Workforce Is a Critical Stakeholder in Distressed Situations: Guidance for Middle-Market Companies

By Stephen Levitan, Managing Director, Oberon Securities

CEO of lower middle market company: “I’m up to my armpits in alligators, scrambling for cash, getting calls from lenders, suppliers and customers, and you’re telling me now is the time to make nice to my employees? And I might even have to pay them more?” In a word- yes.

In times of financial distress or crisis, middle-market companies face simultaneous difficult and unfamiliar challenges: managing lender negotiations, reassuring shareholders, retaining customer confidence and, just as important, maintaining employee engagement. The workforce is not merely an operational asset but a key stakeholder group. Employees are not onlookers—they are active participants in the company's crisis response. If lenders, shareholders, or customers sense a problem, employees will too, probably even before those other outside groups. The absence of communication – or ineffective communication – only amplifies rumors and speculation, potentially exacerbating instability.

By definition, a smaller business has fewer employees, magnifying the potential impact of alienating or losing key staff. Keeping employees in place and motivated can significantly shape a reorganization and even make the difference between recovery and collapse.

A key to success in recovering from crises is convincing others that the company has capable leadership, a solid plan and a viable business. Having worked with many distressed companies, in and outside of bankruptcy, a workforce that’s been kept in the dark by management distracted by the crisis can actually impede the company’s recovery. When a crisis arises, fear and doubt about the future can escalate into distrust, low morale, reduced productivity and difficulty with retention. At the same time, employees’ Jobs may get harder, especially if they deal with external constituencies. Your best employees will also be the ones most able to find jobs elsewhere and they may start looking fast absent good reasons to stay. There are real-world consequences- a distracted workforce will make it harder to hit financial targets which in turn will make it harder to get investor buy-in on a restructuring or reorganization plan. Valuations can decline and recoveries can be diminished—if you’re the founder and a significant shareholder, you could get wiped out.

On the other hand, open and transparent communication positions leadership as credible and empathetic, reducing the likelihood of misinformation taking hold. It also demonstrates respect for employees, reinforcing the idea that they are valued partners in the business’s journey. They will also bring that message to those they deal with every day.

Employees are more inclined to follow leaders who lay out clear plans for recovery. Articulating the path forward—including the role employees will play in achieving success—provides a sense of direction and purpose. For example, if cost-cutting measures are necessary, explain how they contribute to broader objectives, such as securing future growth or preserving jobs. Continuing employees are more likely to accept temporary hardships if they understand the reasoning and see leadership sharing in the sacrifice.

To engage with employees effectively, executives should:

• Be transparent but strategic. Outline the challenges the business is facing and articulate a clear plan for addressing them. Give details to those who need them, but not necessarily to the entire team.
• Acknowledge emotions and uncertainty. Try to balance delivering hard truths with demonstrating empathy.
• Maintain two-way communication. Employees need channels to express concerns, ask questions and provide feedback. Town halls, listening sessions, and anonymous surveys are among tools that can facilitate this exchange.
• Communicate regularly. During crises, uncertainty can escalate quickly. Regular updates, even if incremental, show that leadership is actively managing the situation and respects employees' need for information.
• Be honest but be yourself. Employees won’t trust leaders who suddenly present themselves differently.
• Recognize and reward contributions. Show employees that their efforts matter to the company’s success. This could mean retention bonuses or other forms of financial inducements that could temporarily raise costs and will have to be explained to creditors, but it could be essential to keeping critical staff.

A workforce that trusts its leadership is far more likely to remain productive and engaged, even when facing sacrifices, and as the frontline ambassadors of a company’s brand, they will influence customer satisfaction, supplier relationships, and even lender confidence. A visibly engaged workforce signals stability and resilience to external stakeholders and can have a tangible effect on the reorganization process itself and the underlying valuation.

In the end, crises are tests of leadership and organizational resilience. Companies that value and engage their workforce as a core stakeholder not only navigate these challenges more effectively but they preserve value to emerge stronger, more unified and better positioned for future success.

Author Bio:

Stephen Levitan is a Managing Director at Oberon Securities advising companies on capital structure issues, from raising new capital to selling or restructuring existing indebtedness. He is a seasoned financier with over three decades' experience working with companies experiencing financial stress. Over that period he has been an analyst, an investor and an investment banker.