âLanse Crane on the value of an independent private company board, Q&A with B. Joseph White, latest private company director appointments and private company governance news.
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Private Company Q&A: B. Joseph White
[Editor's note: the following is an installment of our Private Company Director Q&A series. We will continuously update this section with responses from different directors of private companies covering a wide range of topics.]
B. Joseph White
James F. Towey Professor of Business and Leadership; President Emeritus, University of Illinois
Tell me a little about your board experience with privately-owned companies. Is/were the board(s) fully independent, partially independent? Does the board have real power?
I have been a director of Gordon Food Service, one of America’s 40 largest private companies, for over 25 years. Another outside director and I helped the founders create governance arrangements to enable the company to thrive in perpetuity. I have written about this in my book, Boards That Excel (Berrett-Koehler Publishers, 2014).
The board of directors is a mix of family members and independent directors. Independent directors are in the majority. There is also a board of advisors that exercises control of the company.
Yes, the boards have real power and are not simply advisory.
What are your biggest challenges in executing your role as a private company board member?
Making sure that we live up to the high expectations and standards established by the founder. Ensuring the company is operated for the very long term. Ensuring a merit system for promotion and executive appointments while welcoming into the company family members who can maintain the family’s values and contribute to the company’s growth and development through their leadership.
Your most rewarding experience while on a private company board?
Seeing the company grow, develop and success beyond even our high hopes. Working with a family I like and respect. Helping handle the tough issues as they arise.
What are your top 3 reasons to not join a board?
- You don’t admire and trust the ownership/leadership/
- You won’t be able to make a difference.
- You’re not willing to spend the required time.
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.”
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Dell has kept quiet on its financial and business progress since exiting the stock market a year ago and not having to report to shareholders.
Celebrating its anniversary of becoming a private company, Dell decided to publish a report on its performance, which included a letter from Michael Dell, figures and video messages from key executives within the company, according to a Forbes article.
Dell’s chief financial officer, Tom Sweet, was pleased with how things are going.
"We're incredibly excited about the solid progress we made during our first full year as a private company," he said. "Your growing appreciation for Dell solutions last year was a key in strengthening our financial performance. We were able to accelerate our debt pay-down and close the year with a strong balance sheet and saw an uptick in our credit rating. That's important because it enhances our ability to make the investments in innovation that provide you more value.
"We're committed to delivering the IT solutions to help you achieve your goals, whether you're an individual or part of a larger organization. From investing in open networking and channel relationships to investing in research and development and customer-support capabilities, we're working for your long-term success and ours."
In the report document, Dell claims to have committed an extra $125m in "enhanced incentives and investments" for the channel over the past year.
SFX Entertainment has reached a $774 million deal for owner Robert F.X. Sillerman to take the company private, less than two years after its initial public offering, according to a New York Times article.
Sillerman, the chairman and chief executive who controls 37.4% of the company, will acquire the shares he does not already own for $5.25 in cash – 50 cents a share higher than Sillerman had initially offered in February, and a 42 percent premium over the share price on Feb. 24, the day before hits offer was made public.
The deal values SFX at less than half its price when the company went public in October 2013 at $13 a share. The company reported $52 in revenue and nearly $42 million in net losses for the first quarter.
Perspectives for Mid-Market and Privately Held Companies: a closer look at the issues that matter most
Can social media give your mid-market company a competitive advantage? Find out on June 16 at 11:30 a.m. ET when Deloitte Growth Enterprise Services leader Roger Nanney hosts Virtual Perspectives, an in-depth roundtable live streamed on Deloitte’s YouTube channel.
Liz Claman, anchor of Countdown to the Closing Bell, will moderate a discussion on social media and its implications for the middle market. Scheduled panelists include:
- Patrick Cassidy, New Balance’s global digital brand marketing and social media leader
- Carlos Dominguez, President and COO of Sprinklr
- Doug Palmer, social business practice leader, Deloitte Consulting LLP
- When: June 16, 2015
- Where: Deloitte’s YouTube channel.
- Time: 11:30 a.m. ET
60 second survey: Social media and the mid-market
This month Deloitte asked US mid-market professionals for their opinions regarding social media.
Click here to view the results.
The Nasdaq OMX Group Inc. launched its capital marketplace for private companies, the Nasdaq Private Market. The new market joins the likes of SecondMarket and SharesPost as places where non-public companies may list shares and raise capital.
According to the announcement, “NASDAQ Private Market will provide qualifying private companies the tools and resources to efficiently raise capital, control secondary transactions, and manage their equity-related functions.” Securities-related services will be offered through an SEC-registered alternative trading system, NPM Securities, a member of both FINRA and SIPC.
In order for a company to qualify for a listing on the new marketplace, it must meet one of five requirements:
- The company must have received funding of at least $30 million in the past two years and have an enterprise value of at least $50 million.
- Total assets and annual revenue must be at least $50 million each.
- Annual net income must total at least $750,000.
- Shareholder equity must total at least $5 million, and the to have a two-year operating history.
- A listed company could have a sponsor that is a “recognized financial investor(s) with a track record of successful venture investments.”