The Board's Role in Bankruptcy

How did Northwest Airlines, Mirant Corp. and NRG Energy choose new boards after emerging from bankruptcy?

According to an article by Joann Lublin in today's The Wall Street Journal on building the post-bankruptcy board, there are different approaches. Usually, these boards are selected by creditors, but some lawyers, investors, and executives believe such an approach can result in an ill-equipped board, raising the risk of a repeat bankruptcy. They suggest a collaboration between management, incumbent directors, and creditors when a company sets out to select board members after emerging from a bankruptcy.

Most businesses remain troubled in the wake of a bankruptcy, the WSJ found, and that is the reason a rigorous effort should go into board selection. An example of the collaborative approach method has been demonstrated by Northwest Airlines. Mirant Corp., NRG Energy, and Northwestern Corp. have all used similar approaches.

The story offers a cheat sheet in building an effective post-bankruptcy board:

• Persuade creditors, bondholders, executives and current directors to accept an outsider as a neutral broker.
• Seek consensus from those key players about the idea makeup.
• Create a wish list of attributes, candidates, and mix of temperaments.
• Screen incumbent directors as well as new candidates.
• Find enough prospects with multiple skills to allow tradeoffs.