The Chief Restructuring Officer as a key player in corporate turnarounds

By Mathias Heller

In times of economic crisis and corporate reorganization, the role of Chief Restructuring Officer (CRO) is a crucial one. Experienced CROs with a strong track record of delivery are the key drivers of transformation. With Ralf Schmitz CRO Management, the new company founded by Roland Berger and renowned restructuring specialists Schmitz & Partner, restructuring takes on a new dimension: We support companies in distressed situations by supplying experienced external restructuring experts who work hand in hand with well-rehearsed teams of specialists to steer and shape the reorganization process from day one. This combination of leadership and expertise is the future of sustainable restructuring management, in which the CRO will become firmly established in many companies. In this article, we examine the success factors involved in the role of CRO, which originated in the English-speaking world and has since become established globally, becoming indispensable to many businesses today.

Stakeholders like banks or investors, who provide additional capital during a corporate rescue or refinance a company’s existing debt, are typically no longer happy to rely solely on the existing management to oversee the company’s turnaround . They are increasingly demanding the appointment of a Chief Restructuring Officer (CRO), either in addition to the existing executive team or even to replace someone on the management board. As an executive with strong experience in restructuring and leadership, the CRO comes in for a time-limited period and assumes C-level responsibility for turning a distressed company around. They are often supported by a team of external experts.

Given the wide range of situations in which CROs are deployed, their role is highly diverse and multifaceted. The CRO is a key player in the restructuring process, making them, in many cases, the decisive factor in successfully navigating the crisis facing a distressed company. In this article, we describe the five key success factors for a CRO engagement across the five key dimensions of their mandate:

• The timing
• The CRO’s position and support
• Integration into the management team
• The CRO’s remit
• The CRO’s exit

We will illustrate specific examples of these success factors below, based on a case study drawn from our many years of CRO and restructuring experience.

1. The timing

The sooner, the better – for CRO engagements this holds especially true, as there are critical decisions to be made at the beginning of any corporate restructuring. Ideally, the CRO will be involved from the very start during the status quo analysis and will then build on that to plan and steer the strategy for solving the company’s problems. In reality, however, CROs often don’t come in until the company is in a liquidity crisis or, worst case, on the brink of insolvency. That is when external stakeholders like investors assert their influence to insist on the appointment of a CRO.

Case study: In this instance, the initiative to engage a CRO came from parts of the management team and from the owner. The banking consortium was involved in selecting the CRO as a key stakeholder group. The first thing the CRO did was conduct a liquidity analysis, which revealed that the crisis was at a more advanced stage than the company’s own figures anticipated. This case is evidence that the CRO should always be brought in as early as possible, because a status quo analysis and planning are crucial steps at the beginning of a restructuring process.

Success factors for the start of a CRO mandate:

• To ensure the CRO can be brought in as soon as possible in a distressed situation, management and stakeholders should continuously monitor the company’s condition. In practice, company insiders will often think that the situation is not as bad as it actually is.

• An early and clear definition of the CRO’s remit and their job profile is essential for choosing and appointing the right CRO. Their responsibilities and powers should also be clearly laid down.

• The established corporate bodies are responsible for selecting and appointing the CRO. Close alignment with the company’s financial backers is essential in the run-up to this process and is part of the necessary stakeholder communications.

2. The CRO’s position and support

A number of questions come up when appointing a CRO, particularly around the CRO’s position within the organization. In our experience, external stakeholders – especially the banks – prefer the CRO to be appointed as an officer of the company in order to give the individual a stronger mandate, both internally and externally, and to ensure the CRO has the authority to get things done. From the company’s perspective, having the CRO on the board as an officer of the company signals that the CRO shares responsibility for the consequences of the decisions made.

To get the restructuring plan implemented quickly and successfully, the CRO needs access to supporting resources. These can be provided by the company or they can come from within the CRO’s own organization. Often, a CRO is appointed after a consulting firm has produced a restructuring program or restructuring opinion. The chances of a successful turnaround are significantly higher if the CRO has access to additional resources from the very start – such as a team of consultants with restructuring experience.

Case study: The company wanted the CRO to be in a strong position to push through the restructuring measures, particularly externally towards key customers. The CRO was therefore given full powers by the management. Since the CEO left the company shortly after the CRO’s appointment, the CRO additionally took on the CEO’s responsibilities. This automatically made the CRO the primary point of contact for all of the company’s stakeholders. The existing restructuring plan was deemed ineffective; a small team from the CRO’s circle worked together with the CFO and CTO to quickly develop an implementation-focused restructuring roadmap.

Success factors for the CRO’s position within the company:

• Appointing the CRO to the board as an officer of the company is more efficient for crisis management.
• The CRO needs the authority to issue instructions, and this must be clearly defined and communicated. Their authority typically extends to all matters relevant to the company’s restructuring.
• Engaging a CRO in combination with a restructuring consultancy or a restructuring team means the rescue plan can be implemented faster and makes a successful turnaround more likely.

3. Integration into the management team

There are basically two options for how the CRO can be integrated into the management: first, a pure CRO role appointed in addition to the existing executive team; second, a dual role in which the CRO takes on another function as well and is either an addition to or a replacement for existing roles in the management team. Speaking from experience, we have a clear preference for the first option: keeping the existing management onboard and adding the CRO to the team, granting them functional management authority. This allows the CRO to focus fully on the restructuring. Day-to-day operations are already challenging enough for the existing management in a distressed situation and require them to focus on the operational management of the business.

However, if stakeholders have lost confidence in the existing management, the corporate bodies may want to place additional management functions within the responsibility of the CRO. For some companies, e.g., smaller businesses, it may not be financially viable to fund an additional management position, so the dual role can be an obvious solution.

Case study: In this case, the CRO held a dual role and was additionally responsible for sales & distribution.

Success factors for integrating the CRO into the management team:

• The CRO’s role must be clear to all parties: They are neither the management’s mouthpiece nor the owners’ or lenders’ representative. They represent the interests of the distressed company and are responsible for its successful restructuring.
• The division of roles between the CRO and the existing management team must be unambiguously defined to prevent friction, unclear communication and duplication.
• The CRO must be widely accepted across the company and they must also be operationally integrated into the existing management team – both of these aspects are crucial to the success of the restructuring efforts. Any factors that strengthen team spirit and foster a constructive working environment will accelerate the pace of the turnaround.
• The CRO should always be brought into the company officially. If their mandate is hidden, their scope for action will be limited, both internally and externally.
• It is best for the CRO to focus on restructuring. Having responsibility for additional management functions is not optimal, but it does frequently happen in practice due to the conditions on the ground.

4. The CRO’s remit

The CRO’s remit spans all measures aimed at holistically stabilizing the business’s finances and rescuing the distressed company. Essentially, there are four areas to address:

• Financial stabilization: One of the CRO’s first tasks is to stabilize the company’s liquidity in order to avoid insolvency and buy time for the restructuring measures to take effect. They must also implement monitoring systems to ensure that the company has transparency over its liquidity situation at all times.
• Stakeholder management and communications: The CRO must keep the interests of all relevant stakeholders in mind and manage communications with and between them. The goal here is both to secure everyone’s support for the restructuring plan and to identify any individual interests that could damage the company as a whole.
• Operational restructuring: The CRO’s primary responsibility is to lay the foundations for the company to have a viable future. To this end, they must develop and implement measures to reduce operating costs and structural changes to improve profitability. These can range from optimizing structures and processes within the company, to closing or selling unprofitable businesses, to renegotiating contracts or rightsizing the workforce.
• Strategic realignment: “The CRO deals with the past; the CEO shapes the future” – this is the guiding principle here. It means that implementing a long-term corporate strategy is not part of the CRO’s remit. That is the primary responsibility of the CEO, whose long-term leadership role gives them significantly greater credibility for this, both inside and outside the company. But the CRO must lay the groundwork for the company to gain the strategic perspective it needs for a subsequent realignment to succeed.

Case study: The company already had robust liquidity planning and a high level of transparency over its current and medium-term liquidity situation. The CRO therefore began by defining and executing immediate measures to secure liquidity. Key steps here included speaking with key accounts to discuss financial support for the company, and negotiating with lenders to defer upcoming repayments. While the restructuring roadmap was being developed, the CRO initiated negotiations with the works council with a view to reducing the significant level of overstaffing the company now had as a result of the continuous sales losses. At the same time, the CRO took on the task of reporting to the banking consortium.

Success factors for the CRO’s remit:

• The CRO must be familiar with all stakeholders and be aware of their interests. This includes not only obvious stakeholders such as the management, works council/workforce, financial backers, customers and suppliers, but also less obvious stakeholders such as regulatory authorities.
• With this knowledge as a basis, the CRO must establish a transparent information policy and active communications to secure the support of stakeholders and thereby ensure the success of the restructuring plan.

5. The CRO’s exit

Ending a CRO mandate comes with certain risks and is therefore not to be underestimated. To prevent the company from returning to old patterns of behavior once the CRO is no longer present, it is essential to ensure that knowledge has been transferred to the management team and that the CRO’s exit is not taken as a sign that the pressure is off. All key stakeholders must be informed in advance and should support the CRO’s exit.

Case study: After 14 months, all relevant restructuring measures had been executed and the effects largely realized. The search for a CEO for the much leaner company was under way. During the restructuring process, the CRO had secured the involvement of suitable employees to accelerate the implementation and leverage internal company expertise. These employees were now supporting the continued implementation of the restructuring plan.

Success factors for the CRO’s exit:

• The CRO initiates the ending of their mandate once they have finished “dealing with the past” and the restructuring is well under way.
• To keep the restructuring process going after the CRO’s exit, suitable internal stakeholders need to have been identified and developed at an early stage to take over the ongoing projects and drive them forward.

Conclusion

A CRO with proven leadership experience and a track record in crisis management can be a game changer in a restructuring situation. Our latest restructuring study demonstrates this in no uncertain terms: 92% of the experts we surveyed agreed that, in their experience, engaging a professional restructuring and transformation manager – with their strong focus on implementation – increases the chances of a successful restructuring.

But even having a CRO is no automatic guarantee of restructuring success. There are some cases where the distressed company simply lacks fundamental elements (e.g., liquidity, access to new capital and so on) – even the best CRO cannot change that. And then, there are a number of challenges and potential missteps that can occur even when the restructuring is being led by a CRO. Choosing the right person, for example: They must be a good fit for the company at hand – not only professionally but also personally. Or integrating the CRO: If this is not done properly, it often leads to a lack of stakeholder engagement and causes stakeholders to actively oppose some of the restructuring measures or the entire restructuring plan. In that situation, it is all the more crucial for management and the CRO to work together to create a positive atmosphere and demonstrate a willingness to move forward.

All in all, our experience from numerous projects shows that a well-planned and executed CRO mandate enables the confident management of the many diverse issues that are all happening at once in a restructuring scenario and very often leads to a successful corporate rescue.

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