Great board leadership means knowing your role, collaborating with management and more.
Time sure does fly.
Twenty-eight years ago, I was asked to become an independent director of a third-generation, family-owned manufacturing company based in the Northeastern United States with two product lines and three plants. The company had four shareholders. Two brothers ran the company and owned most of the stock; their sisters were the two minority shareholders and did not work in the business. I was young at the time. I had developed a very good working relationship with the brothers after leading a successful consulting project that resulted in substantive changes in the business and shareholder value.
They asked me to be on their board. How much fun will that be?! I was clueless about what being a “good director” meant. They said, “Don’t worry about director liability. We won’t sue you!” (Phew, they didn’t.)
Less than two years later, I became the chairman/CEO of a troubled, private-equity-backed Midwest manufacturing business, which we’ll call XYZ. More fun! I went from the frying pan into the fire. This relationship also started with a consulting project. The PE group said to XYZ management, “Jim will be arriving at the company on Monday to work with you to improve the business.” There were many problems with the company, including a declining industry, tough competitors, demanding customers, loans in default, union/labor unrest, you name it. And, surprise, the management shareholders and the PE group had a contentious, fractured relationship.
Fortunately, XYZ’s outside company counsel was effective, supportive, smart and experienced. He knew what “fiduciary” meant and was a great mentor to me as we all navigated the choppy waters of a turnaround.
Fast-forward to today: 10 more board roles – both fiduciary and advisory – have proved that I still don’t know Âeverything about being a good director. The difference is that I’ve seen and experienced good governance, having served on and observed well-functioning boards with a variety of strong shareholder/management teams.
One of my rules for being a good director is, “Don’t pontificate.” Since I try not to do that in board meetings, this is my chance to hold court on several topics related to private company governance.
Being grounded: The foundations of an independent director
1. Be independent – and stay independent. There seems to be a recurring theme discussed in private director conferences and educational settings that links the lack of director independence with time served on the board. Sorry, folks, but I don’t buy this simplistic connection. There are many other reasons why a director is not independent (see guidelines 2-5). I’ve been a director of one company for over 10 years. I have heard the questions: “Have you lost your independence?” Lost it? Did the invisible director fence stop working? And, “Are you now less independent?” How does someone become “less independent”? Does independence fade quickly or slowly, like disappearing ink?
Let’s call the “long-serving director” Rip Van Winkle. It can be easy for a shareholder to use a “length of service/no longer independent” argument as a cover for not dealing with the root causes of why Rip needs to be replaced. There are a few reasons why a change may be in order: a) Rip has “lost his fastball”; b) Rip’s skill set doesn’t mesh with the company’s future needs; c) Rip is linked to “the other side” of the family, potentially sparking shareholder conflict; d) Rip is an old white guy and more diversity is needed on the board; e) Rip has skipped several board meetings; f) Rip has become a sacred cow. There are many other possibilities.
However, even if Rip doesn’t fit into a tidy, board-skills matrix, what if the majority shareholder wants Rip around simply because Rip: a) is experienced; b) is trusted; c) has good judgment; d) is not timid in offering advice; e) is a sounding board to the owners, the board and management? What’s wrong with that?
2. Remember your role as a fiduciary. Let’s revisit XYZ, the troubled company I served previously.
“You’ve become one of them.”
That’s what a fellow XYZ director (whom we’ll call Money Guy) said to me after one of XYZ’s board meetings. Money Guy was from XYZ’s lead investor group and the majority shareholder. The “them” Money Guy was speaking about was XYZ’s management team. From his tone, I knew Money Guy wasn’t paying me a compliment. I was being admonished because I “sided with management” on a matter that was pivotal to the company’s future. Money Guy knew I had a fiduciary responsibility to the corporation, not just to him and his private equity firm. I was put on the board to be an outside, independent voice. Somehow, that had slipped his mind! This brings me to #3.
3. Wear the correct “cover” to meetings. The military refers to a hat as a cover, and there are many different styles. Examples from the Coast Guard include a combination cap, a ball cap, a garrison cap, a watch cap, a cold-weather cap and a combat-utility cover. Boards typically are made up of directors who have accumulated various covers during their long careers. There are different covers for different occasions or duties, but the style you’re wearing should not change how you think or behave.
The fiduciary director cover is the “primary interest” cover you should be wearing to all meetings. The following covers should be left at home because they represent “secondary interests”:
a. The private equity/venture capitalist cover
b. The professional advisor cover
c. The friendly family member cover
d. The unfriendly family member cover
e. The loyal friend or crony cover
My favorite covers in terms of secondary interests are a, d and e. The first can easily breach the duty of loyalty, while d and e typically mess up on the duty of care.
4. Don’t be a rubber stamp. The rubber stamp understands the barometric pressure prior to the start of the meeting. “Tell me how to vote. I am here for you.” The majority shareholder should realize that you are not on the board to be an automatic vote for them. A director friend told me, “There is a fine line to walk as an independent director when those sitting around the table own the company and you are effectively their invited guest.”
5. Don’t be the majority shareholder’s attack dog. The attack dog regularly prowls the boardroom with an aggressive attitude toward management and other shareholders. Intimidation is the order of the day. For another private equity board on which I was an independent director, the representative from the lead investor group attacked management during, after and in between the monthly board meetings. If management knows you are truly independent and not there to throw them under the bus, it will help build trust. I gave the PE group my opinion on how they ran the board meetings. Oddly enough, once that company was sold, I was never asked to be on any of their other portfolio company boards. And, if asked, I would have declined.
Working with the shareholders and management team
6. Understand shareholder expectations and their personal and financial goals. One owner told me, “I believe the most important consideration for an outside director is ensuring the shareholders’ goals and desires are fully understood. Private company owners are likely to have a complex mix of primary and secondary goals that often change based on circumstances impacting their lives. Multiple shareholders might present further complications that need to be blended into the stew.”
7. Understand the owners’ personalities. This is different from #6. The personality style of the individual majority shareholder exerts a significant influence on the board and management.
8. Don’t be timid about coaching or mentoring the shareholders. Even though they own the company, they may need advice on areas they are unfamiliar with.
9. Understand the business model and the industry. This is basic stuff, but soon after I had joined the board of a company, we were discussing changes to distribution channels. One director said, “That’s not how we go to market now, is it?” He had been on the board for over 10 years and did not know one of the fundamental aspects of the business model.
10. Get to know the management team. Is the CEO and senior team strong-willed, weak or balanced? How well does the CEO work with the company’s owners? Being aware of the strengths and weaknesses of the C-suite will help you be a better coach to the owners.
11. Be a resource/coach to the CEO. CEOs are certainly not alone. They are surrounded by shareholders, major investors, angel investors, family, the board of directors, senior management, employees, professional advisors, creditors, customers and the community. But, at times, their lives can feel a bit lonely. While a director should be a coach to the CEO, being a coach does not mean you have to become the CEO’s buddy. For example…
12. Trust your gut. It’s OK to be a nudge. Don’t allow the CEO or management to stiff-arm you or ignore your questions. Hopefully, you have proved to the owners that your probing is done with good intentions.
Have you ever attended a “Mad Tea Party” board of directors meeting and listened to the CEO’s unrealistic expectations about future performance? In Alice’s tea party with the Mad Hatter and March Hare in Lewis Carroll’s Alice’s Adventures in Wonderland, there was one revealing exchange:
“Have some wine,” the March Hare said in an encouraging tone.
Alice looked all around the table, but there was nothing on it but tea.
“I don’t see any wine,” she remarked.
“There isn’t any,” said the March Hare.
How many times has a corporate leader told you there was plenty of wine, but, in fact, there was only tea? If your gut is screaming, trust it.
13. Understand the culture of the company. Why? By your actions, you and your other directors have a role in shaping and maintaining it. (See #21.)
14. Know your boundaries. “You stay on your side, I’ll stay on mine,” says the song “Riverside” by America. The board is not management and vice versa. Other common descriptions include “Head in, hands out” and “Noses in, fingers out.” I knew of one company where the meddling majority shareholder called the CEO each afternoon: “Just checkin’ in.”
Being yourself: How to act
15. Be consequential. Joe White used this term in his book Boards That Excel: Candid Insights and Practical Advice for Directors. One CEO/owner told me, “I want directors that challenge me and bring perspective and skills I lack. I also want them to be well-grounded. The one thing my board has lacked is someone who is knowledgeable about the specifics of my industry. But I think that has been outweighed by directors with broad experience who see the big picture.”
16. Be a colleague, not a bore. You are on the board to give your opinion and offer advice, suggestions and ideas, not to advance your own career or agenda. You can disagree without being disagreeable. Grandstanding, pontificating and personal bragging are not allowed.
17. Prepare for and attend the meetings. How obvious is this? Don’t be a no-show or an empty seat when you do show up! Sometimes, life happens and interferes with attendance or participation. But if the director’s truancy becomes a pattern, it indicates a lack of respect for the company, the shareholders and fellow board members.
18. Participate. Be available to the owners not only at the board meetings but also between the meetings. Encourage honest two-way communication and feedback. Be active on board committees. If your board does not have committees, encourage the shareholders to establish them and use the committee structure to support the overall board’s work.
19. Embrace, understand and use technology. A pet peeve of mine: I’m tired of hearing about people being “too old” to learn today’s communication technologies. Here is another familiar refrain: “I wasn’t able to download and read the document.” The cloud is something more than moisture in the air.
20. Stay fresh and understand time and place. Owners don’t want “stale.” They deserve “fresh.” Always understand the shareholder and company environment. Have the capacity to anticipate and adapt. To wit…
21. Learn the new alphabet. Be familiar with DEI, ESG, ERM and more. Are these just trendy topics, or are they frameworks for doing the right things and acting the right way?
22. Be curious. Author and speaker James Rosebush commented, “Curiosity creates the scaffolding for dialogue.” An October 2018 Harvard Business Review article entitled “The Business Case for Curiosity” said, “…cultivating [curiosity] at all levels helps leaders and their employees adapt to uncertain market conditions and external pressures. When our curiosity is triggered, we think more deeply and rationally about decisions and come up with more creative solutions. In addition, curiosity allows leaders to gain more respect from their followers and inspires employees to develop more trusting and more collaborative relationships with colleagues.” Curiosity may have killed the cat, but it won’t harm an independent director.
23. Don’t be a dog with a bone. There was a director (we’ll call him Fido) on one company board who regularly gnawed on topics that annoyed him. When management hit one of his go-to topics in their presentation deck, Fido would grab his bone and start chewing. The gnawing can be useful to make a point, but over time it becomes tiresome. After a recent board meeting, I reflected on my own bone-chewing over a personal hot-button topic. I’ve made my point in a few board meetings and I’ve decided it’s time to put the bone back in my briefcase.
24. Take it easy. “Take it easy/Take it easy/Don’t let the sound of your own wheels drive you crazy/Lighten up while you still can.” To borrow from the song “Take It Easy” by The Eagles, I know board work is serious business, but don’t let it overwhelm you. Working with owners, management, employees, other stakeholders and, yes, even your other board members can be fun. Don’t lose sight of that.
25. Be a good shipmate. Seamanship is a great word. It implies specialized skills, expertise and attention to detail. It also represents an attitude – wanting to do things right on and off the water – and a concern and respect for your shipmates. As a member of the Coast Guard Auxiliary, I have learned “there is no higher compliment than being called a shipmate and no better goal than being a good one.”
None of this is complicated, and these guidelines may seem fairly basic or just common sense to you.
If that’s the case, then why have I witnessed so many directors who don’t follow these rules, who behave irrationally and who are ineffective with ownership?
Jim McHugh is a member of the board of directors for Southworth International Group Inc. and Kennebec Technologies, founder and CEO of McHugh & Company Inc., and a member of the Private Company Director Editorial Advisory Board.