October 11, 2001 1:25 PM PDT

Bankruptcy not a stigma for some CEOs

Related Stories

Excite@Home files for bankruptcy

October 1, 2001

Exodus files for Chapter 11 bankruptcy

September 26, 2001

CEO Hancock out at Exodus

September 4, 2001

Egghead to file for bankruptcy

August 15, 2001

Teligent CEO quits

April 30, 2001

NorthPoint files for Chapter 11 protection

January 16, 2001
Jeffrey Sheahan is the latest ex-CEO with the bankruptcy blues.

The chief executive of Egghead.com joins a growing number of former chief executives who saw their companies file for bankruptcy and are now looking for the next opportunity in a tough market. The bankruptcy isn't a bright spot on his record, but the stigma generally attached to the label is fading.

In part, that's because there are so many companies going bankrupt that it's seen as more common, and partly because there is an understanding that the rapid deflation of the tech market also sucked down good companies with good ideas, industry observers say. But it can still be a black mark.

"CEOs who worked at big companies with $50 million in revenues have a bigger stigma attached to them," said Jon Holman, founder of executive recruiting company the Holman Group. "That kind of company already has products in the market place and you can talk to customers, look at the balance sheet and see where the revenues are coming from. So, it's hard to make the case you were later snookered, or that you thought the technology worked and it didn't. Odds are much greater it was something where you didn't do something well."

Sheahan doesn't need to be told that twice--he's already been asking himself the tough questions about what went wrong at Egghead.com, which filed for a Chapter 11 re-organization bankruptcy in August.

"This is not the scenario one envisions when you take the reins of a company," Sheahan said. "A feeling that you failed in some respect is difficult to handle emotionally and intellectually.

"You use this moment to reflect on what you could have done differently, how much of it was the environment, how much of it was you personally. And although I became CEO at a time when (business-to-consumer) companies were having a difficult time, you feel you have the intelligence and team to figure it out," said Sheahan, who joined the online software retailer in 1998 as chief operating officer and became CEO in 2000.

He's got plenty of company, since Egghead is just one of thousands of companies that have filed for Chapter 11 since the market's steep downturn. The Administrative Office of U.S. Courts reports that during the 12-month period ending June 30, fully 10,272 companies have filed for Chapter 11, up 18 percent from the market's euphoric days of 1999.

Headhunters, investment bankers and institutional investors say that while bankruptcies generally don't totally derail CEOs, they are red flags for future employers. More than one bankruptcy is a bad sign. And so is going bankrupt in a well-funded sector.

"If a (business-to-consumer) company went bankrupt, there's virtually no reason to explain why," Holman said. "Everyone knows funding dried up. But if it was a technology company, like a semiconductor company or an Internet infrastructure company, then a venture capitalist or a company is likely to dig a little deeper, because those kind of companies continued to get funded."

Do tell
And former CEOs have to expect some tough scrutiny from boards of directors and investors, who often rank management among their top criteria when evaluating an investment. Companies that are raising capital will not only have to pitch their product to prospective investors, they'll also have to explain the circumstances behind their CEO's past bankruptcy.

"If a private company failed, investors tend to be comfortable with that. But if a CEO of a publicly held company filed for bankruptcy and investors lost a lot of money, it will certainly affect the view on that CEO next time around," said Tony Meneghetti, who heads up Deutsche Banc Alex Brown's West Coast technology investment group. "If, for example, George Shaheen of Webvan joined another company and was soliciting investments, we'd still talk to Webvan's old investors but we'd expect the hurdle to be higher."

Egghead's Sheahan said he's ready.

"There is nothing I enjoy more than getting in front of investors and telling them what transpired and explaining honestly what I did and didn't do well. I'm not going to be apologetic or dismiss it--just explain what happened. I believe the truth sets you free in your personal life and business life," Sheahan said. "I know we lost a lot of money for some investors and they may not be able to overcome that, but some investors are also appreciative that we made a lot of money for them, too."

Institutional investors, such as mutual funds and pension funds, say they aren't necessarily skittish when it comes to investing in companies headed by CEOs who once lead companies that eventually filed for bankruptcy.

"I wouldn't blackball a CEO just because they had a bankruptcy," said Robb Parlanti, senior portfolio manager for Turner Investment Partners, which has $7.6 billion in assets under management. "There were a lot of bankruptcies in the communications and services space, so you just have to look at how the company did when the markets were strong and in their heyday."

Since that heyday, there have been dozens of high-profile boom-and-bust CEOs. Other former CEOs have laid low since their high-profile bankruptcy, such as eToys' Toby Lenk, who says he is working on various projects but doesn't want to discuss them in the media.

Several CEOs left their companies just before they filed for bankruptcy, such as Webvan's Shaheen and Exodus' Ellen Hancock. Shaheen, who left as Webvan faced delisting and three months before it filed for bankruptcy, is now mostly active with various board directorships. Hancock, who had stints at IBM, Apple Computer and National Semiconductor before growing Exodus to the industry's largest Web-hosting company, left just weeks before Exodus filed.

"Not a resume builder"
But these high-profile executives are likely to resurface in similar jobs, headhunters say, since they have extensive experience. Some are even hoping the executives will lead them to the next hot company or technology.

For example, Parlanti said he's watching Alex Mandl, who was president of AT&T before joining wireless-communications company Teligent. Mandl left Teligent one month before it filed for Chapter 11 in May. Like Lenk, Mandl said he is working on several projects but didn't want to discuss them.

"I'd absolutely be interested in investing in any company (Mandl) joins...he gave it a shot and it doesn't mean the next thing he does wouldn't work," Parlanti said.

Company officers are required to disclose to investors, via annual reports and securities offerings, any past corporate bankruptcies they've been involved with. Federal securities regulations call for disclosure for five years after the bankruptcy filing, and this applies to any officer who either worked at the company at the time of the filing or left within two years prior to the filing.

"It's not a resume builder. There's no way you can turn that into a win situation. People don't want to disclose it, since there is no upside to it," said Victoria Wayne, managing director for executive search company Christian & Timbers. "There are some people who go to troubled companies to try to dig them out. Those CEOs inherit a real mess. They can later say it was so big and so bad that I wasn't able to turn it around, but in some cases it also reflects on their judgment."

Despite Wayne's words of caution, Sheahan said his experience has left him "battle tested" and looking for challenging opportunities.

"I don't want to walk into a company that is operating as smoothly as heck, I'd like to help turn it around," Sheahan said. "I can't take this experience and suddenly get gun-shy. This experience hasn't scarred me to the point where I'm going to change my makeup and character...I plan to do my due diligence on a company as any candidate would, and I'm not going into a situation expecting this to happen again."

 

Join the conversation

Add your comment

The posting of advertisements, profanity, or personal attacks is prohibited. Click here to review our Terms of Use.

What's Hot

Discussions

Shared

RSS Feeds

Add headlines from CNET News to your homepage or feedreader.