Board Prudence Amid Financial Distress

When a company faces financial distress, its directors stand at a critical intersection of fiduciary duty and operational urgency. In these moments, directors’ actions are highly consequential, not passive or ceremonial. They must be decisive and take prudent action. A troubled company may or may not be insolvent—defined as either (i) unable to pay debts as they come due, or (ii) liabilities in excess of asset value—but regardless, safely navigating these moments requires sound governance.

If a turnaround or other favorable option doesn’t materialize, and insolvency is unavoidable, several important measures will protect both board members themselves and the interests of stakeholders. Conversely, inaction or missteps from the board risk value destruction, job loss, legal exposure, and reputational harm.