December 13, 2017

In This Issue

5 Board Interview Questions to Ask - C onvincing the Family to Get an Independent Board - The Board's Role in Accelerating Growth & Succession

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Featured Articles

The Board’s Role In Growth & Succession

Building a board with trust and good governance is the key. 

Smart private companies realize boards can play a key role in succession planning.

At Power Construction, Al Gorman, the former CEO, “served as his own board,” according to his son Ken Gorman.

He knew his dad wouldn’t be at the helm forever, so a succession plan was in order. “We had to think ‘How is this company going to continue and could we fulfill and grow what he was giving to us?’” says Gorman. “We decided we could not.” So they needed a governance plan.

Ken Gorman and others in Power Construction’s management team created a fiduciary board to help with succession and bolster plans for growth.

Forming a board of directors can happen at any point in a company’s life. Some are a part of the founding of the business, others are decades later, it all depends on needs and goals.

What is clear is businesses that are at the top of their game often look to board members outside the private company to provide transparency, bring fresh eyes to stale problems, and serve as resources to executives who may not have the specific skillsets needed for business growth.

Many private companies have long realized the importance of independent voices.

For Bush Brothers and Company, makers of Bush’s Best Beans, current chairman and G4 family member Drew Everett says the company pursued independent members because, “as a business it was somewhat dire.”

As the 1990s opened, the second generation of business leaders died and it was time for the third generation to transition in. At the same time, the company was moving away from its trucking business and decided to focus on canned beans.

“Three G3s had executive positions in the company and recognized they needed help,” Everett says. “It was really about survival at that time.”

But with a family board of directors made up of “aunts and widows,” the Bush Brothers executives needed to broach the concept of an independent board with caution.

“We needed trust,” Everett says. “The family had to feel they would be fairly represented by the board and their interests would be recognized by the independent members.”

Once that trust began to build, the company set about creating a nine-member fiduciary board, which is now majority independent. It consists of five independent members, the non-family CEO (the first of which was appointed during this time), three family members and two advisory family members which keeps each branch of the current Bush family at the table, though the advisors do not have voting rights.

“We needed to take risks,” he said. “And we took the time to ID and select board members who were strong within the industry that we could use as resources.”

Bush Brothers also kept family involved through a family council, a family senate and a family private trust company.

At Power Construction, trust was a key issue as well. Founded in 1926, there had been an advisory board at one time, but that fizzled without any real authority.

Neither Power Construction nor Power Wellness, a healthcare management firm founded in 1995 under the Gorman Family Holdings umbrella, had a board.

The boards of directors for both Power Construction (for which Al is the chairman) and Power Wellness (for which Ken is CEO) have two family members, the two top non-family managers and two independents that are professionally recruited with unanimous approval from the rest of the board. The holding company has a four-member board.

The goal of finding quality independent members was to give management resources with insight into the industry in which they operated, even if that meant bringing on an executive from a company that could have been viewed as a competitor, as they did for Power Construction. Eventually that board member earned the trust of the business’ CEO.

“We got to the point where we could not grow any bigger,” Gorman says. “We needed to look at acquisitions and we had never done that before. We needed well-connected people who were experienced.

“At some point you have to put your personal ego aside and decide what’s best for the company.”

Independent members bring important perspectives to different kinds of private boards, not just family businesses.

Mead & Hunt, an infrastructure planning and construction consultancy, has been employee-owned since 1949 when the founding family exited the business (currently 170 out of 550 employees are shareholders). The board of directors has seven fiduciary members who are internal members and three advisory independent members. Chairman and CEO Rajan Sheth says the independent members, though they don’t have voting rights, are vital to the company’s transparency.

“They ask questions internal members may be uncomfortable asking,” Sheth says. “They are also important in the leadership succession and selection process.”

To build trust, the Mead & Hunt board also travels to different company sites for board meetings, inviting two or three shareholders in to observe and then spending time talking to local employees and their families at social gatherings.

Bringing independent members to a fiduciary board means hearing the advice and following the direction the board brings to the table.

“Right off the bat, when we established the independent board in 1991, we embarked on a strategic plan and it’s a discipline we’ve held every five years and we’ve engaged the board in that process,” says Bush Brothers’ Everett.

In addition, he says, the board plays a significant role in succession planning, but took the lead in CEO nominations and other governance.

“I think the board not only supported and led the process to name our CEO [Jim Ethier], but supported Jim’s work in family governance structure alignment and support of the family.”

Gorman says when Power Wellness faced the daunting task of becoming Health Insurance Portability and Accountability Act (HIPAA) compliant; it was the board that was a saving grace.

“We’re dealing with a lot of protected information,” Gorman says. “One of our independent directors, with the risk manager, brought this to the top in 2016 and I sleep better at night knowing that we’re now at the end of that [compliance] process.”


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Convincing the Family: An independent board can be a business boon

Getting family members to embrace an independent advisory board can be an uphill battle, so broaching the subject takes diplomacy and good timing.

Mike Kiolbassa, president of the smoked meat business Kiolbassa Provision Company, Inc., struggled to convince his family that creating an independent board was good for the future.

“It was a 68-year-old company,” he explains. “My dad was there 50 years, me for 30 years. They said, ‘Why? Are we going to lose control? Does this cede our control?’”

Kiolbassa continued to press for the advisory board. “Just the growth of the company — the size and pace — we needed the perspectives of outsiders to help us navigate the changes,” he recalls.

At first the elders balked, Kiolbassa says. “I had to really sell my family on the advisory board.” Some of the family members were upwards of 80, and he saw the board as a way to bring different perspectives to the table. “I wanted them to have someone besides me giving them a financial picture and a picture of the company,” he notes, adding a board would bolster accountability.

Dave Juday, the now-retired chairman of IDEAL Industries, approached the suggestion of an independent board to his family gingerly.

“When I took over the company, it really plateaued,” he says. “I said, 'We really have to be a different company, we cannot sustain the way we are. The family is growing faster than the business is.'”

But still, he didn’t force getting an independent board on family elders. Instead he brought out a plan to install one in the future “when the time was right.” When the family agreed that it was something the company could benefit from, he didn’t push implementation right away.

That "right time" came when Juday’s uncle lost his eyesight and could no longer read the board materials, including financial data and other pertinent company information, before meetings. “So I said is this the time? Maybe it’s time to change.”

With the family’s agreement, independent directors were appointed.

Juday admits he may have made some mistakes along the way leading the 100-year-old family company.

As the chairman of the board for 30 years, Juday refers to his time in the leadership of IDEAL Industries as being “a benevolent dictator,” and that made serious changes to its governance even more important.

“Three outside [board directors] were brought in, partly for their expertise, but they also brought some gravitas to the family members — someone to talk to the family that would bring some validity to what was being said,” Juday says.

However, the first directors Juday appointed, he admits, weren’t the best for a new, independent board.

“The first three [board] iterations we went through, I chose the directors myself and in retrospect that wasn’t a good idea,” he says. “They were just like me.”

Using a recruiter, he says, was essential to finding quality directors that brought a different perspective and skill sets to the table. “We were able to attract better people than I thought we could [for the board],” he notes. “We needed an outsider.”

The skills the Kiolbassa board needed were in operations, marketing and finance. A recruiter worked with Kiolbassa to find the right candidates and, in another move to put his family at ease, he let the owners vote on the appointees.

Cindy Burrell, president of recruiting firm Diversity in Boardrooms, says founding a board is "really about finding people that are going to be the right match.”

Burrell specializes in placing directors who are women and/or people of color. She says a recruiter can sometimes bring in a candidate with a skill set the company has not considered in the past.

“At the board level, I think there’s the world to choose from,” Burrell says.

The board makeup and finding “the right match,” adds Juday, takes time to master. You have to be nimble and willing to adapts to current needs, he stresses.

“You have to start with not what do you want for the board, but what do you want for the business and what do you want for the family,” Juday says. “Start with the question, not with the answer.”  


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5 Questions for a board interview

Two experts in director interviews -- from opposite sides of the table.

From the interviewee:

In preparing for an interview for a board of director position with a private company, I would have many questions for shareholders and management.

My assumption is that either before or after the initial round of interviews, I would have access to a collection of "due diligence" materials about the company including

(but not limited to) current and historical financial performance, products, customers, competition, the industry and corporate legal matters. In addition, I would want to understand the board mechanics — frequency of meetings, expected time commitment, D&O insurance and compensation.

Here are the five key questions I would ask during my interview.

  1. What is the company’s long-term strategy? Describe the company’s business model. What I would try to understand is if the person interviewing me clearly articulates the strategy. Is there a strategy? Is there alignment about the company’s future direction? Do the owners really understand the components and nuances of the company’s business model?
  2. What is the long-term strategy of the shareholders regarding the company? Are the shareholders ‘in it’ for the long term or is there a short-term horizon with the intent to sell at some point? Is the company getting prepared for a change of control event? Is there alignment amongst the shareholders about their ownership in the company?
  3. Can you describe the board: history, type, expectations, goals, role/responsibilities? How has the board evolved over time? Is the board being formed, changed, or simply adding a new or replacement person? How do the shareholders and management use the board? Is it a strategic board or more of an audit/perfunctory board?
  4. Can you provide some board background? What are board members' connections to the company and/or the shareholders? Who are the other board members and what roles have they served over time? Are they truly fiduciary/independent?
  5. Can you provide insights into key members of the management team? Describe their roles, history with company, and their strengths and weaknesses. How do the shareholders view the current senior team? Are there any management changes anticipated in the short term? What are the thoughts around succession planning?

From the interviewer:

There is a fallacy that serving on a private company board is somehow easier than serving on a public one.

After all, public company boards are subjected to intense scrutiny about their bottom line and answer to a disparate collection of stakeholders; activist shareholders are now common and regularly upending corporate leadership.

Private company board members face none of these issues.

But serving on a private company board brings its own unique challenges and requirements. The conditions and terms of private company board service differ, depending on the private company type and its strategic vision. A family business board may be more concerned with long-term sustainability; venture-capital (VC) or private-equity-backed (PE) company boards prioritize a possible acquisition, potential IPOs, and ROI. They also generally have shorter time frames to produce results.

Here are five questions I use to get to the heart of a potential director.

  1. Why do you think you are a good fit for this board? It’s critical that any potential board member understands the commitment they are being asked to make: Not only the fiduciary duties associated with being a director — duty of loyalty, care, good faith — but also the expectations and general responsibilities of a director. Often, private company boards can serve as a training ground for rookie directors who lack board experience and don’t have a clear idea of what they are going to be asked to do. Dive deep into a candidate’s current or prior board experience (you want someone with at least some board experience; the nonprofit sector often offers candidates), and ask what experience they have acting in other fiduciary capacities. Knowledge of the general field in which the company operates is key. It’s critical to identify any knowledge gaps, so they can be addressed later in a director onboarding program.
  2. Do you have any conflicts of interest? Divided loyalties is the hidden landmine that can result in drama (at best) or legal ramifications (at worst) down the road. An unearthed conflict of interest can quickly steer a company off its strategic course and distract the board. Certain circumstances, especially in VC or PE-backed companies, can be exceptionally complicated when investor representatives serve on boards in which their firm invests. It’s critical that candidates be transparent about current relationships and past affiliations — and that you ask about them.
  3. Are you prepared for the time commitment? You used to be able to miss board meetings — or two, or three. Not anymore. Private company board members are expected to attend every meeting, so check your candidate’s calendar and other responsibilities. According to the 2016-2017 NACD Private Company Governance Survey, the average private company director spends a whopping 172.5 hours, annually, on board-related matters. That’s more than four full-time weeks every year. In the hyper-connected business world of today, much of the communication between board members and executives at private companies is “off the cuff ”; directors need to have expectations laid out that they should expect more frequent informal points of contact, and they’ll be expected to respond in a timely manner.
  4. Do you understand the culture of this organization? Private companies often have a deep-rooted, and unique, boardroom culture that stems from multi-generational family ownership or a founder-led company. There is a right way to make points, ask questions, raise issues. Exemplary board candidates will do their due diligence and familiarize themselves with a company’s history, culture and operations. That being said, candidates should be comfortable and ready to reconcile differing opinions and mediate potential conflicts between family board members or major stakeholders. Companies should inquire about a candidate’s ability to handle conflict and their willingness to voice unpopular viewpoints in a convincing yet respectable manner. They should also question the candidate’s personality, work style, leadership style, and values. Importantly, companies should determine whether the values of the candidate align with that of the company.
  5. Can you spy — and manage — disruption? In their early stages, private company boards are often filled with like-minded individuals — family, friends, and business acquaintances — which can unfortunately lead to group-think, decision-biases, and strategic ineptitude. In their search, private companies should seek out candidates that have unique experiences and diverse perspectives that not only inspire but inject new ideas, conversations, and innovative thinking to the boardroom. Companies should ask the candidate what upcoming trends or industry-specific disruptions they believe are on the horizon, how these may affect the company, and how he/she can turn these threats into what they are: an opportunity.

Click here for the full article.