The Securities and Exchange Commission accused HealthSouth executives, including Scrushy, of orchestrating a $2.6 billion accounting fraud dating back to 1999. By the spring of 2003, HealthSouth’s stock had plunged to 9 cents per share; it was widely expected that the company would file for bankruptcy. Hardly a week went by that spring without an executive pleading guilty to securities fraud: All five of HealthSouth’s CFOs pled guilty, as did seven other executives. (Scrushy decided to take his chances in court and, in a stunning blow to federal prosecutors, was acquitted in June 2005). "With all of the guilty pleas, it was hard to know who was involved and exactly how far the fraud went," May says.

Operating under klieg lights of scrutiny, the board members had to embark on an all-out effort to overhaul HealthSouth’s governance and convince investors, customers, employees, the media and its home city of Birmingham, Ala., that the company deserved a second chance and could be transformed.

May believed that, unlike Enron, HealthSouth was a viable business, albeit a badly managed one. "There were 45,000 people who worked at the company who didn’t do anything wrong and didn’t deserve these problems," he says. But by the end of March 2003, it became clear that Scrushy, who had come up with a plan to spin off part of the company in an effort to retain control, was the biggest of HealthSouth’s problems. So the board declared Scrushy’s employment agreement invalid and named Hanson as chairman and May as interim CEO. May’s job, in a nutshell, was to try to rescue the company, or, at the very least, keep it out of bankruptcy.

Binging and Purging
Among the companies that made headlines for the wrong reasons in recent years, Tyco, Reliant Energy and HealthSouth took remarkably similar paths. Today all three are in various phases of a recovery and are actively engaged in an ongoing effort to restore public trust, despite the fact that each nearly wound up filing for bankruptcy.

All three purged standing directors and engaged new ones to start the cleanup process. In hindsight, this step served to reassure investors, bankers and employees that the company was headed in the right direction. Tyco and Reliant Energy both had to contend with board members and managers who were reluctant to step aside, but most of them eventually got the message that they were standing in the way of their companies’ repair.

HealthSouth, however, suffered a more intractable problem when Scrushy refused to resign from the board of directors. Board members have been holding special sessions for the past three years to avoid giving Scrushy the chance to turn up at their meetings. Last September, freshly vindicated in court, Scrushy demanded access to HealthSouth’s financials and said that the company lacked leadership and vision. On his website, he posts press releases aimed at, as the site claims, "setting the record straight." He continues to be a thorn in the board’s side.

John Krol also has experience with the delicate task of jettisoning tainted directors. The new chairman and CEO of Tyco, Ed Breen, recruited him to be the troubled company’s lead director in August 2002. Tyco’s new management, Krol says, worried about liability issues and that the public would perceive that the board members from Dennis Kozlowski’s reign had acted improperly. "All of these people were successful in their own right, but they just weren’t paying attention," Krol says.

TOP VIEW: When scandal-plagued companies formulate their crisis-management plans, they often look to new board members first and foremost. These veteran leaders are often given the dirtiest jobs in business: purging standing board members, jettisoning tarnished executives and spinning out careful PR campaigns to assuage creditors, investors and employees.

During their first 45 days at Tyco, Krol and Breen dismissed roughly 200 executives and managers who seemed too closely tied to the old Tyco. They hoped that if new managers could show Tyco’s bankers that they were taking the company’s problems seriously, they would earn some negotiating power in regard to the company’s $26 billion debt, and thus avoid bankruptcy. "After assessing the situation, we realized that speed was the only friend we had, so we started making changes very quickly," Krol recalls.

(Now board members at Tyco face a new battle. In February, institutional investors filed a lawsuit to try to prevent the company from splitting into three separate parts, a move the board believes could help unlock value, which, in turn, could help rebuild trust in the company.)

Reliant Energy, because of its base in Houston and a similar business model, was frequently compared with Enron. Reliant Energy brought in Texas lawyer Bill Barnett as its post-crisis lead director in October 2002. He viewed the company’s problems as a series of legal challenges, each of which he describes as "a crisis of confidence that we knew we had to tear down and rebuild." That included razing and rebuilding the company’s management. "As the new directors began to meet, they realized that the company had to change in a radical way, and we didn’t think the existing managers could do it," says Barnett, who was named the National Association of Corporate Directors’ 2005 director of the year for his work on Reliant Energy’s board.

Barnett believes that one aspect of Reliant Energy’s relatively successful restructuring is the fact that none of the new board members knew each other very well, and the board included only one holdover. "We had to learn to trust one another," he says. "We wound up giving each other a crash course in how to fix a troubled company." But even while he was helping build the new board, the Department of Justice was preparing criminal charges against Reliant Energy for allegedly inflating electricity prices.

What Barnett now calls the company’s saving grace was that, unlike Enron, Reliant Energy did not suffer the challenges of out-of-control management. The new board and senior executives began an aggressive campaign to distinguish their business in the public eye from the other notorious energy company. Executives met with middle managers and provided them with reams of information to help answer employees’ questions. Employees who met with customers and vendors were given FAQ briefs so they could quickly and accurately respond to questions. The face-to-face forums between managers and employees continue and have become an important form of internal communications. Reliant Energy also started an ethics hot line that employees, customers and investors could call, and invested in ethics training for its staff. It also brings in outside business leaders on a regular basis to discuss ethical dilemmas at other firms.

The new management team holds frequent meetings with investors and analysts, and has increased the amount and quality of information it discloses on the company’s financials. The changes are reaping benefits. Investor Relations magazine honored Reliant Energy in 2005 for having the best disclosure policy, based on responses from 500 investors and analysts.

Perk Persona Problems
At HealthSouth, Bob May, too, reached out to internal staff to correct external perception problems. Some of the fixes he instituted were almost symbolic. The board members opened the executive dining room to all employees, as well as the two floors that had been reserved for top executives at HealthSouth’s headquarters. To create a more inclusive corporate culture, May began hosting brown-bag lunches in the cafeteria, where he reassured employees on all rungs of the corporate ladder that executives were working hard to turn things around.

Then there was the significant matter of trying to clear the company’s muddied reputation among an entire generation of investors who will probably never hear the name "HealthSouth" without thinking of Scrushy’s 13 corporate jets and sponsorship of an all-girl rock band.

HealthSouth board members met in special sessions for three years to avoid having founder Richard Scrushy crash their discussions.

The company hired New York public relations firm Joele Frank, Wilkinson Brimmer Katcher, which specializes in crisis management for tarnished companies. (One of its other clients is distressed donut maker Krispy Kreme.) The board wanted to differentiate the HealthSouth bloated with executive perks from the new, leaner company focused on patient care. Part of that involved selling off the corporate jets and divesting extraneous businesses that had nothing to do with rehabilitation hospitals. But it also required reassuring the general public that HealthSouth was still a viable company and that creditors, consumers, employees and investors should not feel compelled to go elsewhere.

Because HealthSouth had so many outlets in so many different communities, the board signed on to a public relations strategy focused on convincing newspapers to write stories showing that its local facilities were not involved in the scandal, which was centered at the company’s headquarters. It won small publicity victories: the Miami Herald announced in September 2003 that HealthSouth Rehab Hospital of Miami would take part in National Rehabilitation Week, reminding the public that at least the hospitals remained open for business. In fact, admissions and volume at HealthSouth facilities remained relatively strong.

After the company announced in July 2003 that there was no reason for HealthSouth to file for bankruptcy, business gradually began returning to normal. In May 2004, the company was able to hire a permanent CEO, Jay Grinney, a veteran health care executive, whose job, now that the company was stabilized, was to start growing HealthSouth again.

May, who left HealthSouth to become CEO of San Jose-based Calpine Corp. last December, says today that there are few things more satisfying than helping a struggling company avoid collapsing under the weight of scandal. Today HealthSouth may be much smaller, but observers such as Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware and a member of HealthSouth’s new board, credit the board of directors with managing to keep the company alive during an incredibly challenging period for both managers and the company’s thousands of employees.

Michelle Leder is the author of Financial Fine Print: Uncovering a Company’s True Value.

Art by Ken Orvidas.