Family-owned companies can benefit greatly from the input and guidance of an independent board.
Anne Eiting Klamar, M.D., President and CEO, Midmark Corporation: “In a privately held situation, you not only have the opportunity to hire your bosses, you can also fire your bosses.”
Family business owners who want their companies to last multiple generations must ensure their firms can withstand global competition, a trio of family business members advised PCGS 2014 attendees at a session entitled Governance for Family-Controlled Companies. The panelists noted that an independent board’s advice can help a company develop a strategy that points the way toward growth and competitive strength.
“I think good governance is not just the right thing to do, but it’s a competitive imperative,” said Lansing Crane, the sixth-generation former chairman and CEO of Crane & Co. and the chairman of four boards (two of which are family company boards).
“Think of having a board of seven to eight people working for you, putting in what is an average for most companies of 200 to 300 hours a year for your benefit,” Crane said. “That’s seven times 200 to 300 hours’ worth of work from people who are really knowledgeable and committed to your company’s success.”
Anne Eiting Klamar, M.D., president and CEO of family-controlled Midmark Corporation, said that her board is probably the greatest strategic advantage that our company has. Klamar told the audience, “As you think about your company and your future, I would ask you to have the courage to think about what the next generation or the next [management team] needs, and be able to put that guidance in place for them.”
Klamar lauded her board for asking great questions, developing great leadership, pulling out succession planning and making it meaningful, and holding me to the highest standard, which is a little scary, but it’s always the right thing to do.
“We have found great benefit in having a diverse board that can be aligned [while representing] different perspectives,” said Joshua Nacht, a married-in, next-generation member who is a director of Bird Technologies. “We really work to encourage idea development and consensus as a board, and to constructively challenge the management team.”
Voices of experience
Crane shared with attendees how Crane & Company’s revamping of its board helped the venerable family firm, now 213 years old, evolve from a company with 90% of its product lines obsolete or in irreversible decline (including blueprint paper, carbon paper, stock certificate paper and fine writing paper) to a profitable, growing, global technology company. “The board was good in supporting certain kinds of things that I think we all believe in, but [are] hard to practice,” he said.
Crane, the company’s former chairman and CEO, said the board helped establish transparency, information sharing and accountability at the company. The board fostered respect for rules and practices, which enabled stakeholders to work through disagreements. “You need to have a respect for the process,”Crane said, and [the board] brought that.” And, he added, the board emphasized that decisions must be made on the merits of the issue, and bias in favor of family members’ personal interests must be eliminated to the greatest possible extent. “Those are the rules of good governance that a board can support, day in and day out,” he said.
Klamar candidly discussed the help she received from her board when she was named to lead Midmark in 2000. Although she had been a director of the company since 1993, she had been a practicing physician and had not worked in the corporate world. I knew nothing about business, Klamar confessed. When she took the helm, Midmark’s sales were down and the company was losing money, Klamar recalled. “I knew I needed a really great board to help me out,” she said. “I needed business help, I needed financial help, I needed marketing help, I needed strategy help.” The directors’ assistance paid off tremendously, Klamar said. “Because of my board, I’m delighted to share with you that the company has grown fourfold in the time that I’ve led it.”
Nacht described the challenges inherent in Bird Technologies’ ownership structure. The company is owned by the descendants of radio frequency technology entrepreneur J. Raymond Bird. There are three family branches, with one branch having 60% ownership. Four family members have 90% ownership, and another four family members have 10% ownership. “We very intentionally don’t talk about the branches, but we talk about ourselves as an ownership group,” Nacht explained. “Because of the disparity in ownership, the family has done a lot of work to ensure fairness in the decision-making process,” he said. “Considerable thought went into solving the issue of How do we have a fair process in our group to make sure that everybody’s needs and wants and desires are being attended to?” Nacht said.
Bird Technologies has a professional management team composed entirely of non-family members, Nacht said. The company’s board of directors includes six independent directors and three family directors. The chairman is a second-generation family member.
Bird’s family owners created a family governance structure, called the Family Leadership Council, in 2007 with the help of a consultant. “The desire was to better structure and organize the ownership group,” Nacht told PCGS attendees. Three family members and one independent adviser make up the Family Leadership Council; members can serve for two three-year terms. The council, he explained, “serves as the initial forum to develop ideas, facilitate discussions and decisions, address the issues that are coming up, and create a meeting agenda. Family members bring their concerns or ideas to the council; they donâ’t raise them at the ownership meeting,” Nacht pointed out.
“We have the ownership group at the top,” Nacht said. “The Family Leadership Council is the leadership for the ownership group and the main conduit to the board of directors. The board of directors then deals with the management team. We have clearly delineated boundaries between the systems, but very good interaction and communication between the three systems: ownership, board and management team.”
Crane said that in his view, while the CEO leads the company, the primary obligation of the board chair is to manage the boundaries separating the board, the company and the shareholders. “The board chair has to be the communications link, and sets the guard rails.” Crane said.
Finding good directors
Crane said that directors must serve as “the voice of the owners, the eyes of the owners, and in some ways the guard rails of the owners.” All shareholders must be represented equally, he noted.
Klamar said she looks for three key attributes when evaluating prospective directors: values congruency, high behavioral standards “We don’t shout. We don’t bang tables. We don’t belittle one another, and skill sets that will help guide the company into the future have my board mapped out through 2019 as to how many members, what we’re going to need, and how that will change over time,” she said. “I think you have to be that planful about building your board.”
“I don’t think there’s anything more important than the strategy component and getting the right CEO,” Crane said. He pointed out that privately held firms have an advantage in this area: “Private companies can spend more time on strategy than public companies can because they don’t have to devote as much time to compliance.”
As the Crane & Co. story demonstrates, a company’s strategy must be adjusted as the competitive landscape shifts, Crane said. “You just can’t aim at your little cabbage patch, because eventually you’re going to get marginalized,” he warned. “You should be students of the business, but over the long run, what I argue for is not getting attached to a specific legacy business but having the company evolve so it’s continuing to improve its value.”
Lansing Crane, former Chairman and CEO, Crane & Co.: “Directors must serve as the voice of the owners, the eyes of the owners, and in some ways the guard rails of the owners.”
Klamar said that Midmark’s board members, who include sitting CEOs, are compensated at market rates. Directors receive a retainer, a meeting fee, and fees for sitting on committees and for chairing a committee. In addition, she said, directors receive a small amount of equity in the company at the beginning of each board year. “They do enjoy that equity interest and that feeling of being true owners,” she said. “They are not just board members, they’re shareholders, and so they have that perspective.” When directors retire from the board, they are required to sell their shares back to the company, she said.
“You have to recognize the upside”
Crane urged family business owners to overcome the fear that appointing an independent board is tantamount to losing control of the business. “You have to recognize the upside,” he said. “Someone who’s not willing to let go and give up autonomy is risking the enterprise, because the world will consume you at the end of the day. And the flip side of that is, if you’ve got good people, you’re going to succeed.”
“In a privately held situation,” Klamar noted, “you not only have the opportunity to hire your bosses, you can also fire your bosses. So it’s a really unique position in which we find ourselves. Directors can be removed and replaced if they don’t create value for the company or if there are problems between the directors and the family or management,” she pointed out.
“I’ve come to realize through my board that, really, family business is about creating value for the shareholders,” Klamar said. “Once I shifted my framework to creating value, it was a lot easier to let go.”
Governance System Interaction: A Case Study
Bird Technologies’ non-family CEO requested additional guidance on the family owners’ long-term vision for the company, director Joshua Nacht recalled. The chairman of the board, a family member, approached the Family Leadership Council (Bird Technologies’ family governance body) with the CEO’s request. The council produced a draft and took it to the ownership group for approval. The ownership group, aided by an outside adviser, refined the document.
The draft then was sent to the board, which approved it and forwarded it to company management. The managers in turn developed a list of seven ideas for how to realize the long-term vision. Of those seven ideas, the board rejected three including a suggestion that the company be sold as “non-starters,” Nacht told PCGS attendees. “But of the four that remained, the board said, ‘Mix and match these. Make these work; we like these ideas.’ “ A report on that discussion was forwarded to the Family Leadership Council and the ownership group, so all stakeholders were aligned on the vision and how it would be achieved, Nacht said.
Joshua Nacht, Director, Bird Technologies: “We really work to encourage idea development and consensus as a board, and to constructively challenge the management team.”
“And I’ve asked the CEO since then numerous times, actually how is this working?” Nacht told the audience. He said, “This is great. Because I communicated a need, it went through the system, and I got what I need.” He uses football analogies, so he said, “I know where the out of bounds are, and I know where the end zone is, and I can keep driving towards that.”
Nacht emphasized that the long-term plan was developed in accordance with our vision and values, which we’ve clearly defined in the family and clearly communicated to the CEO.