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Live-Blogging the Big-Bankruptcy Empirical Research Agenda (2): Defining Terms

posted by Jonathan Lipson

Still at UCLA.

Regardless of how you define chapter 11 success, selecting the information that should compose a chapter 11 database to help you figure out what works (and what doesn't) is often a much trickier problem than you might think.  Consider, for example, the simplest question:  what is a “turnaround manager?” 

It’s a question you might want to be able to answer, because you might think that they do (or do not) make success (however defined) more likely.   The services of the  ZolfoCoopers and Alvarez and Marsals of the world  don't come cheap.  If they aren't improving outcomes, maybe they aren't worth the price.

Yet, we know that the ZolfoCoopers and Marsals are not the only turnaround managers. For example, LoPucki observed that many companies in trouble may simply let senior management go, and “promote some subordinate lackey who is declared to be a turnaround expert.”  Is that person a "turnaround manager"?

Douglas Baird suggested that perhaps membership in the Turnaround Membership Association is some evidence of who is a turnover professional.  The problem is that the TMA includes lawyers, investors and others who would not intuitively fit the bill.  Indeed, the TMA website observes that less than half of its members (45%) are "Turnaround practitioners who consult with or participate in helping troubled companies in the recovery process, including interim corporate managers, financial and operating advisors, accountants."  The rest are lawyers, investors, and so on.  Being a member of the TMA is, in other words, going to be overinclusive, and may be underinclusive, since there is no apparent requirement that membership is a prerequisite to being hired as a turnaround manager.

In other cases,  senior lenders may suggest in workout negotiations that the company hire a new chief financial or restructuring officer.  That person may have worked with the lender in past cases, and the lender may say that this new person will do a great job of reorganizing the company.  They may or may not have a title that indicates they were a turnaround professional.  Was “Chainsaw” Al Dunlap a “turnaround professional” for this purpose?  Would it matter whether he was a member of the TMA?

If we were concerned only with formal appointments during chapter 11, it might be easier:  You would just rely on what the lawyers say in the pleadings.  The problem is that many folks who realistically are turnaround managers may have been retained as employees before bankruptcy.  No pleading would be filed to retain them.

The point is not that we don't know what turnaround managers are--we can sort of "know-it-when-we-see-it"--but that making decisions about how to identify and delimit observable facts in the real world can be much more difficult than you might think.  What facts on the ground are readily available proxies for the facts that matter?

This may be inside-academic-baseball.  Yet, we all know that how you define terms is often the difference between success and failure.

 

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