Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 6Corporate Governance in Distressed Firms
When a firm becomes financially distressed, almost every aspect of its governance is affected in some way. To start, managers and directors of a corporation owe fiduciary duties to the enterprise, encompassing a community of interests including creditors, shareholders, and other parties. For a distressed firm, the interests of creditors, shareholders, and other parties often conflict; the actions taken by managers in a restructuring can have far‐reaching implications for who are the “winners” or “losers.” The nature of compensation contracts needed to provide adequate incentives during a restructuring will change, as will labor relationships more broadly. Further, both management and board positions are likely to experience high turnover, particularly when the firm emerges from Chapter 11. Finally, many restructurings lead to large changes in ownership, with former creditors emerging as the new owners of the company. While such changes in control are common, the mechanisms through which they occur can be quite different than for nondistressed firms. This chapter discusses these aspects of governance and their impact on the incentives of managers and other participants in the restructuring process.
MANAGER, CREDITOR, AND SHAREHOLDER INTERESTS
Academics have long recognized that potential agency conflicts between debt and equity holders are exacerbated when leverage becomes high, as it does when firms near financial distress. ...