What private company CEOs want from their boards, Seth Goldman of Honest Tea, and private company governance appointments and news.
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Honest Tea: Seth Goldman on Great Taste and Good Governance
The success of Honest Tea owes much to its initial board of directors. That’s according to founder and “TeaEO” Seth Goldman, who outlined during the Private Company Governance Summit 2015 how he took his company from a start-up out of his own kitchen to eventually turning it into a multi-million dollar enterprise.
Goldman co-founded the company with his college professor from Yale, Barry Nalebuff. It was a two-man operation that they eventually parlayed into a multi-million dollar sale to Coca-Cola with products now featured in over 100,000 stores across the United States.
The idea originated after Goldman found himself wanting a satisfying beverage after exercising, but the products on the market were often too sugary, high in calories and did not adequately quench his thirst. He wanted something that had enough calories to satisfy without overwhelming him. So how did they take this idea to brew healthy, organic drinks into a fruitful business.
First came the investors, and then he needed to create a board.
As Goldman noted, the original investors were his parents, sister and Nalebuff ’s friends and family. In other words, people who they “wouldn’t feel bad about losing their money,” Goldman said.
Creating the Board
As the company was growing in its early stages in the late 90s, Goldman realized he needed to create a board of knowledgeable people with the right expertise.
“We needed a board to help us think beyond day-today survival,” Goldman said. “How do I make payroll? How do I keep up with production? You need people who have been in that hot seat and have felt the pressure.”
A big part of Honest Tea’s success was Goldman’s ability to recruit highly-qualified individuals for his board. He was able to bring on Mark Ordan, founder and CEO of Fresh Fields, who had expertise in the natural foods business. Goldman then wanted someone with experience with a socially responsible brand, and was able to recruit Jeff Swartz, the former president and CEO of Timberland. Next he wanted someone in the beverage industry, so he brought in the CEO of Saratoga Beverage Group, Robin Prever.
These three board members were very influential in getting the company headed in the right direction. Goldman credits the fact he had an aspirational, idealistic view of what business could be, plus persistence in recruiting such a talented and experienced board. Then in 2002, they brought on Tim Tenney, a second-generation Pepsi distributor.
The Role of CEO
With the proper people in place, it was time for Goldman’s idea to come to life where it would be a prominent staple in food stores across the country. As CEO, he said his job had three primary duties:
• Create an idea that makes everyone excited
• Bring right people on
• Have the right resources to do it
Goldman already had the first two taken care of. In the first 10 years of the business, they raised over $10 million in private equity. Fast-forward to 2007, and the company had $23 million in sales. Suddenly Goldman realized that he now had a different set of needs. The company was generating a lot of interest from national chains, however, it didn’t have the distribution to make it work.
Finding the Right Partner
Honest Tea was featured in 15,000 stores across the U.S. in 2007, but that wasn’t big enough.
“We knew we needed distribution,” Goldman said. “We needed resources for growth, invest in expansion, advantages around purchasing, being part of a larger buying group, access to markets we didn’t have access to, and to scale production.”
Goldman set up a meeting with Coca-Cola in 2008 and the popular beverage company was very interested in Goldman’s brand. An important factor for Coca-Cola was its desire to trend more towards health and wellness and social responsibility.
That year, Goldman sold 40% of his company to Coca-Cola and it was time to restructure his company’s board. He had seven members on his board, and that number was reduced to five when Coca-Cola came onboard. Coca-Cola held two seats on the board, allowing Goldman to maintain majority control.
With Coca-Cola in the mix, Honest Tea’s distribution grew from 15,000 to 100,000 stores nationwide. Goldman was able to reach scalability by moving to a new manufacturing plant and purchasing multi-million dollar brewing systems, allowing production to increase from 18,000 bottles to 500,000 bottles per day.
“It took production to scale without compromising the brand,” Goldman said. “Better consistency, clarity, better efficiency and better yield.”
The strategic partnership between Honest Tea and Coca-Cola was successful because:
• They brought in the right people
• Guided Goldman in the valuation process
• Offered big picture marketing
Goldman said the partnership worked because they were able to “offer something different than the other side doesn’t have, and respect what the other side is doing.”
Goldman sold 100% of the company to Coca-Cola in 2011 for over $150 million. Most recently Honest Tea was able to strike a deal with Wendy’s and is now featured in all 5,800 stores in the country. The original investors in Honest Tea made 25 times their original investment by taking a risk.
“Those who say it cannot be done should not interrupt the people doing it,” Goldman said.
Rob Chakler is an associate editor for Directors & Boards, Private Company Director and Family Business magazines.
What Private Company CEOs Want From Their Boards
What should private and family company CEOs expect from their boards, and how can the board help a CEO lead his or her company most effectively?
These were key questions addressed by a panel of private company CEOs at the Private Company Governance Summit 2015. These CEOs also discussed their working relationships with their boards and how their boards have been a guiding force for providing discipline, accountability, strategic guidance and expertise.
F. Douglas Raymond III, partner, Drinker Biddle & Reath, LLP, moderated a panel discussion with Julia H. Klein, chairwoman and CEO of C.H. Briggs Co.; Paul Bartelt, president and CEO of The Vollrath Group; and Keith E. Williams, president of Underwriters Laboratories, Inc.
“There’s no such thing as best practices, there is no playbook in private company governance,” said Doug Raymond. “There is no standard set of guidelines to abide by since every company is different and operates on its own standards.”
Finding the Right Balance
A key area is striking the right balance and alignment between family or management and the board to run a successful company. One of the most important aspects of this alignment, according to the panelists, was making certain that the family or shareholders, the CEO and the board are completely transparent, so that each knows what the others are doing.
“You have to understand the dynamics of the family, what’s important to them, what their long term financial goals are, and most important, what their long term family goals are,” said Paul Bartelt. “The objective of the family, CEO and the board is to have an open and honest conversation about what’s possible and whether you can strike a balance to meet those goals and commitments.”
Having people in the business work independently of one another is something that causes miscommunication and could cause tension throughout the hierarchy of the company.
If there is such a disagreement, or if the board is not fully briefed on what the CEO is doing, then it could lead to a negative reaction. Board members—whether they are from within the company or independent—want to feel like their opinion means something.
“You want to make sure (board members) are involved in the conversation and dialogue, like they feel like they have a chance to give their point of view,” Julia Klein said. “Even if the decision ultimately goes in the different direction, they feel like they’re part of the process.”
Keith Williams added, “You want the very best people on the board to have the skills that you need. And at the same time, it’s good to avoid bringing in board members who think they’re going to be management. That actually creates problems in the business.”
Other ways to increase the line of communication between the board and the CEO include:
• Have quarterly phone calls and meet individually before group meetings to ensure there are no surprises at the actual meeting.
• Make sure board members know they have clear-cut roles.
• Make sure the board is aligned in their strategic role.
“The most important thing is for the shareholders, the directors and management of company to have a clear understanding and agreement on what the roles and responsibilities of each are, and what the expectations are in terms of frequency of communication and interactions in the business. Then I don’t think you can go wrong,” Williams said.
“Quite frankly there are some board members that have phenomenal input and you have them on your board because they are most effective at a board meeting,” Williams added. “And you have some that you recruit for specific technical leverage. It starts on how you build a board, what you want your business to be and what your expectations are.”
Dealing with Disagreement
No matter what line of business you are in, there are bound to be disagreements between management and the board members on how the company should be run. When these disagreements arise, it is the CEO’s and management’s responsibility to create a strategy, and then it’s the board’s responsibility to execute that strategy.
Family business settings work a little differently. When dealing with a hostile family member or someone who just wants to disagree with everything and play devil’s advocate, it’s best to handle the situation outside of the board. Often times family members are the ones who know how to deal with other family members best, and there is no need to bring in an outside perspective on those matters.
“Directors and family members should have separate meetings,” Klein said. “It formalizes the structure. There’s no potential to have anything ‘behind someone’s back.’”
Appointing the next in line to take over for the current CEO is a very crucial part of any board’s role. But often, private companies aren’t exactly sure who that person should be.
To help with that process, our panelists suggested:
• Review senior management with the board to see if there are valid replacements.
• Formalize a program to help eventually pick the successor.
• The board should push the CEO to think regularly and formally about succession.
Each panelist had uniquely different experiences in dealing with succession planning. Some CEOs put together an advisory board to help with the decision; some have regular discussions with the board chairman seeking advice and counsel; others knew personally who they did and did not want to take over.
The Dysfunctional Director
What happens if the CEO encounters a dysfunctional director? Some companies, whether privately-owned or publicly-held, have a real problem confronting a problem director and finding ways to deal with him or her.
“Our board frankly kind of just lives with it,” Williams said. If your company wants to take a proactive approach to dealing with a dysfunctional director, board evaluations are a good place to start. “A board evaluation services those issues (of a dysfunctional director) rather quickly,” Klein said. “You need to ask, how do you think we did as a board? How well did you prepare? What can we do better? Then the board chair takes a look and evaluates those answers.”
Fiduciary vs. Advisory Boards
The topic of fiduciary boards versus advisory boards also was addressed during the panel discussion. The speakers discussed and the advantages and/or disadvantages of having either.
The key takeaways were:
• You should work towards having a fiduciary board to protect the company from risk and protecting the investment from risk. There’s a high level of gain to be had with that mindset versus just an advisory board.
• A fiduciary board can act as a buffer between ownership and management.
• You’re not able to attract great advisory board members if you are not able and willing to take advice from them. It will be very short-lived. The company really needs to take advice and act on it.
Rob Chakler is an associate editor for Directors & Boards, Private Company Director and Family Business magazines.
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
According to research from The Conference Board (in collaboration with Bloomberg and GRI), women continue to be under-represented in management positions despite the push for gender equality on boards.
Data shows that women only accounted for 22% of management positions among S&P Global 1200 companies.
The analysis by region suggests companies in Asia-Pacific and Latin America showed improvement.
According to a survey conducted by the Financial Executives Research Foundation, private companies reported a median increase in audit fees of 2.0% and an average rise of 2.7
The report examines responses from 220 financial executives, and audit fees reported by SEC filers of more than 7,000 organizations.
Private companies that participated in the survey paid an average of $254,740 in audit fees, with a median of $70,000.