The board’s role in compensation, succession and talent oversight.
Milton Pinsky, who recently stepped down as CEO of Banner Real Estate Group LLC, faced some drama when it came to setting pay for family members, but having a board oversee the compensation structure took some of the heat off him.
“I owned a majority from the outset,” says Pinsky, who founded the Northbrook, Ill., company with his brother and father in 1990 and is now executive chairman. “My brother and father were my partners. Part of the mission, right from the outset, was to make it possible to be an ongoing family business.” Pinsky’s brother-in-law joined the company as a partner in 1996.
The presence of an independent board, he explains, helped him when a family disagreement came to a head. The board was seated in 2005.
“One family member was unhappy with his compensation, and maybe didn’t understand fully the documents that were signed and put into place. We invited him to engage outside counsel or a consultant to advise him, to educate him.”
Because Banner’s independent directors committee determines all family members’ compensation, “we were really protected,” he adds. The disgruntled family member’s independent counsel explained to his client, “You just really don’t have any remedies other than executing your buy-sell,” Pinsky says.
The grievance “kind of came out of the blue,” Pinsky recalls. “Without the board structure, I think it would have led to a split. I think it’s something that will heal in time, as that individual realizes there are healthy mechanisms to express concerns.”
In companies owned by a family or a partnership, the CEO’s chair is the hot seat. Decisions made by the occupant of that seat are scrutinized closely, particularly when they involve succession and compensation.
An independent board removes emotion from these decisions and helps the company make the best choices. Two members of family firms — one CEO and one family director — along with a veteran independent director explain how it works.
Pinsky’s decision to establish an independent board was inspired in part by the experience of two friends of his who had left their family’s successful business because of family issues. He read up on board governance and discussed the subject with a family business adviser.
Today, Banner Real Estate’s board consists of four outside directors (the independent directors committee) and two family directors. The family also created a family council and a business governance committee to interact with the board and the business.
The independent directors committee of Banner Real Estate’s board has sole discretion to fire, hire, promote and determine the annual salary and bonus of each family member working in the business.
It was important to cede majority control to the independent directors, Pinsky says. If he controlled the board, “it would not serve the purposes that I wanted,” he says. “It would still be deemed that I was setting everybody’s compensation.”
The role of the family
In family-owned private companies, problems can occur in the absence of a properly structured relationship between the family owners and the board.
A lack of family governance and inadequate board oversight led to poor succession management at Menasha Corporation in the past, says Charles E. Shepard, a fifth-generation member of the Smith family, which owns Menasha. The company, based in Neenah, Wis., was founded in 1852 and has had independent directors on its board since the 1960s. Shepard is a director of the company, which provides packaging, logistics and marketing services.
“We started to experience problems as we transitioned from my uncle, who was our last family CEO, to his successor,” Shepard says. The company had three unsuccessful CEO transitions in a row, which “reflected, obviously, a failure on the board’s part,” he adds. The company struggled financially during this time.
“The family became very alarmed, naturally,” Shepard notes. “And at the same time, my generation was recognizing, ‘Hey, we’re starting to be in charge. Our parents are moving off the board; we’re starting to take their positions.’”
The fifth generation began meeting to discuss the role they should play with respect to the business. They engaged a family business consultant to help them with family governance. “We had a business that was trying to manage a family, and that does not work,” Shepard says. “The family needed to manage the family.”
The Smith Family Council was established in 2004. Shepard, its first chair, recently stepped down after 13 years as a council member.
“It’s been a terrific success,” he says. In its early years, the council focused on educating the family about family governance. Today, its primary mission is engaging the family, particularly the sixth and seventh generations.
How a board reduces drama
Margaret Pederson, vice chair of Xamax Industries and a director of Viad Corporation, shares an anecdote from her time as an independent director of Texture Media, a digital company. Investor groups joined the two founders, and the company experienced culture clashes between the tech entrepreneurs and the financial people. A strong operating executive with experience in the digital arena was brought in to serve as president.
“One of the founders had held that title in the past, so we were already juggling what the roles and responsibilities were, and what the strategy was,” Pederson says.
After the first year, disagreements arose between the co-founder and the CEO, and the board had to choose between the two. “The founder did leave the operating role, but stayed on the board, and the CEO took on increasing responsibilities,” Pederson explains.
“After you put the board in place, there is much less drama,” Pinsky points out. At Banner, “we have an engaged board,” he says. “A lot of major decisions are made on a consultative basis at board meetings. I really appreciate the fact that there’s four people who get to know our business better and better over time. It’s a great mechanism.”
Objective decision making
Empowering Banner’s independent directors committee to make decisions about family employees has prevented conflict, Pinsky says.
“My son is working in the business, and my niece is considering working in the business,” he says. The two family members understand that the successor was chosen not by Pinsky, but by the committee.
Non-family member Kent McCreedy, who had been Banner’s COO, succeeded Pinsky as CEO on August 24. McCreedy joined the company as president in 2006 and was promoted to COO in 2015.
Pinsky says McCreedy initially declined a job offer at Banner. McCreedy had previously worked for a family business that “went bankrupt as the father and the son were screaming at each other in the office,” Pinsky says. “I think if we hadn’t created a board, we would have never been able to recruit him.”
The requirement that the independent directors committee must approve hiring or promotion of family members reinforces the message that these decisions are based on objective criteria, Pinsky says. When his son was seeking work at the company, the non-family hiring manager told the committee, “If his last name wasn’t Pinsky, I already would have hired him.”
The structure helps protect his relationship with his son, he points out. “My son reports indirectly to [McCreedy], who reports to the independent directors committee,” he explains. “If [my son is] going to either be fired or promoted, I’m supposed to hear about it after the decision is made and before they tell him, so I can debrief my wife.”
Because he’s removed from decision making affecting his son, he adds, “My relationship with him is just [as a] dad; I’m cheering him on. I found out about his raise and bonus from him.”
Talented family employees want to feel that they rose through the ranks because they truly deserved it, Pederson advises.
“The people who are really qualified want to be judged on their merits, and not on their name or their sex or their race or any other outside criteria,” she says. “In terms of talent development and succession planning, having a level and a fair playing field is really important.”
Developing future leaders
The objectives at Menasha, Shepard explains, were to create a process for assessing and developing promising leaders and to leverage the process to help the board fulfill its oversight role vis-à-vis developing talent, recruiting and managing executive succession.
The company’s current CEO, a veteran company executive who was promoted from within in 2009, takes the long view, “which I appreciate more and more every day,” Shepard says. “As he took office, he recognized that we were not doing a good enough job of building our talent and working on succession. He brought in a very smart, experienced and capable HR leader who started building a system that we have today.”
The company created standard measures of potential and performance based on a list of competencies that are assessed “in a very systematic and analytical way,” he adds.
Menasha developed three leadership programs for high-potential individuals at various levels within the organization. Semiannual meetings are convened to discuss succession management and talent development and to develop a plan for each high-potential executive and manager. Information on their progress is tracked via a talent management system.
Shepard says he’s heard from the company’s HR team that the ability to review a comprehensive data set facilitates better decisions. Industrial psychologists interview top executives, “so we’re really understanding them at a very deep and profound level,” he says.
During four meetings per year, the board delves deeply into CEO succession at one or the other of Menasha’s two operating companies. The board knows which of the top executives are likely to become CEO candidates. Directors also discuss potential career trajectories for the other executives, and who their successors might be. A “green/yellow/red” scorecard system makes it easy to identify which positions have a strong succession plan in place, which need more work on succession and which currently have no promising candidates.
Prior to the leadership transition at Banner, a portion of nearly every board meeting was devoted to succession for the COO position, as well as “opportunities over the next several years to add bench strength, to potentially have an internal candidate to be the third CEO sometime down the line,” Pinsky says. Similar discussions focus on other key positions in the company, he adds.
NextGen engagement efforts
Family business leaders must ensure that the next generation is well prepared. That’s where family governance comes in.
At Menasha, the family holds an annual family gathering. While the gathering has an educational component, the primary purpose is to strengthen family bonds and secure the connection between family members and the company.
“We [want] people to enjoy each other’s company and be thinking long-term about where the business is headed and where the family is headed,” Shepard says. “People have been terrifically responsive. I think it’s a testimony to the power of family governance.”
Pinsky says that when his family observed a lack of engagement among its next generation, they decided to set aside a percentage of company distributions for a donation to a charity chosen by the younger generation in a collaborative effort. After the program had been in place for about five years, the younger members began to express curiosity about why the set-aside amount was variable instead of fixed. This sparked greater interest in the company, he says.
A key to uniting family members is to develop a culture of openness, and good family governance bolsters that, Shepard says. “If you have a structure that feels democratic and feels transparent,” he explains, “you start to build trust, and create an atmosphere of trust. And that’s really important.”
Even with such a structure, Shepard notes, grievances will arise here and there. In such cases, family leaders should reach out to those who appear to hold a grudge and make an effort to try to resolve the issue.
“If there’s a lot of conviction about the fairness of the process, the transparency of the process,” Shepard says, “you’re going to have fewer hard feelings.”