Why do private companies need a board?
There are really two reasons, and I use the quote I read somewhere, “Everybody needs a good boss, even the CEO.” That is one reason: the second reason is strategy.
Are there good reasons not to do a board?
Sure. In my company, there are only two of us, we do not need a board; there are not enough moving parts. We just worked for a client in 2013 in which we formed a board of advisers. It did its job and it disbanded within twelve months. So sometimes there is an advantage to bring a board on as overseers and bring in specific value to the organization, and then when that is gone, then you disband it.
Where do you draw the line between the need for a board of advisers or a board of directors?
It is a real fuzzy line. Every public company, every ESOP and every nonprofit has to have a board of directors because there needs to be oversight and governance; you have other people’s money in the company, so it is for the stockholders. The board of directors’ job is twofold:
a) to hire and fire CEOs and b) to approve strategy; that is it in its simplest form. Boards of advisers can provide the same function, but let’s say the CEO owns one hundred percent of the company -- the board of advisers really cannot fire the CEO.
There are other private companies we work with here in the Twin Cities that might be on the third or fourth generation of ownership. For those companies there is a need for a board of directors because there are generations of shareholders who are not intimately involved or they might not be involved at all.
Other companies are big enough – like Cargill or Carlson Companies – that they have a board of directors because they need significant oversight. Oftentimes a smaller manufacturing company, whether it is five million or twenty-five million, really, a board of advisers can provide the same thing without all the fiduciary responsibilities.
You have talked about how many people have an erroneous misconception about the cushy roles of boards.
That is mostly because of media coverage of big public companies if there is a problem. In reality, in most of the smaller private companies, the boards roll up their sleeves. For one client we recruited a board member, who during her first board meeting identified a solution of how the company could bring two or three million dollars in savings to the bottom line. There are many ways of getting involved, and that’s what you typically see at private company boards.
Somebody said that a board member’s real value can be seen in the work they do outside of board meetings, such as spending time with the CEO or other executives. How much time do you have a right to ask of a board member?
People often ask me, “How can you tell if my board member is valuable or not?” And my comment is, “Do they show up to the meeting prepared?” So there is a quarterly meeting, and every company has at least a quarterly board meeting. “Have they read all the information about the financials and the strategic issues? Are they prepared to talk about what is the agenda?”
That is number one, but then the second thing is really, “What are they doing to help the organization between meetings?”
They are usually asked to join the board because they bring some specific skill or value. It could be financial; it could be sales and marketing, it could be operations. How are you going to help the company? The company might be going through that Lean Six Sigma journey and maybe a board member has significant experience with Lean. So every other month, the board member sits down with the VP of operations to find out how the journey is progressing. The board member can give both strategic and practical advice on the current and future challenges the company is facing.
Alternatively the company might be thinking about expanding internationally into China and the board member has both experience and contacts and can assist in introductions. The value is not just in the board meeting once a quarter, the real value is between meetings. Is the board member responsive if the company asks, “Hey, can you help us? We have an account we are going after.” Or secondly, “Could you mentor this executive a little bit?” You cannot stick your nose in it and try to run the company but you sure could be a trusted adviser.
Let’s talk about family legacy. You have talked about how a board can provide continuity through generational family ownership.
Think about it as a simple formula. Think of a family tree. We have mom and dad at the top and they have four kids. They all have spouses, and they each have four kids. And so we go from two, to four, to sixteen. It gets pretty big as the tree starts to grow. I have four children, and I am one of six, I’m the youngest, and my dad tapped me to be the one to be the person who overlooks the family’s work. Why not my older brother, or why not my older sister? You don’t know which one of the kids is going to be the person to move the company forward and oftentimes, the father or the mother, whoever runs the business, has a tough time saying, “You are the chosen one.” The board can provide objective input on how best to manage the company with the family members that are involved.
Private equity companies want to have people on boards to protect their interests also. How common is that?
It is very common. Private equity firms are almost like a kind of independent owner because they do not operate the business but they own all or a significant portion of the business.
They are looking for a group (board) that can provide both expertise and governance of the business to maximize its success.
Private equity firms are made up of really smart people who understand the value of having others helping the team reach its goals. The sum of the experience and willingness to help of a good board is much greater than any individual collection of people.
Where do you draw the line for activism between what a board does and how it directs senior management or how it personally gets involved?
Well, the great quote is, “nose in and fingers out,” but I think where you draw the line is that if the board member is actually starting to get involved with senior management without the CEO’s knowledge. It is the CEO’s job is to run the company. If the senior management is coming to you and you are not including the CEO, a board member has clearly broken the line of communications.
But the second part of it is, if a board member has their own agenda of what strategy the company or individuals should be doing then they are less effective as a contributing board member. Management must develop and execute an agreed upon strategy. If the execution of the strategy does not work, it is up to the CEO, for which there are consequences.
How do you know when it is time to get rid of a board member?
There are two instances when a board member should move on. First is if they are disruptive. When they come to board meetings, is this person complaining all the time, a know-it-all or are they are unprepared? They are too much in your business, without bringing value. The other end of the spectrum is when they are no longer bringing value. This often happens when somebody has been on the board for an extended period of time. Has the world changed but the board member has not kept up with the environment? If the board member came on the board twenty-five years ago and retired ten years ago and is still just hanging around on it, they are probably not bringing a lot of value to the organization.
And in a private company, is it the board that votes to take someone off a board, or can the CEO unilaterally do that?
One of the most important things in effectively operating any board is the bylaws that govern the actions of the board. If the bylaws are created correctly, exiting a board member can be less painful. Several bylaws that every board should have are: age limit for retirement, term limits, change of employment situation, attendance and a code of conduct.
So you can find ways to remove the disruptive or ineffective board member easier, but in the end, if there is a chairman of the board, it is the chairman’s responsibility.
If it is a board of advisers and it is the CEO owner, it is their responsibility, and frankly, the conversation goes a lot easier than most people perceive it as, because the person who is either meddling too much or is not bringing value knows this inherently.
Are you a fan of limited terms?
In a way. Term limits are meant to keep the board from getting stale by forcing regular rotations of board members.
The last board that we set up, the bylaw for term was one year, and annually, the company would review it. If the expectations are set correctly the board members will accept the terms going on the board. The downside of having a one-year term limit is that the board could potentially turn over annually and it takes a few meetings to get familiar with the company’s financials and management team.
How about recruiting: Is it always better to do it blindly through a recruiter?
I’m not sure there is a perfect answer for that. I’m a little bit biased because we are in the business of recruiting board members, but let me tell you why I think it is better to have people you do not know on your board to begin with. With it you get unbiased perspective and advice regarding the business. This is critical to the success of the effectiveness of the board. A true board member – remember, “nose in, fingers out,” -- has to give objective, straightforward advice. If the CEO has some blind spots, or the board member does not agree with the current or proposed strategy -- even if the CEO owns one hundred percent of the company -- the board member has to be able to tell it straight.
Now, the counterargument is that many CEOs and business owners said, “I really need somebody I can trust, and I trust this person I know well.” The person you know and trust may not give the most objective advice because of the relationship. I do not buy that as much, because I think you lose too much by just having people you trust around you who are not willing to challenge you. You have got to be challenged, because if you do not get challenged, the competition and the marketplace will challenge you constantly. I am a big fan of really getting people, and going beyond your network, because you will most likely attract board members better suited than your own network.
You said earlier that even the CEO needs a boss. We’ve all seen companies and the nonprofits go off the rails because the CEO is not answering to anybody. It changes the focus of the organization.
I have a client who owns multiple companies. One of the smaller companies has a board. A much bigger company that he started from scratch has no board and he wants us to put one together. The reason is to help the owner and his senior management team with strategy and accountability. The board’s collective voice is stronger than that of just the owners to the management team.
You have said that certain board memberships could bring an impartial voice not only for ownership, but others as well.
They are called stakeholders. This is often overlooked. In every business there is a much larger group of individuals who have a vested interest in the success of the company. This includes ownership, employees, customers, vendors, communities and even the government.
At the end of the day, how do you assess whether or not the empowerment of a board or the recruitment of a board has been a good decision?
Accountability and strategy are the keys. Does the board help the organization and the CEO to be accountable to the success of the company and its stakeholders? Have the collective efforts and wisdom assisted in the development of a winning strategy for the company?
The other part of the board’s value proposition is providing help on big issues companies face. Has the board been able to assist in navigating the opportunities and challenges that can drastically affect the course of the company?
Has anyone ever come to you at the end of their day and said, “Building a board was not a good idea.”?
No, it has never happened.
Jim Zuehlke is a prinicpal at Cardinal Board Services