The Value of an Independent Board
Keynote speaker Lansing Crane -- chairman of Canal Insurance Company, SOG Specialty Knives & Tools and Wells Enterprises, and the former chairman and CEO of his family’s business, Crane & Company -- dedicated his remarks at the Private Company Governance Summit to the memory of Don Keough, who died in February 2015. Keough was president, chief operating officer and a director of The Coca-Cola Company from 1981 to 1993. Under Keough’s watch, the company launched its notorious failed product, New Coke. “You have to give him credit for recognizing that they made a really bad mistake,” and for moving quickly to reverse the decision, Crane observed. As a prelude to his speech, Crane noted that Keough authored a book entitled The Ten Commandments for Business Failure, the inspiration for the theme of the PCGS keynote address: “what we’ve learned from our mistakes.”
Crane & Company: The Board as Strategic Advisers
Crane started out by recalling his tenure at the helm of Crane & Company, Dalton, Mass., where he led the transition from a family-only board to an independent board. “I was called to the family business back in 1995 after a career of practicing law,” he said. “Crane & Company at that point was coming up on its 200th anniversary; it was formed in 1801. For most of its [history] Crane was the market leader in a great range of paper products. But by 1990, our business had suddenly faced changes that we hadn’t anticipated.”
With the advent of the electronic age, the market for several of those product lines -- blueprint paper, carbon paper and business letterhead -- had started to disappear. And there were challenges to a reliable line of business, U.S. currency paper, which Crane has been making since 1879. As color copiers became more sophisticated -- and tempting to counterfeiters -- the government wanted to embed security features in currency paper.
At the time, Crane said, the board consisted of 11 family members. “The family members were there not because they had participated in the business, but because they’d inherited it,” he said. “And they really didn’t understand the business. The net result was, as these technology changes came along, making our products obsolete, the board didn’t know what to do. And management didn’t have the support and the wisdom it needed to deal with the strategic challenges that we faced.”
Lansing Crane’s 12 Rules for
|1. Don't share the weatlh|
|2. Keep shareholders in the dark|
|3. Reward activity and the seniority, not performance|
|4. Treat family employees better than others|
|5. Don't share company perforamnce information with employees|
|6. Use the word "I" instead of "we"|
|7. Let family trump on all decisions|
|8. Believe no one can understand your business better than you|
|9. Believe that tactics are really strategy|
|10. Avoid candid performance decisions and communications|
|11. Engage low-cost advisers and don't tell them anything|
|12. Take no risks|
At that point, there were 100 family shareholders and many more family stakeholders. “We’d been around for a few years, so we’d spread out across the country and across the world,” Crane noted. An assessment of family talent identified individuals who had not served as directors but were “business-savvy, experienced and could bring judgment to our board,” he said.
“We persuaded the 11 family members that we had on the board to step down,” Crane told attendees. “We brought in four new family members, and then we did a search for outside directors who could bring business experience, business judgment, sophistication.” The new nine-member board consisted of four family members, four independent directors and Crane, who at the time was chairman and CEO.
The reconstituted board decided that “we would focus our investment dollars and our resources on the currency business,” Crane said. “The board created an environment where we could look at our strength -- our ability to produce banknote paper, our ability to recognize what governments needed as customers -- and begin to develop our capability to provide solutions to the new problems that they were facing with technology. That led us to investing in an international banknote operation.”
In 2002, Crane & Company bought a paper mill and printing facility from the government of Sweden. “We revitalized it so it became state-of-the-art, and then we started investing in [security] technology for inclusion in banknote paper.”
Having those capabilities “put us on the map around the world,” Crane said. “We suddenly had the ability to sell to many more governments than just the U.S. government.” Crane & Company’s emergence as “a viable, international business that was based on technology,” the former chairman said, started with the creation of a board that could provide support for the development of a new strategy and the allocation of resources to support that strategy. “We would have never been able to do that as a family board,” Crane asserted.
Canal Insurance Company: The Board’s Advice on Personnel Decisions
Crane is also the chairman of Canal Insurance Company, a 75-year-old family business based in Greenville, S.C., and he shared with PCGS attendees the story of how a revitalized board helped Canal put the right management team in place.
Canal, which provides insurance for truckers, had transitioned to the third generation by about 2003. “They were left with 14 owners who were essentially brothers, sisters, cousins, all within about ten years in age of each other,” Crane explained. “The bandwidth for the family was really narrow.” The board at the time consisted of three family members, two of whom were senior executives in the company.
Around 2007, Crane told the attendees, “The family looked around and they said, ‘You know, we think we need to have a hedge against family decisions and personnel decisions. We want to bring in some outside people who can help us in making decisions about our CEO, making decisions about our senior management. We’re just not comfortable with the leadership that’s in place.’ Business was going very well, but they wanted a hedge against it being too insular.” The three family directors added four independent directors, including Crane. “The idea was to provide oversight, to provide external experience and independent judgment. And the unspoken message to these new independent directors was, ‘Will you just make sure that we’ve got the right management in place here?’ ” Crane said.
“We were recruited over about a nine-month period, and as we were looking at the financials, and we were talking to the people in the business, it sounded like a fabulous business,” Crane said. He recalled talking to company managers who explained that the company specialized in insuring small long-haul truckers, with one to four rigs.
When the recession hit in 2008, those small truckers started failing, “and Canal’s business just went right downhill,” Crane said. “They didn’t see it coming.” Meanwhile, larger insurance companies started to enter the trucking market. Canal’s management, Crane told the PCGS audience, suffered from a classic problem: They didn’t know what they didn’t know, and they had difficulty adjusting to the changes in the market.
Canal’s independent directors “ultimately helped to deal with the people decisions related to the business,” Crane said. “And in the end, what the board had to provide for ownership was guidance for a transition of leadership, and ultimately a new strategy.”
Wells Enterprises: The Board’s Role in Culture Change
Crane also discussed the contributions of an independent board at Wells Enterprises, where he is chairman. Wells, based in Le Mars, Iowa, is run by the third generation of the Wells family; it makes Blue Bunny ice cream as well as private-label products for other companies, including Weight Watchers. In 2005, there were five family members on the company’s executive team, who also served on the board. The company set the ambitious goal of becoming a national brand. However, the family leaders didn’t recognize that they lacked the financial capability to achieve that goal, and consequently the company experienced financial difficulties. Crane told the audience. “They didn’t understand what it was going to take and what the consequences of their decisions were,” he said.
As part of a restructuring to regain solid financial footing, four family members stepped down from their executive positions, and a new family member moved into the CEO’s chair. Four independent directors were added to the board.
“The idea was not that these guys didn’t understand ice cream,” Crane explained. “They needed business practices that would provide objectivity, risk management and best practices. And Wells today is a great success. The board had its hand in providing oversight, governance and discipline. But it’s more a cultural change. And that cultural change led to the business being successful.”
Crane contrasted Wells’ success with the woes that have befallen a family-owned competitor, Texas-based Blue Bell Creameries. Blue Bell took its ice cream off the market and issued a product recall in April 2015 after samples tested positive for listeria. “It’s a pretty dramatic thing to see a company of that size have to do what they’ve had to do,” Crane said. “It’s mostly a story of just not having good manufacturing discipline. And it comes back to culture.” He noted that Blue Bell’s board consists of three family members, in contrast to Wells’ board, which has independent directors and an independent chair.
Borrowing an idea from Coca-Cola’s Don Keough, Crane introduced his “12 rules for family business failure” (see sidebar). The most important trap to avoid, according to Crane, is the tendency to not take risks. “Taking risks is essential to being successful in business,” Crane said.
He cited the example of Crane & Company’s decision to purchase the Bank of Sweden’s printing plant and paper mill in order to enter the business of printing international banknotes. (U.S. currency is printed exclusively by the Treasury Department.) Crane said it was a challenge to convince his family to invest overseas and venture into a new business. “But the board provided me with the backbone and the support to be able to persuade the family,” he said. “If we hadn’t taken that risk, the company would not exist today, certainly. We would have gotten marginalized by our competitors.”
Family business leaders must “provide meaningful liquidity” to family shareholders to ensure their commitment to long-term family ownership, Crane said. “I’m a big believer in that.” As it was completing its strategic change, he told PCGS attendees, Crane & Company sold a minority stake to a private equity firm to provide capital for the family while still allowing for growth of the business.
In summary, Crane said, “Boards can provide strategy. They can provide judgment in people transitions and acquiring executive talent. They can provide governance and cultural change and standards. All of which, for private companies, can be a challenge.”