Board of Directors

Recruiting and working with a Board of Directors once your search process is complete can be one of the more significant learning opportunities as a new business owner. CEO’s find that a well-constructed and managed board of advisors/directors goes a long way in filling the knowledge gap for a less-experienced leader facing strategic and operational issues in their business. Only 20% of private companies have a board – there is a good chance that your competition does not and a high probability that your seller did not have one- giving your business a powerful edge going forward.

A quick survey of over a dozen searchers reveals that board management may represent as much as much as 15 work-days per year, or 7% of your executive bandwidth, including the meeting and the often 5x additional time of preparation beforehand. This allocation of your own time, a very scarce resource, requires serious reflection on its value.

Doren Spinner from Norfil says, “I get a lot out of my board meetings. It is easy to get buried in the weeds and miss important items that you just aren’t addressing. It also keeps me accountable, just like I do with my own management team.” Yet, while most report a positive experience, one observed after their first year of meetings: “I generally spend a significant chunck of my meeting educating my board and do not walk away with great revelations.” Getting this right is important.

Meeting Protocol and Best Practices

All searchers with a board report having 4 meetings a year, scheduled within 3-5 weeks after quarter-end, leaving enough time to finalize financial results and to reflect on the company’s performance and progress compared to prior years and forecasts. Most report a mix of meeting locations, from where the business is located to the most convenient location for the board members, with meetings occasionally being held in a conference call. Meetings at the company allow the board members to observe the “culture” and develop a more personal connection to the business and staff. Meeting length was reported from 1.5 hours to 6 with an average of 3.2 hours. Some reported a dinner meeting the night before or a lunch after a morning meeting, stressing the need for a quiet room so conversation can be heard by all.

The average number of board members reported by searchers was 4 with a low of 3 and a high of 7. In a couple of instances, the seller had a position on the board where the financing terms included a roll-over of their proceeds and/or a mandatory board seat. In one case searcher was unable to locate a 4th board member and the consensus from the other two investors was not to expand further. In several instances, searchers reported having various staff members and employees present to the board to bring faces to the names discussed at meetings.

Preparation time by the searcher/CEO varies from 3 hours to 35 and an average of 18. Many reported that their preparation coincided with their own internal management rhythm and declined in time after their first year as the got into a routine. Few searchers reported having a formal “Chairman of the board”: instead the CEO sets the agenda, timing, and runs the meeting. Board “packages” are sent out in advance with a range of 2 to 8 days and an average of 4.6. Half reported having conversations with board members between meetings, mostly one-on-one to address specific issues or questions. One searcher reported “I send out some pre-reading materials, all during the quarter and will refer to them during the meeting”. Mike Zani at Predictive Index says, ” I try to call board members between meetings to build rapport”. Lars Gehre at Green Vault reported, “I have regular one-on-one meetings with my board members to maintain a personal relationship and discuss topics that they individually can be most helpful with; their mentoring is invaluable.”

To chair an effective meeting, Alex de Pfyffer of Heritage Holdings says, “Maximize your listening during meetings: this is a chance for you to get valuable advice and benefit from your directors’ experience.” David Dodson, a former searcher and current investor advises, “Put the most important items at the top of the agenda. Target ‘air-time’ at 65% for the CEO and 35% for board members who can share experiences rather than telling the CEO what to do. Assign a lead investor to mentor the CEO on the board process and conduct annual board member reviews”. 

Peter Francis, another ex-searcher/investor says “Only the CEO should come from inside the company. Consider compensation level up to 10% of CEO pay. Schedule meetings 12 months in advance, ever-greening. Operate by consensus. Directors need to be part of the business AND apart from the business.” Mark Anderegg of Madison Equity Associates found most helpful “Having a routine ‘executive session’ without the CEO present after every meeting to review process, air uncomfortable issues and review the CEO’s performance followed by immediate feedback to me was very helpful.”

Building a Board

Funded searchers had very few instances of “outside” board members, instead recruiting members from their own investor pool. Utilizing outsiders was more predominate in the case of self-funded searchers who can recruit industry experts with domain experience who are also familiar with the local marketplace. Only about 1/2 the self-funded searchers had a board with at least one having just an advisory board with no fiduciary responsibility.

Paul Thomson, a funded searcher, said, “Bring in outsiders if you can, they can be very valuable.” Lars Gehre from Green Vault, a self-funded searcher, reports “I have found the independent board member that a searcher recruits can be a great ally.”

It can be hard to find these valuable outsiders, and it may take a searcher some time to learn their business, as one searcher reports, “my idea of an ideal independent board member continued to change significantly over time, I am glad I waited.”

These board members are not getting rich with their positions. 50% take zero fees with the searcher covering just travel expenses, if any. For those who are paid, the range was from $1,250 per meeting up to $2,500. A searcher reported “Most members are investing their own money and are drawn to the mentorship aspect of search. I think the goal is to find board members who you view more as mentors than just capital providers. I think building a personal relationship with your board / investors is more important in search than in other businesses.”

Be on the lookout for good board members from the first stages of your search. One searcher found, “The search phase is a great time for investors and searchers to see if there is a mutual fit. Think of it as a 2-year bi-directional interview process. It has also been great to get advice from searcher folks that have been in your shoes and who can help educate the other board members.” Another reported, “Most people are investing their own money and are drawn to the mentorship aspect of search. Be thoughtful about what everyone’s role is on your board. We have CEO coach, technology expert, an industry expert, a prior searcher and a strategy veteran.”

Take time in your selection, as one searcher observed, “You’re selecting your bosses for the next 5-10 years!”. It is not only about their skill set or prior experience as Mark Anderegg at Madison Equity Associates points out, “The personalities matter – be intentional about the cohesiveness of the entire group. Recruit people you actually want, both as human beings and as it relates to relevant experience.” Asking for searcher references from potential board members is a good way to seek out how other searchers view a potential board members contribution. Often this happen between the time between LOI and closing when there is plenty of “down time” to make these calls.

While a few searchers reported having prior owners on the board as a part of their earn-out or roll-over, there are a small number of historical incidences where this has not worked out well for the searcher. With very deep domain experience, it is sometimes difficult for the seller to maintain objectivity and continued support for the searcher CEO as they watch over their business being transformed and may have an “out sized influence” on the other board members. As one searcher suggests, “You can always involve seller in other ways, but would be difficult to remove them from their board seat.” Just another reason to avoid seller roll-overs, best left to PE transactions with less emotional tie to the searcher.

A number of self funded searchers delay the process of putting together a board until one or two years after closing; concentrating instead on learning the business. One searcher found that “as time has gone on I have valued mentor-ship more not less”.

Board Governance

With a traditionally-funded search, the board plays the role of representing the LP’s, much like a corporate board having responsibility to the shareholders. In a self-funded search, the CEO/Owner must make a fundamental decision about their willingness to “take direction” from the board members on issues they might disagree on. As Ari Medoff at Arosa observes, “What is the board able to decide? And if there are no decision rights, what is a board in actuality?” Searchers have to consider their objective, as Ross Porter at Heritage Holdings points out, “The question of who has control over the board (searchers vs. investors) and what the board can control in the company needs to be understood up front.”

A similar choice must be made for a “sponsored search” with a single investor. Many searchers find significant value in having outsiders on the board to contribute alternative points of view. Will the single investor be willing to relinquish control to the board on key strategic or operational decisions? and and encourage outsiders. Ultimately, your board can relieve you of your duties, as has happened within the search community few times over the years. Whether you have a single investor source of funds or multiple investors, your focus has to be on earning the trust of your board members.

Board Engagement

Board engagement varies over the life of the business. Mark Anderegg says “My initial board served in some respect as executive coaches, helping me learn what it means to be a CEO. In early days, there is no such thing as too much engagement with your board.” Critical decisions and advice centers around operational and HR issues as the searcher CEO learns the business, the personalities of the workforce and fundamentals of the industry. Searchers in this early stage report as little as 25% time spent on strategic issues, increasing progressively and dramatically over the future years.

The board also serves to track your projections and assessments about the business, but as Max Sadler from Inman Square Capital warns, “Best to not over-promise, better to under-promise and over-deliver! Alex de Pfyffer observes, “Keep an open mind and don’t think that because you know the business better, pointers and advice from the board won’t be helpful.”

Managing the agenda and topics of discussion can avoid the less effective focus on financials and current operations. Mike Zani at Predictive Index says, “Be proactive, drive your agenda to focus on challenging problems, long term issues and guidance that you need for the future rather than reporting out on the past”. It does not always have to be about business, as one searcher admits, “I’m not afraid to share the personal side of this journey. It helps to humanize yourself, and to have a more authentic discussion. They are usually able to relate to whatever you’re going through, and have often suggested next steps/improvements/things to look more deeply into.”

There are some Cloud based tools that employ digital board portals and are useful for communicating, tracking and consolidating Board engagement. Options ranging in price from under $2,000 a year upward and include: Diligent Boardbooks, BoardPaq, Directors Point, and Finteglaw eGavel-Board.

Another searcher cites a technique that has worked for them, “I present and discuss problems early and often. Boards should never hear about major problems or decision for the first time when it is critical to decide, better to plant the seeds as far in advance as you can.” But, sometimes this can’t be avoided, best to bring it up when you find out and reach out to board members quickly and/or ask for an interim phone meeting.

Another challenge for searchers and board members is calibrating guidance to a less-experienced searcher/CEO. This is quite the opposite from a Private Equity funded business where the CEO is often a seasoned operating executive. The Searcher/CEO need to learn by experience not by fiat!

One searcher lamented that “unfortunately, as I grew into the role, I felt that the board continued to see me as the day-one CEO for quite a long time.” As another searcher pointed out, “Pick your battles. Don’t fret over extra few thousand dollars of salary or bonus each year. When you need something considerable from your Board, it will be 10x easier if you have an established a track record for yourself.”

Summary

Like any relationship you have over your career and in life, developing a board takes attention and effort to give you the outcome that you want. Thoughtful selection, effective communication and engagement with the board members can result in tremendous benefits for a searcher who comes to the table with little or no industry knowledge and operational experience.

Simply put, the right board can help you accelerate the growth of the business and your leadership effectiveness. All searchers need mentoring to “grow into being a CEO” and a board is one of the ways to accomplish this. Like many choices in search, your board effectiveness is what you make of it!

Search on!

Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I frequently update individual blog posts, add to the Reference section and Search tips, so visit the www.jimsteinsharpe.com website regularly.