September 12, 2018
Top Private Company Boards Are Change Agents Driving Success - Fixer-Uppers: Re-building company value to prepare for sale - G overning Executive Pay Strategy in an Era of Business Transformation
Top Private Company Boards Are Change Agents Driving Success
Company owners and managers value their directors and rely on their guidance, expertise
Private companies are often able to navigate transitions, everything from the death of a leader to major acquisitions, thanks to strong board governance.
Nominations are open for the 2019 Private Board of the Year awards.
Attend the Private Company Governance Summit June 5-7 2019 at the Fairmont Washington, D.C., Georgetown to learn from previous Private Board of the Year winners.
The six top private boards, recognized by Private Company Director, Directors and Boards and Family Business magazines as governance innovators, have directors who are change agents, providing company owners and executives guidance through transformation. They are valued by management for their forward thinking and expertise, bolstering stability and support to take companies to the next level.
Whether fiduciary — boards that protect shareholders by voting on binding decisions for company management — or advisory boards — more informal boards that have no binding regulatory role, the nominations for Private Company Board of the Year put trust in their directors to guide their businesses through whatever changes they faced.
The winners range in size, from under $100 million to over $1 billion in revenue. They are family and private equity businesses with advisory and fiduciary boards.
This year’s winners — The Larry Miller Group of Companies, Richmond Baking, Sasser Family Holdings, South Central Inc., Vertex Inc. and Vets First Choice — prove that governance comes in many forms at any size.
Here’s an overview of the winners.
The Larry H. Miller Group of Companies
Fiduciary Board, over $1 billion
The Larry H. Miller Group of Companies has grown from a single Toyota car dealership to a $5.5 billion business in just under 40 years. Married couple Larry and Gail Miller bought that first dealership together and when Larry died in 2009, Gail wanted to keep the company within the family in perpetuity; a goal that was shared by Larry who was a proponent of good governance.
Several years after Larry’s passing, Gail found a note Larry had written saying: “Need to organize an independent board of directors. “ That prompted Gail to seek out the help from a host of sources, including the National Association of Corporate Directors (NACD). The board was announced in 2015.
“We’re a pure entrepreneurial business, but the business is too big to manage without some help— and that’s why we formed the board,” says Gail, who serves as chairman of the company’s board. “We had 80 companies under one umbrella, but no formal board. We had committees of senior managers, but no board, to help lead coordination between the businesses.”
The board is made up of four family members, one employee (the CEO), one former executive of the company, and six independent directors.
Currently, the business’s areas of focus fall into five primary areas: automotive; sports and entertainment; finance and insurance; real estate; and philanthropy. The company also owns the NBA team the Utah Jazz.
“We bought the Jazz in 1985 for $22 million — worth north of a billon now,” Gail says. “But we didn’t buy it to sell it, and there were many questions from the community after Larry’s death on what might happen to the franchise. So we put our sports into a legacy trust, with some other companies to provide continuing financial support, with the intention that the Jazz will stay in Utah in perpetuity.”
The Larry H. Miller Group of Companies governance highlights include:
- Succession planning and a family employment policy that drove the hire of a corporate human resources manager to build corporate culture and develop leaders across the company.
- Quarterly board meetings and an annual management meeting.
- Regular board evaluations, conducted by outside experts.
- The use of outside experts to build the board and identify directors.
- Guidance of the board through disruption — AI, big data, possible self-driving cars. According to Henry Stoever at NACD, “They built a board to disrupt themselves.”
Sasser Family Holdings Inc.
Fiduciary Board, $100-$350 million
The board at Sasser Family Holdings Inc., has helped the company successfully navigate hiring the first non-family CEO, acquisitions, a complex international realignment, short- and long-term incentive plans and succession planning throughout the organization.
Sasser, founded in 1928 and is in its fourth generation, first established a board in 1960 as an all-family board, has evolved to three independent directors, three family directors, the non-family CEO and Fred Sasser, former CEO and executive chairman (his position ends at the end of 2018). There is also an “associate director,” a non-voting seat held by a family member chosen by the family council.
“We’re looking ahead,” says Bill Hudson, president of the H.D. Hudson Manufacturing Company and an independent member of the Sasser board. “We’ll have one of our board members terming out, and so we’re now going to start laying the groundwork for starting up our process for recruiting our next independent director.”
The company has an exhaustive selection process identifying key skill sets and aligning those skills to where they want to take the organization in the future. “We’ll identify the gaps and that’ll help us write up the specifications for our director recruitment,” Hudson explains. “And then we’ll go out to the marketplace in an organized fashion to find that.”
Shares of Sasser are 100%-owned by family members. The shareholder group consists of about 15 adults and 10 minors (some of whom are owners via trusts).
The enterprise consists of the holding company and seven business units: CF Rail Services, CFCL, CF Asia Pacific, Union Leasing, Express 4x4 Truck Rental, Xced Aviation Services and NxGen Rail. The subsidiary businesses provide rail and vehicle transportation equipment solutions, including asset leasing, repair and maintenance, fleet administration management and rail technology services throughout North America, Australia and Europe.
Sasser Family Holdings governance highlights include:
- Sasser is in the midst of a multi-year process to professionalize the company and its governance. This has included the creation of a family council and family documents (mission, values statements, family bylaws, shareholder agreements) and development of family education.
- The corporate board has evolved from a three-person, all-family board (established in 1960) to its current structure.
- The next evolution, to a majority-independent board, is now in the planning stages.
- The board worked with a consultant to institute a high-performance board system, which introduces a higher level of accountability at a strategic level. All board members and management have embraced the system and the performance shows up in the bottom line.
- Evaluation of the full board, individual board members and committees is ongoing. A third party conducts the evaluations.
Fiduciary Board, $100-$350 million
Vertex, Inc., providers of tax technology and services, has seen a host of benefits from good governance, including prompting more accountability and strengthening succession planning.
In 2000, the three children of Vertex’s founder, Ray Westphal, bought the company from their father and immediately sought to create an independent fiduciary board.
“We knew the value of creating a board and filling it with folks far wiser and experienced then ourselves,” says Jeff Westphal, former Vertex CEO, co-owner and board member.
“Over time,” he continues, “our independent directors have been invaluable assets to us, be it through objectively evaluating and contributing to company strategy, insisting on accountable operational/financial performance, executive succession planning a way for our first non-family president in 40 years, and all the joyful, stressful, complicated and intricate issues that arise for family's that co-own a growing business in a dynamic market together.”
Finding directors with diverse talents, even if they were outside of the Westphals’ network, was important to the siblings. It was also was a top priority to set the board in place as soon as possible after taking over ownership.
The decision to build a board wasn’t to mediate any conflict between the owners; the family wanted good governance in place to prevent conflict.
“They’ve really taken the view they want to treat this as a public company in terms of governance,” says former PwC partner Ric Anderson, one of Vertex’s independent directors.
Vertex provides cloud-based and on-premise solutions that can be tailored to specific industries for every major line of tax, including income, sales and consumer use, value added and payroll.
Vertex Inc. governance highlights include:
- Non-family directors who can outvote the three owners.
- Active audit, compensation, nominating/governance committees, with formal charters, all chaired by independent directors.
- Five board meetings annually.
- An outside expert contracted to do board evaluations every three years; internal evaluations done annually.
- Strong compensation for directors to attract top talent and experience.
South Central Inc.
Fiduciary Board, under $100 million
South Central Inc. has had a fiduciary board for 30 years. The family office and investment company owned by the Engelbrecht family was initially rooted in media and telecom, but the company’s investments continue to be wide-ranging in spaces such as healthcare, consumer package goods, technology, banking, real estate, HR/PEO services and contracting services.
John David Engelbrecht pushed the family to set up strong independent governance three decades ago. John David was an experienced public board director and brought that expertise back to the family business, while “melding it with our family values all those years ago,” says his son, John P. Engelbrecht who is CEO of the company. His dad is president and chairman.
What started with two independent members now has five with only two family members on the board. Each director meets independent standards and has shown leadership as a CEO, CFO or managing partner in various industries.
The board is “independent to a fault,” says one independent board member, noting that company executives and owners are transparent and willing to be challenged by the board.
Independent director Andy Goebel is an expert in governance, having served on other boards and as a corporate secretary. Goebel, who served on another board with John David Englebrecht, was chosen because of his financial expertise.
Goebel says the family takes their governance cues from public boards. “They see value in the governance model,” he notes. “John David, being an independent member of Vectren, knows board members need to be independent.” (Vectren is an Evansville-based utility company.)
South Central Inc. governance highlights include:
- Although the family owns 100% of the business, directors are expected to and certainly act like they are held to public company standards.
- The board approves the auditor, executive compensation and any investment of over $1 million to hold the CEO accountable to high standards.
- They have created and approved a CEO disaster recovery plan in case of the CEO’s sudden death.
- The company has a shareholder vision statement and an investment focus document to give the board a clear direction.
- Seeking experienced board members with a large breadth of skills.
Vets First Choice
Fiduciary Board (Investor-owned/Private equity) $100-$350 million
At Vets First Choice, a private equity backed provider of technology-enabled healthcare services for companion and equine veterinary practitioners, the board is involved in all aspects of strategy.
The company is owned by a group of investors, but the board is not strictly made up of shareholders. The board includes two founders/investors, two independent members and six investor members.
“The board started with five members, then grew to seven and now nine. It’s not uncommon for investors at this stage to want to be proactively involved,” says David E. Shaw, chairman of the board. “Our first investor, Polaris, is still on the board, Terry McGuire.
“We added independents right away. Ted McNamara — he had the financial background to head our audit committee. We knew him as both a CEO and CFO. Two other VCs came in when their investments were made. We seek investments from firms that would add value — and one value is serving on the board.”
The private-equity-backed company is now expanding geographically to China.
The board’s impact has been strong on strategy, especially in the acquisition and partnership strategy, of the company. The independent directors on the board, in addition to contributing to this strategy, also serve to protect the interests of management to ensure that over dilution of management incentives doesn’t occur.
Vets First Choice governance highlights include:
- The board is deeply and granularly involved in the strategy of the company.
- The board’s performance evaluation resulted in a recalibration of committee responsibilities.
- Diversity on the board ensures that members think about the company, as opposed to just their own investments.
- Independent directors were added for specific areas of expertise, and are treated equally with investor board members.
- Independent directors also represent the interests of management shareholders, to ensure their ownership is not diluted as additional investors are added.
Advisory Board, under $100 million
Richmond Baking, one of the oldest family-owned cookie and cracker bakery in America, went through a “significant reorganization” two years ago when the chairman of the board and patriarch, Jim Quigg, died.
And it was the board that helped the family and company through the painful loss.
“I cannot imagine how difficult my father’s passing would have been if we didn’t have a board,” says Bill Quigg, Jim’s son and CEO of the company. “The six of them became dads to us. They took their loyalty and dedication and just stepped up, and took on that leadership role for our company.”
The family put an advisory in place about 10 years ago with six non-family and two family members.
The one business decision Bill said really showed the board’s value was closing down their struggling Oregon operations.
In 2010, Bill found himself stretched thin, especially having to travel to keep tabs on their only West Coast facility. “Frankly, I had to swallow my pride,” he explains, because he started that business in 2000 and it was supposed to be his mark on the company. The company flew the board out to Oregon to see the operations and that solidified the board’s decision to advise him to pull the plug. “I wasn’t upset with them, but I needed them to help me push that last 1% of the decision,” Bill says. “They provided the catalyst.”
Founded in 1902, the Quigg family now operates three state-of-the-art baking facilities in Indiana and Georgia.
Richmond Baking governance highlights include:
- A very involved board that has evolved over time.
- Formal board structures.
- A board with the ear of the CEO and the family owners.
- Board assistance in major management decisions.
- The board is well-compensated.
By John M. Collard
Valuing a company is the easy part; creating that value in the first place so you can measure it is a more formidable task.
It can be done, however.
Take a $59-million systems integration and networking firm serving the federal government. The owner of the company, which had 660 employees, wouldn’t delegate any responsibilities. The firm had a 42% turnover rate, hadn’t won a major contract in four years, was losing money and had no cash.
Some of the strategic recommendations included:
- Build management and business development teams to operate in new competitive commercial and international marketplace.
- Increase sales-win rates.
- Reposition company in new areas to get greater value for the owners.
The outcome: The firm started winning competitive bids. Following realistic growth expectations of $120 million in five years, with 40% to come from commercial market, the company was sold.
Investing in under-performers and rebuilding value has become a more acceptable practice. It can be very profitable if you know what to look for and how to execute, as many buyout firms and investors are finding out.
To do this, you must:
- Ascertain if a company can be turned around.
- Know how to fix the problems.
- Avoid paying down debt in lieu spending on growth.
- Obtain at the right price.
- Manage the turnaround.
- Sell at increased value.
This is simply stated yet tricky to implement. But there is a process to provide positive results.
This niche market allows investors to capitalize on initial positive results, which may have become stalled investments.
Seek enterprises with a critical capital shortage, with future potential. Selectively acquire companies that can provide quality products at competitive prices that are severely undervalued due to ineffective management, and/or lack of market direction and unacceptable penetration. There are opportunities that require capital, yet lack competitive market experience and essential managerial skills where the economy is masking the real situation. Take advantage of distressed-level asset pricing and invest cents on the dollar in exchange for large returns. The infusion of capital put into the hands of a leader and guiding board with a sound strategy and a return-on-equity goal in mind can be a powerful motivator.
The key to returns from investing in under-performers is to build properties future buyers want to invest in. Build an enterprise with the sole purpose of selling it at maximum value — concentrate on exit strategies from the start.
Provide what future buyers look for:
- Consistency of businesses that create value.
- High probability of future cash flows.
- Marketing-oriented management team.
- Track record demonstrating ability to sell and compete, develop, produce and distribute products, thrive and grow.
- Realistic return potential from their fair entry valuation.
There is great value in shining up or rebuilding an entity and setting it on a path toward long-term growth — then making your exit.
There are many buyers who accept lower return rates for stable growth and shy away from underperformers until they have been fixed. Leave some future enticement for your buyers.
Whether you invest in a new entity or a portfolio property gone bad, the recovery cycle is much the same. This cycle starts with a mismanaged slide into trouble, determination of viability and investment, renewing the entity’s health, and ultimately selling the property.
All troubled entities reach that state through a progression of mismanagement — from officers to board members to investors. The current owners have the opportunity to repair the damage and rebuild value in the company. When the entity is at a precipice there is opportunity. Owners, lenders and other stakeholders will have little choice but to bargain and deals can be made. Be cautious however: Many wait too long and while doing so allow the value to deteriorate completely. Avoid the pitfall of investing in an insolvent company with no fix available. As surprising as this sounds, many do.
Determine turnaround viability by truly understanding the two or three things wrong within the company causing its breakdown. Don’t be fooled by symptoms, and never listen to current senior management; if they knew what was wrong they should have fixed it before now.
Make certain you have solutions to fix the real problems that no one else has used, perhaps because you can bring new non-cash resources or applications to influence the revitalization. Take advantage of mispriced material inputs, labor, assets or capacity and intellectual property. The answer is never, “just add cash,” and always requires new leadership guidance to implement change.
Negotiate acceptable terms that allow for substantial upside when your work is done. Now you can invest. If there are no solutions, creditors won’t cooperate, or the price unrealistic, go on to the next deal. Finding good turnable deals is fundamental to success.
There must be a successful turn before the entity can be sold. Never leave this to chance. Always take active control of the entity — passive investing, if managed by prior management alone, is like a placebo and you will lose your investment. Passive positions are only acceptable if they contribute to an investor pool with an active lead participation. New leadership is a key.
Many equity investors approach an under-performer in their own portfolio by applying strictly financial considerations. These same financial investors compound their problems when they take control of their company to determine salvageability or whether it’s a candidate for sale or liquidation. When sold, which is often the case, they write-off their investment. The scenario reveals a fundamental problem: Purely financial consideration is not enough when an operational or revenue-driven turnaround is required. While many investors have run financial or investing institutions, few have run companies as well and are ill equipped to do so. This certainly leads to opportunity for those who can run them.
Substantial value is derived from investors with senior operating leadership experience in their background. They can determine whether one strategy or another can affect the revitalization, and why others didn’t work in the past. Many private equity firms and hedge funds are adding operating executive (CEO) talent to complement their managing partners.
Thomas Paine said, “Lead, follow or get out of the way.” When there is an underperforming entity, it is time for existing management to get out of the way. They guided the company in this mismanagement slide. Why allow them to further complicate the situation?
Process of recovery
There is a process to guide an entity through corporate renewal. It involves utilizing a transferable set of skills to revitalize the property and restore it to a sale-worthy state. Then sell the entity and realize returns.
Bring new leadership. Focus on value creation and guide the company to a new plateau. Your advantage is that of an objective focus, untarnished by the situation at hand. You bring a perspective that does not reside within the company because the players lack experience with their new situation. You are the teacher, the stakeholders are the pupils and together you rebuild in a new direction. You effectively manage “change control.”
Install a CEO or board with transition experience in value-building situations. This leader will demonstrate expertise in:
- managing crisis, transition, and rebuilding processes;
- shaping business strategy and financial structure;
- developing management talent, building caliper teams, utilizing and growing existing resources;
- growing sales and market share;
- maximizing return on capital;
- linking management performance to ultimate goals;
- developing incentive-based compensation programs.
This leadership must get directly involved in making decisions to achieve the ultimate goal — sale at increased valuation. They must be held accountable for performance and timely results. Most importantly, they must get things moving. On the revenue/sales side, look at where and how revenue is generated and keep it coming. On throughput/production, get product or service out the door. How else can you bill for it?
The final step to complete the turn is to hire a marquee manager to lead the enduring team. This permanent team adds to the value equation.
Set strategy. Your investing goals are a shorter-term high multiple return (for the risk) while allowing ongoing longer-term returns for the buyers providing you an exit. Implement long-term strategies which will survive that exit.
While situations differ, one essential strategy is to drive revenues; growth cannot occur without more sales. The strategy must address the problems plaguing the company and provide a roadmap to revitalization. If all you can do is think of strategies tried before — don’t invest.
An effective strategy is key to implementing change. You must establish a new vision, distill this direction into concrete goals and objectives and create a guide for everyone to follow. Rebuilding momentum is critical to success.
Build a quality management team. The value of a company increases sharply with a strong, permanent, credible team who can demonstrate their ability to produce consistent sales, profit and cash flow results. Establish continuity in the organization to allow everyone to expect orderly change and opportunity.
Capitalize on available under-utilized human capital — those remaining middle managers. Chances are they are dedicated to the company and its success. Guide them to their next level, and they will take the company the next big step.
Acquire new business/sales. There are only two ways to increase sales — sell new products to existing customers or sell existing products to new customers. Most under-performers have forgotten, or never had, the basics of marketing and promotion. Clearly promote what your products and services can do for your customer to satisfy their needs; differentiate why your product stands apart from the competition.
Become market-driven, adapt to changing conditions and improve your competitive position. Deliver only what customers are willing to pay for.
Establish a sound capital structure. Create reasons for investors to invest and buyers to buy. A sound strategy with a viable marketplace, efficient delivery and production vehicles coupled with a cohesive management team will entice the investment community. Securing new capital becomes much easier when investors see high probability of return and a viable exit strategy.
As important to infusing cash for working capital needs is to make certain cash won’t be diverted into past commitments. Establish relationships with creditors so they will work with the new management team — give them upside when the turn is complete. Consider a “creditor’s committee” approach to keep them plugged in and participating. Pre-packaged bankruptcies are also available to ensure cooperation. You can always purchase assets out of bankruptcy to ensure a clean structure, a strategy being utilized more often as buyout funds get more comfortable with the process. In many ways this approach can be considered alternative and complimentary financing.
Implement processes. Use systems and processes to drive the business and control the day-to-day environment, which allows management to run the critical elements of the company. Many managers waste time on tasks where results would be essentially the same, managed or not. Focus on the important things — controlling cash and costs, increasing sales and enhancing value creation. Manage these.
Processes define guidelines and expectations — watch for the benefits derived from communicating what is expected. This will re-establish delegation of authority and expectation to those who can turn the events of the company. When results are recurring this stimulates value.
Nurture resources. Leverage all resources —people/facilities/advisors — to complete the turn. Set up an incentive structure for employees awarding only when they accomplish the goals set forth in your long-term strategy. A robust incentive structure shares the risk and if it’s successful, all will gain. If not, you’re not subsidizing poor performance. Your incentive for investing is returned when the sale occurs. Their incentive should be based on performance that will take the company beyond its sale. After all, they are a key asset your buyer is looking for.
Exit. Know when to “cash out.” The greatest return on investment comes when the turn is complete and the company is ready for the next tranche investment to fund growth. At this point there are many new investors who will want to participate.
John M. Collard is chairman of Annapolis, Maryland-based Strategic Management Partners, Inc., a turnaround management, asset and investment recovery firm.www.StrategicMgtPartners.com.