens exploded. Within hours, the company’s owner called a meeting with the lender to explain the details of the crisis. They agreed to have weekly calls and/or meetings to continue the open line of communication while the company addressed the problems and went through remediation. In other circumstances, the lender might have panicked. However, in this case, the lender had performed extensive due diligence, including on the character of the owners and management team, and had found that they were beyond reproach. The lender chose to stay the course and weather the storm with this borrower. A year later, the company’s performance exceeded budget, and the lender allowed the owner to take an additional distribution, earning the lender additional income in conjunction with the loan.

There are certain professionals who leave an unbelievably positive impression because even though they may lose the deal, they do the right thing. They are the ones you will always keep in mind for future callbacks or recommendations to others.

Think About Ethics

Think about your own cases. If you are participating in a deal, do others have the same motivation, goals or agendas that you do? Pardon the cliché, but are all the participants paddling in the same direction? Or is one party significantly improving its position and squeezing cash flows out of the entity to the detriment of the other constituencies?

With interest rates continuing at record lows and increasing sources of capital chasing fewer deals, pressure mounts to find opportunities. So with these “shades of gray” issues becoming more problematic, how do you determine whether you are seeing a fair and accurate picture? Are you looking deep enough? Might you be looking too deep, creating something that may not be there? Could there be a really obvious opportunity, there for the taking, but you have so much going on that you can’t see the forest through the trees?

Points to Ponder

Here are some things to ponder as we approach the New Year:

  • Consider the bigger picture for better successes.  
  • Listening has become a lost art. Leaders who listen twice as much as they speak often find success. They respect co-workers, colleagues and employees by listening to ideas that may be contrary to their own.  
  • Those who are part of the humble minority versus the arrogant majority have great value. See how they can better position the organization for the future.
  • Focus on the long term rather than the push and pull of quick fixes for shorter-term successes. At the end of the year, you may be better off deferring some of your wins to next year. While this may cause a shortfall for 2016, it could establish a great foundation for 2017. 
  • Sift through the morass and clearly articulate why something went right or wrong. Evaluate its success or shortcomings. If it can’t be communicated in a focused manner, it usually raises other concerns.
  • Think about what is best for a company’s customers and clients, not just for the firm. Have you maximized client value and reaped all the rewards for all parties? This may help you reach year-end goals while leaving a runway and foundation for the coming year.
  • Reward the employees who contribute to your success when they exceed your expectations. Have you taken the time to say thank you and let them know that you appreciate their efforts?

Perhaps these thoughts will keep us moving toward a successful conclusion to the year and facing fewer shades of gray. Have a great holiday season.


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Robert D. Katz

Robert Katz CPA is a Managing Director of EisnerAmper Financial Advisory Services Group, and works with public and private companies, in and out of bankruptcy, to create and execute the strategy needed to restructure or improve operating performance.

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