Those of us who are of Hirschfield’s mettle can expect to receive similar phone calls as dozens of Chapter 11 survivors, ranging from telecom giant WorldCom to venerable battery manufacturer Exide Technologies, scramble to build brand-new boards. Headhunters, CEOs and creditors-turned-investors are turning to former executives who are in their 40s, 50s and 60s—people who have extensive experience running companies and, often, deep knowledge of a particular industry. Many potential board members, however, have taken a step away from the corporate rat race, selling the companies we built from scratch or otherwise retiring. With enough wealth for ourselves and our heirs, it is no longer necessary to work, although we are not yet ready to spend the rest of our lives on the golf course. When the call comes, most of us might expect to react the same way Hirschfield did; we will wonder if there is anything at all in it for us.

TOP VIEW Sooner rather than later, nearly every not-quite-retired executive will hear from a recruiter for the board of a deeply troubled company, with a plea to lend much-needed expertise and sobriety to the anticipated turnaround. It is a dirty job, but those of us who enjoy a challenge will find both psychological and financial rewards, provided the company does have the potential to reverse its past misfortunes.

At a glance, joining the board of a company emerging from Chapter 11 with a freshly wiped slate might sound like a safer proposition than becoming a director of a troubled company. In practice, however, to succeed in overhauling a bankrupt company, a board member must be a diplomatic virtuoso with a flair for psychology and marketing, not to mention an instinctive finesse for bottom-line decisions when the bottom line is somewhere near the center of the Earth. 

“You do not have liability for bad past decisions, but you do have responsibility for fixing them,” says Michael Embler, vice president for Franklin Mutual, who currently sits on two post-Chapter 11 boards, Kindred Healthcare, formerly Vencor, a Louisville, Ky., operator of pharmacies, nursing homes and hospitals, and AboveNet, formerly Metromedia Fiber Network, in White Plains, N.Y., which trades on the pink sheets.

The job takes a great deal of time for people who had been entertaining plans to kick back a little bit; each board is likely to demand at least 40 hours a month and attention to issues ranging from regaining the confidence of customers to delicate negotiations with regulators and accountants. The directors need to represent—simultaneously—the interests of creditors-turned-shareholders, whose primary goal may be a quick and profitable sale of their holdings, and new investors looking for longer-term rewards as the company reinvests and expands its business. The board must address the fundamental issues that caused the bankruptcy in the first place, issues that might be company-specific but could also be symptomatic of the woes of the industry or the economy. The position presents a challenge that a former executive with energy to spare might welcome, the way an auto-racing enthusiast welcomes the challenge of competing in the Paris/Dakar Rally. Still, no one gets to be director material by driving blindfolded.

Dodging Icebergs
Hirschfield knew what he was up against, having served on two other post-bankruptcy boards, Carmike Cinemas, a Columbus, Ga., movie theater chain that had hit financial difficulties in the wake of an overly ambitious expansion, and WilTel, the successor to Williams Communications, which had been one of the high-profile telecom bankruptcy cases in the spring of 2002. “I knew I couldn’t give Rob an immediate answer,” he says. “I didn’t want to sign on to take a cruise on the Titanic.”

At Peregrine, the former creditors, who were drawing upon their network of contacts to find directors, were asking Hirschfield to fill a slot on what would prove to be the company’s fourth board in less than two years. Members of the original board had resigned or been dismissed by September 2002, when the company filed for Chapter 11 protection from its creditors. Recruiter Michael Nieset, a partner at Heidrick & Struggles, handpicked the second board after Peregrine’s then-CEO, Gary Greenfield, called him on his cell phone while he was racing in transit at O’Hare airport. “Can you get out here and build a board for me, pronto?” Greenfield asked. “I need them yesterday.”

Within six weeks, Nieset had assembled a slate of board members whom he felt had the right combination of governance skills, industry expertise and financial acumen to steer Peregrine through its turnaround and who “would be seen by anyone looking at Peregrine as a world-class board.” Its members included Thomas Weatherford, recently retired as chief financial officer of San Jose-based Business Objects, as chairman; Richard Koppes, former general counsel of CalPERS, the California pension giant, to head up governance; and, for industry expertise, venture capitalist Peter van Cuylenburg and John Mutch, former chief executive of HNC Software.

“We need to find people who can stand the increased scrutiny that boards are getting these days, especially if they’re coming back after a bankruptcy.” —Jim Jenkins, Mellon HBV

Mutch, the only member of the second board to survive a series of resignations and who is now CEO of Peregrine, says his primary motivation was the challenge of trying to restore Peregrine’s position in the San Diego technology community. “If I could be helpful,” he says, “it would be wonderful.” Just as interesting, he confesses, was the chance to learn, first-hand, how a company makes its way through the bankruptcy process. But it would be tricky: When the second board met for the first time on St. Patrick’s Day in 2003, “we had to start from scratch,” Mutch recalls. “We had to form a board structure, decide who is going to be chair, who is going to be on what committee, on day one, without much more understanding of the people we were working with than we could get from their resumes.”

All too soon, board number 2 encountered one of the major challenges for many directors of post-Chapter 11 companies: finding a way to work with the company’s creditors. At the urging of Greenfield, who believed Peregrine had a stronger future as an independent entity, the board rejected a bid from Hewlett-Packard to buy the company for $250 million, which was more than creditors believed the company was worth.  The relationship between Greenfield and the creditors soured, and when creditors won two-thirds of the equity in the final bankruptcy settlement, they demanded control of the board. Until then, Greenfield says, “the thinking had been that this board would serve as the nucleus” of a new, permanent board of directors, but creditors saw things differently. Even as cleanup began after the company’s “Back to the Black” party on a hot Thursday night last August, creditors announced the formation of board number 3, dominated by their own members. Greenfield resigned, and Mutch succeeded him.

Governance experts argue that it is hard for a board dominated by former creditors to restore a company’s credibility. “Their priority is not spending money on infrastructure, governance, risk management and other things that give companies a solid long-term operating structure,” says Robert Bostrom, managing partner of the New York office of law firm Winston & Strawn. In Peregrine’s case, the creditors understood that and acted, approaching Hirschfield and others to take their places.

BEFORE YOU JOIN • Consider the causes of bankruptcy and see if they are conditions the board has the power to change.  • Investigate whether potential liabilities remain in place. • Shield your personal assets from future liabilities.

It took Hirschfield about a month to decide that he would be willing to join Peregrine’s fourth board. He sifted through mountains of financial documents and talked to other directors. Then he flew down to San Diego for intensive talks with key managers. Andy Brown, former chief financial officer of Legato Systems, another new board member and head of the audit committee, undertook similar due diligence. “I had to understand the risks,” he says.

The new directors agree it will take another year or so before Peregrine has shaken off the legacy of the fraud and bankruptcy and their task becomes easier. For now, being a Peregrine director means biweekly meetings on Tuesday afternoons for at least two hours, all by telephone; Brown dials in from his Silicon Valley home office, Hirschfield from Wyoming or his second home in Los Angeles, while Mutch sits in Peregrine’s San Diego head office. They know the board cannot afford to tolerate poor attendance at the meetings. Only once has a Peregrine director missed a board meeting, says Jim Jenkins, a portfolio manager at distressed bond investment firm Mellon HBV, a division of Mellon Financial Services. “Then it was only because he was stuck on a plane.”

No Sinecure-Seekers
Directors cannot be prima donnas, Jenkins says. “We need to find people who can stand the increased scrutiny that boards are getting these days, especially if they’re coming back after a bankruptcy,” he notes. “It is destructive if you have some jerk with an enormous ego who wants to do everything his own way.” Anyone inexperienced in crisis management, or uncomfortable dealing with thorny or potentially controversial decisions, also may find themselves out of place in a boardroom such as Peregrine’s.

For Hirschfield, once he had established that the company’s business was viable, the decision to join came down to whether he felt he could make a difference—and whether he believed he could have fun. Directors’ pay may be rising, but he does not need the cash and had not been looking for another board seat. “You choose to do this, so it shouldn’t be agony; it should be fun and fulfilling,” he says. “I’m not a technologist, but I just love hanging out with all these young, enthusiastic guys and learning. I’m having a great time.”

Art by Jean-François Martin