Ten excuses for not establishing a board of advisors, what makes an effective private company board, and private company governance appointments and news.
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The Effective Private Board
At a well-attended optional session before the start of Private Company Governance Summit 2015, four experts discussed the mechanics of creating and running an effective private company board. Moderator Steve McClure, Principal Consultant, The Family Business Consulting Group, led a conversation with directors Darcy Howe (Heatron, The Bama Companies), Jim McHugh (Southworth International Group, Inc. and Kennebec Technologies, Inc.) and Dennis Cagan, Copper Mobile, Acorn Technologies, Truston, HeartStories Inc., New Law Technology Inc.)
On the agenda were: preparation and engagement of the board, board leadership, board evaluations, effective director recruiting strategies and board independence.
Preparation and Engagement
“To have an effective board, the word that comes to mind is preparation—preparation at the management and chairman level, and also the preparation of the directors,” noted Jim McHugh. “The best performing board I’ve been on is one I’m on now, a family owned company, with four outside directors, two family shareholders and the CEO.”
According to McHugh, this board has three active committees: compensation, audit and governance. Each board meeting features extensive materials for review and analysis, and in addition to regular board meetings, conducts a two day off-site strategic meeting of the board once a year. But most important, “The board meeting begins where the board book ends. We don’t flip through the pages. We get into topics beyond what’s in the book.”
For Darcy Howe, this focus on what’s outside of the numbers is a key to an effective board. On one of her boards, she’s the only non-engineer or non-accountant director. “The reason why I’m on the board is that I have market experience and the owners had different ideas going forward as to what they wanted to do. While they had been running board meetings with what I call a traditional board book and numbers, they were avoiding—because they didn’t know how to tackle it—the topic of how we were going to get to where these shareholders wanted to go. My role is to help the board get out of the weeds.”
Staying out of the weeds only works, however, when the board is cohesive and well-led. For Dennis Cagan, board leadership is critical. “There is nothing in my experience that will make a board ineffective faster than a lack of leadership. The biggest dysfunctionality on a board can be a lack of cooperation and respect among the board members. The most pertinent cause of that is a lack of leadership. You need a board leader who’s willing to cut off or reprimand appropriately, whether that’s privately and separate from the board meeting, or during the board meeting itself.”
Cagan notes that board leaders should keep the board focused and on topic, without being dictatorial. “The goal is to keep a level playing field, so that all of the directors are encouraged to make comments, while discouraging repetition and grandstanding on certain issues when people have already said the same thing.”
But it’s important that this board leader—whether the chairman or a lead director—remain focused on what’s important at the board level. For Jim McHugh, one of the least effective boards he served on featured a chairman whom he considered “a meddler. He’d drive into minutia and berate the CEO about things the CEO didn’t and shouldn’t have known about, because it was so in the weeds.”
Board leadership can come from anywhere in the board, as Howe noted. “One of the traits of a good board member is that you need a high level of emotional intelligence—you have to know where the dysfunction is, know who the ‘pals’ are in the room, how to take disagreement offline, how to form a consensus.”
An excellent tool for building and maintaining board effectiveness is some form of regular board evaluation to ensure that the board is well-led, and the directors are engaged and contributing.
“I’m a believer in board evaluations, because they force conversations that may not otherwise happen,” said Howe. “Director term limit or age limits—sometimes these are signs of weaknesses on a board, because the board doesn’t have a mechanism for addressing underperforming directors. A really healthy board is willing to say to each other, ‘you’re awesome, but you need to speak up more, or take something off line.’”
Cagan recommends annual board evaluations, with the evaluation method designed around the board’s overall collegiality.
“What you’re trying to do is coax out the most pertinent information about what directors think of themselves and their peers. If they’re more likely to share this with someone they don’t know in a private verbal conversation, or if they’re more likely to do it in a written anonymous evaluation, that’s the way to do it. The board evaluating itself is just as important as the board evaluating management, which they’re going to be doing on a regular basis, no matter how formal it is.”
Recruiting Great Directors
Putting together the right mix of directors remains the largest challenge for any private company that wants an effective and high performing board. The first step is an effective recruitment strategy. The panelists recommend a variety of approaches, including:
- Use your industry’s trade association to identify potential director candidates
- Use governance group resources, such as the NACD’s BoardLink, the Private Directors Association, Women in the Boardroom, or Women Corporate Directors, among others, for recommendations and prospective candidates
- Hire a board consultant
- Retain a search firm
- Ask for recommendations from other board members
In any event, Cagan recommended that a private company board aim high. “The place where I encourage people to start is with people they know or know of or have heard of even, even famous people in their industry or region. Don’t undershoot who you can get. You can often get way higher quality and more experienced directors than you necessarily think you can.
“Being qualified doesn’t mean being suitable. There are more people qualified to be on your boards than are suitable for being on your board. Suitability comes more from their behavior, how they interact with other people—if you have a chest pounder who’s going to stand on the table and pontificate on everything, no matter how smart they are, that’s going to be bad for the board.”
“And beware of the person who is collecting a lot of boards,” cautioned Howe. “Boards take time. In this day and age, it’s not that you get the board book two days ahead, and then you go to the board meeting and then you leave.”
One of the most difficult areas for private company owners is to deal with the idea of director independence, and the potential of “loss of control.” But as the panelists pointed out, a board that isn’t at least partially independent of ownership and management isn’t as effective a group—and that the board members always serve at the pleasure of the shareholders.
“The acknowledged standard for a good private company board is to have a majority of independent directors, though there’s some discussion of what makes independence, “ said Dennis Cagan. “The number of directors is less important than having a majority of independent directors. What about control? The board reports to the owners, if the owners don’t like what they say, they can vote them out. The issue isn’t control, but to be exposed to the greatest variety of ideas and thoughts and opinions as possible.”
Jim McHugh serves on boards that have a majority of independent (non-family) directors. “An independent director, to me, is independent. You’re free to give your advice, speak your mind, offer constructive criticism—and take it yourself—but you’re there not to be a rubberstamp.”
Darcy Howe noted that family-owned businesses often have different board needs than other privately-owned companies.“ The family dynamics are really important, and having board members who understand this is really important. I call myself the keeper of the 100 year plan. You need board members who are the keepers of that plan—that’s not management’s role. Someone needs to own your family vision and your independent directors can really help here.”
10 Excuses for Not Establishing a Board of Advisors
One of the most significant factors determining the survival and success of a closely held company, especially a family business, is the presence of a board of advisors. Yet many such firms lack a board, or have one that meets seldom and contributes little.
Why do very smart entrepreneurs continue to ignore a strategy that promises great long-term payoffs for them and their successors? With apologies to David Letterman, here are their top 10 excuses for not establishing a board of advisors:
10. No one “good enough” will want to serve on my board. Start seeking out advisory board members, and you’ll be surprised at the caliber of talent you can attract. When Jay Schindler took over as president of ESKCO, a Dayton, Ohio, firm that provides promotional marketing and corporate packaging solutions, he and his father, Jim Schindler, rethought their requirements for a board. Jim contacted Clay Mathile, who built Iams pet food company into an international brand and sold it to Procter & Gamble Co. Mathile agreed to serve on the ESKCO board and to help the Schindlers restructure it to meet the needs of their growing company. “It was the best thing we could have done for the business,” Jay says.
9. I don’t want to upstage my current advisors. When you’re making decisions about what’s best for the business, the focus must be on what is best for the business, not your advisors. An advisory board offers the opportunity to expand your circle of experts beyond your lawyer and your accountant. Strong outside board members can look at your business with fresh, practical eyes (especially if they have already managed companies one step ahead of yours) and improve the bench strength of your management team without expanding your payroll.
8. I have no idea who to choose as board members. Your current network of advisors — bankers, accountants, lawyers, friends, trade associations, your local Chamber of Commerce — can help you build a short list of potential candidates. You and other family members can then interview the top two or three candidates until you reach a business consensus about whom you can trust to serve your business best.
7. I don’t have time to work on one more project. Board development may not be urgent, but it will save you time and money in the long run. Especially if you’re considering passing the business on to the next generation, board development becomes an essential part of that process. As you begin to enjoy the golf links, a strong board will help you savor your time away more completely. You can chair regularly scheduled meetings where others will challenge the next generation with non-parental, businesslike voices, and you won’t be the one worrying about the balance sheet. Your bankers and other investors will become more confident, knowing that the company’s future doesn’t depend on your heartbeat alone.
6. I don’t want outsiders to know about our problems. Families cherish their privacy, for many good reasons. But sometimes the risk is worth taking. Outsiders can take the heat about thorny issues like realistic salaries for relatives — and perhaps point out problems you didn’t even know you had.
5. I don’t think we have enough issues to discuss. A typical board agenda might include (1) reviewing management’s implementation of the strategic plan, (2) comparing last year’s financials with this year’s, (3) helping determine the feasibility of expanding into a new region or product line, (4) discussing reports from department heads and (5) developing criteria for selecting the next CEO. If you could have the best business brains in your region providing you with a “think tank” as you tackle tough issues like these, would you really rather face all this alone?
4. A board will slow down our decision making. This may well be true, but as your company becomes more professionalized, slower decision making may be precisely what works best. Rushing to put out one fire after another may suit a startup with little at risk, but not, say, a 20-year-old company with two dozen or more employees.
3. Directors will be too concerned about liability. Many family business owners develop boards of outside advisors who meet together with the legal directors to share information and expertise, even though the family stockholders alone take the final vote. This may diminish the exposure of the advisors and reduce the risk of their liability. Of course, you must refer to the laws of your state and consult your own legal counsel about specific board requirements. Liability insurance may be purchased to secure the commitment of the best candidates.
2. If I pick the wrong people, how will I get rid of them? Terms of office make sense, and some simple written expectations in an introductory letter can clarify goals until more formal bylaws are developed. A first term may be one year, so that there is an exit opportunity for all parties. After that, terms may be staggered for two or three years, to maintain continuity and to provide outside advisors with enough knowledge of the business over time so they can provide well-informed counsel.
1. I don’t want to give up control. Actually, developing a board of advisors may be one of the best means to maintain control, especially if your company grows and prospers. When you retire, the role of chairman of this board may suit you very well. As chairman, you can convene the board four or six days a year, review the financials of the business in a systematic way, tap the brains of those who can best help your business prosper, retain authority to hire top management and develop a sounding board to test the fresh ideas of the next generation. Boards are an essential resource for managing sibling/cousin rivalry in successors when you are no longer the tiebreaker. Sounds like a good plan to maintain control, without camping out in the office every day.
Ellen Frankenberg, Ph.D., is CEO of The Frankenberg Group. She is a family business psychologist who consults with family and closely held companies on their strategic issues and business practices, including board creation. Dr. Frankenberg's book, Your Family, Inc.: Practical Tips for Building a Healthy Family Business, is in its fourth printing. In 2001 she was named by the Family Firm Institute as a Family Business Advisor With Fellow Status, the most prestigious qualification in her field. She can be contacted at email@example.com.
Registration is now open for the fourth annual Private Company Governance Summit, May 11-13, 2016 in Washington, DC.
Session topics include:
- The Board’s Role in a Crisis
- Dealing with Conflicts of Interest on Private Company Boards
- How to Interview Director Candidates
- Cybersecurity and the Private Board
- Preparing for the Board Meeting
- Private Company Capitalization, Liquidity and Shareholder Return
Expert briefings on:
- The IPO/M&A-ready Board
- Onboarding independent/non-family directors
- Board liability and risk
- Board strategy
- Board diversity
- The dynamics of family members on the board
- Private board committees
- Director and board evaluations
- The board’s role in talent oversight and development
Fuhu, one of Los Angeles’ fastest-growing private companies, has filed for bankruptcy, according to a bizjournal.com article.
Mattel will buy the company that manufactures children’s electronic Nabi tablets unless a higher bidder comes forward. The company was founded in 2008.
Fuhu posted revenue of $195.6 million in 2013, however, the company experienced problems when its Taiwanese manufacturer Foxconn couldn’t deliver its devices on time for the holiday season at this time last year.
According to court papers, Fuhu owes more than $46 million to Foxconn.
Mattel lent Fuhu $300,000 to fund bankruptcy proceedings and has offered to buy the company for $9.5 million.
Fuhu topped the Inc. 500 list in both 2014 and 2013.
The Birmingham, Ala.-based company will be acquired for $3.25 in cash per share by a group including Clyde B. Anderson, members of the founding Anderson family, senior company managers and others, the journal article said.
The Anderson family "has made several efforts to take [the company] private in recent years," the report noted.
The company has 257 stores in 32 states, the article said. (Source: Birmingham Business Journal, Dec. 8, 2015.)