January 17, 2018
What Private Boards Can Learn From Public Boards - Taking the Heat of the CEO - How to Develop a Diverse Board & Pick the Right Chairman
What Private Boards Can Learn From Public Boards
An interview with Dennis Chookaszian, retired chairman and CEO of CNA Insurance Companies, conducted by Roger Nanney, vice chairman, Deloittle LLP, and national managing partner of Deloitte Growth Enterprise Services.
Can you talk about your background?
I’ve had three careers. My first career was with Deloitte. I was with them for eight years in management consulting. About half of the work I did was technology systems work, half was accounting and finance work. Then I was with CNA for 27 years; CFO for 15 years; the president, CEO and chairman for nine years, then on the board until I retired.
My third career, which I’m doing now, is a combination of two things. I serve on the boards of many companies and I teach two courses at University of Chicago in the MBA program, and teach four of five times a year at two different universities in China and I also teach at a university in India. The courses I teach are corporate governance, related to both public and private companies and also not-for-profits.
I’ve served 13 public boards and 50 private company boards. When you serve on 60 different boards you kind of see everything.
We’ve all watched what’s happened in the public company environment with boards over the last decade. How has the private company board evolved over that period of time and to what extent has there been any mirroring with what’s going on in public boards?
The public company sector, from a governance point of view, has changed radically over the last 20 years driven, in part, by Sarbanes Oxley, which changed the whole control infrastructure. And shareholder activism is changing things such as proxy access. As that’s changed, it has spilled over a bit into the private sector because many of the people who serve on private boards have seen the impact governance has had and the benefits.
There are things you see that are quite different in the public sector, the issue of diversity [for example]. Go back 20 years and you’d find very few women serving on boards, and today the number is still below where it should be but is increasing.
And so the element of diversity, bringing in women and people who are ethnically and racially diverse, has improved the decision-making process in a very important way. I see that on the boards that I’m on. When you bring people in with those diverse backgrounds, board decision-making improves a lot.
That’s starting to take place in private companies but to a lesser degree, largely because there aren’t that many independent board members. In the private company sector, most don’t have independent board members. They have a few, but most of them don’t.
My suggestion in working with a lot of them is that the independent board member really helps. When you look at private equity firms, many of the boards that are backed by private equity firms do in fact have independent board members. The boards I serve on now, many of them are in that exact situation: I’m the independent board member for it. And they’ll look for people with industry expertise or functional expertise they need.
On board engagement with company management, have you seen the level of engagement change and is it applicable across the life cycle of a private company?
Definitely. The issue of engagement gets to this question of what really is a board and what function does it provide, public or private.
There’s an article I would recommend, one of the best things that I’ve seen on governance and how the board functions, written by David Nadler, who unfortunately passed way, in the Harvard Business Review titled “Building Better Boards.” (https://hbr.org/2004/05/building-better-boards) He points out five different types of boards: a passive board, a certifying board, an engaged board, an intervening board and an operating board.
A passive board is the old-style board where basically the CEO appoints his friends, somebody he plays golf with. The person comes in for an occasional board meeting, but he does what the CEO wants him to do.
A certifying board is one where you have members of the board, and they are fundamentally there to make sure the basics of shareholder governance are done, but basically they’re there on a compliance basis.
An engaged board, which in my judgment is a board where you want to be, is a board that is a partner to the CEO and helps the CEO.
An intervening board is one which is needed from time to time when things go bump in the night and the board has got to step in and take a more active role than they would ordinarily take. Some boards take intervening actions, which in my judgment are not so good, where the board intervenes in management actions rather than letting management do their jobs.
Finally, the last is the operating board. In private company situations a very significant number of them are operating boards with no distinction between the board members and management. They are all, in one way or another, in some operating position.
A definition I’d offer on what a board is and how it should work, if it’s functioning properly, is 'noses in, fingers out.' A board member should be very well-informed on what’s happening, should investigate things, should understand operations and controls — cyber is a big issue. But should stay out, keep fingers out and let management do their job. If it’s not being done right, you don’t do management’s job, you replace management. ■
Taking the Heat Off the CEO
The board’s role in compensation, succession and talent oversight.
Milton Pinsky, who recently stepped down as CEO of Banner Real Estate Group LLC, faced some drama when it came to setting pay for family members, but having a board oversee the compensation structure took some of the heat off him.
“I owned a majority from the outset,” says Pinsky, who founded the Northbrook, Ill., company with his brother and father in 1990 and is now executive chairman. “My brother and father were my partners. Part of the mission, right from the outset, was to make it possible to be an ongoing family business.” Pinsky’s brother-in-law joined the company as a partner in 1996.
The presence of an independent board, he explains, helped him when a family disagreement came to a head. The board was seated in 2005.
“One family member was unhappy with his compensation, and maybe didn’t understand fully the documents that were signed and put into place. We invited him to engage outside counsel or a consultant to advise him, to educate him.”
Because Banner’s independent directors committee determines all family members’ compensation, “we were really protected,” he adds. The disgruntled family member’s independent counsel explained to his client, “You just really don’t have any remedies other than executing your buy-sell,” Pinsky says.
The grievance “kind of came out of the blue,” Pinsky recalls. “Without the board structure, I think it would have led to a split. I think it’s something that will heal in time, as that individual realizes there are healthy mechanisms to express concerns.”
In companies owned by a family or a partnership, the CEO’s chair is the hot seat. Decisions made by the occupant of that seat are scrutinized closely, particularly when they involve succession and compensation.
An independent board removes emotion from these decisions and helps the company make the best choices. Two members of family firms — one CEO and one family director — along with a veteran independent director explain how it works.
Pinsky’s decision to establish an independent board was inspired in part by the experience of two friends of his who had left their family’s successful business because of family issues. He read up on board governance and discussed the subject with a family business adviser.
Today, Banner Real Estate’s board consists of four outside directors (the independent directors committee) and two family directors. The family also created a family council and a business governance committee to interact with the board and the business.
The independent directors committee of Banner Real Estate’s board has sole discretion to fire, hire, promote and determine the annual salary and bonus of each family member working in the business.
It was important to cede majority control to the independent directors, Pinsky says. If he controlled the board, “it would not serve the purposes that I wanted,” he says. “It would still be deemed that I was setting everybody’s compensation.”
The role of the family
In family-owned private companies, problems can occur in the absence of a properly structured relationship between the family owners and the board.
A lack of family governance and inadequate board oversight led to poor succession management at Menasha Corporation in the past, says Charles E. Shepard, a fifth-generation member of the Smith family, which owns Menasha. The company, based in Neenah, Wis., was founded in 1852 and has had independent directors on its board since the 1960s. Shepard is a director of the company, which provides packaging, logistics and marketing services.
“We started to experience problems as we transitioned from my uncle, who was our last family CEO, to his successor,” Shepard says. The company had three unsuccessful CEO transitions in a row, which “reflected, obviously, a failure on the board’s part,” he adds. The company struggled financially during this time.
“The family became very alarmed, naturally,” Shepard notes. “And at the same time, my generation was recognizing, ‘Hey, we’re starting to be in charge. Our parents are moving off the board; we’re starting to take their positions.’”
The fifth generation began meeting to discuss the role they should play with respect to the business. They engaged a family business consultant to help them with family governance. “We had a business that was trying to manage a family, and that does not work,” Shepard says. “The family needed to manage the family.”
The Smith Family Council was established in 2004. Shepard, its first chair, recently stepped down after 13 years as a council member.
“It’s been a terrific success,” he says. In its early years, the council focused on educating the family about family governance. Today, its primary mission is engaging the family, particularly the sixth and seventh generations.
How a board reduces drama
Margaret Pederson, vice chair of Xamax Industries and a director of Viad Corporation, shares an anecdote from her time as an independent director of Texture Media, a digital company. Investor groups joined the two founders, and the company experienced culture clashes between the tech entrepreneurs and the financial people. A strong operating executive with experience in the digital arena was brought in to serve as president.
“One of the founders had held that title in the past, so we were already juggling what the roles and responsibilities were, and what the strategy was,” Pederson says.
After the first year, disagreements arose between the co-founder and the CEO, and the board had to choose between the two. “The founder did leave the operating role, but stayed on the board, and the CEO took on increasing responsibilities,” Pederson explains.
“After you put the board in place, there is much less drama,” Pinsky points out. At Banner, “we have an engaged board,” he says. “A lot of major decisions are made on a consultative basis at board meetings. I really appreciate the fact that there’s four people who get to know our business better and better over time. It’s a great mechanism.”
Objective decision making
Empowering Banner’s independent directors committee to make decisions about family employees has prevented conflict, Pinsky says.
“My son is working in the business, and my niece is considering working in the business,” he says. The two family members understand that the successor was chosen not by Pinsky, but by the committee.
Non-family member Kent McCreedy, who had been Banner's COO, succeeded Pinsky as CEO on August 24. McCreedy joined the company as president in 2006 and was promoted to COO in 2015.
Pinsky says McCreedy initially declined a job offer at Banner. McCreedy had previously worked for a family business that “went bankrupt as the father and the son were screaming at each other in the office,” Pinsky says. “I think if we hadn’t created a board, we would have never been able to recruit him.”
The requirement that the independent directors committee must approve hiring or promotion of family members reinforces the message that these decisions are based on objective criteria, Pinsky says. When his son was seeking work at the company, the non-family hiring manager told the committee, “If his last name wasn’t Pinsky, I already would have hired him.”
The structure helps protect his relationship with his son, he points out. “My son reports indirectly to [McCreedy], who reports to the independent directors committee,” he explains. “If [my son is] going to either be fired or promoted, I’m supposed to hear about it after the decision is made and before they tell him, so I can debrief my wife.”
Because he’s removed from decision making affecting his son, he adds, “My relationship with him is just [as a] dad; I’m cheering him on. I found out about his raise and bonus from him.”
Talented family employees want to feel that they rose through the ranks because they truly deserved it, Pederson advises.
“The people who are really qualified want to be judged on their merits, and not on their name or their sex or their race or any other outside criteria,” she says. “In terms of talent development and succession planning, having a level and a fair playing field is really important.”
Developing future leaders
The objectives at Menasha, Shepard explains, were to create a process for assessing and developing promising leaders and to leverage the process to help the board fulfill its oversight role vis-à-vis developing talent, recruiting and managing executive succession.
The company’s current CEO, a veteran company executive who was promoted from within in 2009, takes the long view, “which I appreciate more and more every day,” Shepard says. “As he took office, he recognized that we were not doing a good enough job of building our talent and working on succession. He brought in a very smart, experienced and capable HR leader who started building a system that we have today.”
The company created standard measures of potential and performance based on a list of competencies that are assessed “in a very systematic and analytical way,” he adds.
Menasha developed three leadership programs for high-potential individuals at various levels within the organization. Semiannual meetings are convened to discuss succession management and talent development and to develop a plan for each high-potential executive and manager. Information on their progress is tracked via a talent management system.
Shepard says he’s heard from the company’s HR team that the ability to review a comprehensive data set facilitates better decisions. Industrial psychologists interview top executives, “so we’re really understanding them at a very deep and profound level,” he says.
During four meetings per year, the board delves deeply into CEO succession at one or the other of Menasha’s two operating companies. The board knows which of the top executives are likely to become CEO candidates. Directors also discuss potential career trajectories for the other executives, and who their successors might be. A “green/yellow/red” scorecard system makes it easy to identify which positions have a strong succession plan in place, which need more work on succession and which currently have no promising candidates.
Prior to the leadership transition at Banner, a portion of nearly every board meeting was devoted to succession for the COO position, as well as “opportunities over the next several years to add bench strength, to potentially have an internal candidate to be the third CEO sometime down the line,” Pinsky says. Similar discussions focus on other key positions in the company, he adds.
NextGen engagement efforts
Family business leaders must ensure that the next generation is well prepared. That's where family governance comes in.
At Menasha, the family holds an annual family gathering. While the gathering has an educational component, the primary purpose is to strengthen family bonds and secure the connection between family members and the company.
“We [want] people to enjoy each other’s company and be thinking long-term about where the business is headed and where the family is headed,” Shepard says. “People have been terrifically responsive. I think it’s a testimony to the power of family governance.”
Pinsky says that when his family observed a lack of engagement among its next generation, they decided to set aside a percentage of company distributions for a donation to a charity chosen by the younger generation in a collaborative effort. After the program had been in place for about five years, the younger members began to express curiosity about why the set-aside amount was variable instead of fixed. This sparked greater interest in the company, he says.
A key to uniting family members is to develop a culture of openness, and good family governance bolsters that, Shepard says. “If you have a structure that feels democratic and feels transparent,” he explains, “you start to build trust, and create an atmosphere of trust. And that’s really important.”
Even with such a structure, Shepard notes, grievances will arise here and there. In such cases, family leaders should reach out to those who appear to hold a grudge and make an effort to try to resolve the issue.
“If there’s a lot of conviction about the fairness of the process, the transparency of the process,” Shepard says, “you’re going to have fewer hard feelings.”
By Jennifer Muntz and Andrew Keyt
Our natural tendency is to surround ourselves with people whose backgrounds, experiences and viewpoints are similar to ours. But in order to achieve the true power of a board of directors, you must take a different approach when considering director candidates.
Boards hold management teams accountable for developing and executing a dynamic strategy. The strategy must be aligned with the values and needs of the family shareholders and must address the competitive challenges faced by the business.
Research has shown that boards make better decisions, leading to higher company performance, when they include independent members as well as directors who are diverse in terms of gender, ethnicity, skill sets and opinions.
Diverse boards are in the best position to help a family company with strategic planning, succession planning and managing family dynamics.
Here are some additional advantages of a diverse board.
• It provides greater objectivity and a wider variety of perspectives. Directors of wide-ranging backgrounds ask better questions and are more willing to challenge the prevailing view and offer new insights.
• It makes better decisions on behalf of all stakeholders.
• It eases the difficulty of working through sensitive issues that can divide a family, such as succession planning, executive compensation and dividends.
• It is better able to ensure that the needs of the family are met, the business strategy is optimal and the family’s interests are protected.
• It mentors the successor or next-generation leadership group and introduces them to role models and influential business leaders.
Despite these advantages, many business owners fill their boards with family and friends. Family members may become directors without understanding the role and its legal responsibilities. Many lack the knowledge and skills required to be an effective overseer of the company’s strategy.
Sometimes, family owners who work in the business dominate the board. When this happens, often the board fixates on day-to-day operations instead of focusing on strategy. Family owners who don’t work in the business may think their role as a director is to represent their family branch or their generation, overlooking their legal and fiduciary responsibilities to all shareholders of the company.
It’s also unwise to name your friends or advisers, or others who have a long-term relationship with the family, as directors. These individuals tend to be ingrained in the family culture and thus act more like insiders. They often are reluctant to challenge a strong CEO or family leader.
Boards with a preponderance of insiders or friends are highly susceptible to groupthink. The desire for harmony and conformity leads to flawed decision making. Members of these boards go along with the strongest voice in the room even though their gut tells them otherwise.
Things to consider when seeking board candidates
• Look for individuals you don’t currently have access to. You shouldn’t put your attorney, accountant or banker on your board; these people have a financial relationship with you and thus are not independent. It’s also not advisable to appoint a member of your YPO group to your board, since you already have access to YPOers at the group’s regular meetings.
• Find candidates with broad business skills and unique experience that will help you tackle current strategic challenges and those that are coming your way. For example, if your company will be going through a CEO transition or restructuring in the next five years, find someone who has led a company through that strategic challenge. If you are planning acquisitions, seek out someone who has had that kind of experience in business. Reach across industries to find candidates who have achieved goals similar to yours.
• Look for gender and ethnic diversity wherever possible.
• Business skills are important, but character and personality are also critical variables. A director may have all the right business skills, but if that person can’t work productively with other board members and management, and can’t challenge people’s thinking in a productive way, he or she could be a disruptive force and create distractions.
• When building a relationship with a candidate, assess his or her enthusiasm for and interest in both the business and the family. A candidate who is authentically excited and eager about the family and business can be more powerful than a candidate who is “a professional board member” or whose main selling point is that he or she would bring prestige to the board.
The role of the chairman
When thinking of board diversity, also consider the importance of the chairman’s role. An effective chairman encourages diversity of viewpoints and healthy debate.
Typically in family businesses, a family CEO becomes the chairman of the board upon his or her retirement. Many families are in favor of this because they have already established trust and know what to expect from this person. From the family’s perspective, the move from CEO to chairman represents a minimal change.
In other cases, a family member is selected as chairman based on the individual’s qualifications, career experience, track record and leadership skills. A family chairman can ensure that the family’s values and vision are represented in the business’s strategy and direction. Many families who plan to have a family chairman in perpetuity tend to be more willing to hire top non-family professionals to serve on the management team, rather than filling the C-suite with family members.
On the other hand, a family chairman who lacks the necessary qualifications or leadership skills can be disruptive. It’s tempting for a family chairman to pursue an agenda that serves the interest of his or her own family branch rather than the interests of all the shareholders.
Increasingly, we are seeing families elect non-family members to chair their boards. These non-family chairmen offer skill sets and experience not found inside the family pool and thus are better able to address the strategic challenges facing the family enterprise.
An independent chairman can critique a family CEO’s performance or personal style in an objective way. And a non-family chairman, who provides a third-party perspective during times of conflict, can help ease tensions and build bridges between family factions. Greater family unity results in stronger emotional connections to the business.
A non-family chairman must have the confidence and credibility to hold family managers accountable. The chairman must also be empathetic and understand family dynamics.
If you’ve decided it’s time to search for a non-family chairman, the first place to look might be within your current board. Your independent directors already understand your business and the competitive landscape, your strategic plan, your family and business history, and your family culture and relationships.
Things to consider when seeking a board chairman
• The chairman must have the skills to work with management and facilitate an effective board process.
• The chairman must be trusted by the family and by management.
• The chairman’s values must be aligned with the family’s values. For example, if the family is conservative and the chairman is a risk taker, friction is likely to result.
• The chairman must have the skills to foster family unity and cohesion.
• The chairman must have high emotional intelligence. He or she must understand the complexity inherent in all family enterprises and the dynamics of the specific family ownership group.
In order to develop a strategy that will enable your business to last for generations, it’s essential to form a diverse, independent board. Directors who bring objective viewpoints and a broad range of skills and resources can greatly improve communication and decision making. They also can help develop family members for future leadership. The result will be better business performance, which will lead to a satisfied family ownership group.
The best time to tackle a challenging project like diversifying your board or removing an unproductive director is when things are going well in your business. The tough work a family does during the good times enables them to unite, persevere and prevail during the down times.
Jennifer Muntz is the executive director and Andrew Keyt is the president of Family Business Network-North America, the North American chapter of an international learning community for families with medium-sized to large businesses (www.fbn-na.org).
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