Holding back bankruptcy: the very survival of a troubled company that is approaching—or in—bankruptcy can depend on how well HR gathers information, trims costs, retains key people and communicates with stakeholders - Cover Story

HR Magazine, May, 2003 by Robert J. Grossman

Frank Filipovitz has been living an HR executive's worst nightmare. For the past three years he has waged a losing battle to save jobs for thousands of workers as his company struggled for survival under bankruptcy protection. At his desk in the suburban Cleveland headquarters of LTV Corp., Filipovitz, vice president for HR and a 23-year company veteran, somberly fields questions from former employees and tries to settle benefits claims. He has been striving to preserve paychecks and benefits for LTV's 11,000 steelworkers and health coverage for its more than 40,000 retirees and their family members.)

In the 1990s, LTV gambled on a growth strategy of borrowing heavily to add two business units to its core business of manufacturing steel. Then the bottom fell out of the steel market. International competition, labor commitments and mounting debt plastered the company with red ink, sending Filipovitz and other senior managers scrambling to plug gaping holes in the dike. "I was working 20 hours a day, seven days a week," he recalls. "There was anger and frustration everywhere."

As bad as things were in the early days of the crisis, however, Filipovitz was hopeful that targeted retrenchments of hourly and salaried employees would help the enterprise stay afloat. When the cuts didn't stanch the bleeding, and with creditors growing impatient, the company, with $6.1 billion in assets, was forced to consider more drastic action: Chapter 11 bankruptcy In what was the largest U.S. public bankruptcy in 2000, LTV received court authorization to freeze its creditors in place, regroup and come up with a new plan to pump life into the company.

Chapter 11 No Easy Way Out

It seems a day doesn't go by without another major company entering Chapter 11 bankruptcy--a federally protected legal status offering some financial breathing room while a company tries to stabilize its operations and survive as a going concern. Enron, United Airlines, WorldCom, US Airways and Kmart are among the household names struggling to salvage their business after filing for bankruptcy protection.

For human resource managers in financially troubled companies, working to avoid bankruptcy, operating during it and attempting to emerge from it will challenge every skill and HR function to the utmost.

While the goal is to emerge from bankruptcy with a healthy company, Chapter 11 is too often the beginning of the end, according to Lynn LoPucki, a law professor at the University of California, Los Angeles, and a leading authority who has maintained a database of filings since 1980. Of the companies in his database that filed Chapter 11 petitions in 2000, 20 percent went in with the intention of selling off business assets and folding. The remaining 80 percent followed the Chapter 11 reorganizing process, planning on emerging leaner and with less debt within a year or so. Twenty-seven percent of these optimists failed to make it and had to liquidate. In the end, only 53 percent of the companies that filed actually emerged from bankruptcy. And even those survivors face daunting odds. "Twenty to 30 percent of the survivors will fail in the first three to five years," LoPucki says.

John Rizzardi, who specializes in smaller bankruptcies--companies with sales between $500,000 and $20 million and fewer than 1.00 employees--as chair of the creditors' rights and bankruptcy practice group at Cairneross & Hemplemann in Seattle, says only 10 percent to 15 percent of filings result in reorganizations. He estimates that only 2 percent of these companies last more than three years.

Companies that do regroup and emerge from Chapter 11 usually are forced to toss substantial numbers of workers overboard to stay afloat. For example, LoPucki says, 98 companies that emerged from bankruptcy from 1991 to 1996 shed 31 percent of their jobs--a total of 265,000. The number increased as companies failed down the road. Top leadership--CEOs, COOs and the like--did not fare well either. About 90 percent of the time, the bosses at the helm when Chapter 11 began were history when the company emerged.

Far from a moratorium on expenses, bankruptcy brings its own new costs. Even with streamlined procedures that allow quicker, prepackaged Chapter 11s and cut the average time "in" from about a year to six months, hundreds of companies in financial distress can't afford the tab. Administrative costs make it prohibitive. Under bankruptcy laws, a company must pay legal bills and consulting fees not only for itself but also for all the creditor committees and other entities tied to the process. The costs for big companies can be millions of dollars, says Brent Longnecker, president of Resources Consulting Group in Houston, whose bankruptcy clients include Williams Communications Group, with $5.9 billion in assets (the 10th-largest bankruptcy in 2002) and $3.4 billion Kaiser Aluminum & Chemical Corp. "The company is paying investment bankers, accountants, auditors, consultants, turnaround specialists...all at a time when cash is key."