Good Governance Lights the Way to Success
Honoring top private company boards that serve as examples for growing companies.
When a private company holds its governance to the standard of public boards of directors, it often leads to success.
Every year, Private Company Director, Family Business and Directors & Boards magazines recognize private company boards that excel in governance, and they include firms of all sizes and all industries.
In May, the Private Company Boards of the Year 2018 will be announced at our Private Company Governance Summit: Boards and Business Disruption in Washington D.C.
Here are the 2017 winners, broken down by revenues and by fiduciary and advisory status. (Fiduciary boards are those tasked with protecting shareholders and voting on decisions that are binding for company management. Advisory boards are more informal that play no binding regulatory role.)
SAMARITAN MEDICAL CENTER
(Fiduciary Board, under $100 million revenue)
Family-owned Samaritan Medical Center owns and operates 18 medical office buildings in San Jose, Calif. The 50-year-old company has had a board of directors for 25 years, but added independent members after Dave Henderson, one of the owner’s son-in-laws, became president.
Samaritan governance highlights include:
• A formal operating agreement established in 1998 outlining all elements related to Samaritan’s business including spending limits, the roles and responsibilities of owners, board term limits and sale of shares.
• An eight-member board, evenly split between family members and independent directors.
• The chairman/CEO roles are split, for 12 years the chairman role has been filled by an independent director.
• The board has three standing committees with formal charters — finance (independent chair), compensation (independent majority and chair), nominating, and an ad hoc independent directors’ committee to assist the company with ownership matters.
• A recently completed 10-year plan to substantially expand the company’s holdings, including real estate.
W.S. DARLEY & CO.
(Fiduciary Board, under $300 million revenue)
W.S. Darley & Co. is a fourth-generation business designing, manufacturing and distributing firefighting, defense and emergency services equipment. The company is based in Itasca, Ill., and has grown rapidly in the last 20 years when revenues were $20 million. Estimated 2017 revenues are $220 million. The board was first established in 1976, but added independent directors in 1990. Additional outside members were added in 2008.
Darley governance highlights include:
• There are nine board members — four are independent and one is a non-management shareholder representative.
• The board is built around skillsets and experiences the company needs to grow.
• The board holds executive sessions and has an outside attorney advising.
• The company maintains a separate eight-member advisory board for the defense area.
• The board is increasingly involved in succession planning, hiring and onboarding family members, and receives a report from the fourth generation in the business at each board meeting.
• The board has staggered board terms.
• The board has been able to successfully implement majority vs. unanimous decision-making in a family business.
BUSH BROTHERS AND COMPANY
(Fiduciary Board, under $1 billion revenue)
Bush Brothers and Company has been family-owned since 1908. Currently, the company is likely best known for the Bush’s Best beans line, followed closely by the TV commercials that feature Jay Bush (a board director and family member) and “his talking dog.” In the 1990s, the company began to build a board structure and aimed to professionalize it. They modeled the board after the rigorous standards public boards are held to, including regular, formal evaluations, even tapping a corporate psychologist to conduct individual interviews of board members in a qualitative feedback process to flush out opportunities for improvement.
Bush Brothers governance highlights include:
• The fiduciary board includes five independent directors, three family directors and a non-family CEO. There are also two non-voting family members. All five branches of the family are represented in the boardroom.
• There are no term limits for independent directors; family members can serve two four-year terms.
• There are three committees with formal charters — audit, nominating and governance, and compensation. The committees hold quarterly meetings before the full board meets and independent directors hold the majority in two of the committees, while the compensation committee is completely independent.
• The chairman and CEO roles are separate and there is a separate lead director.
• The board conducts formal self-evaluations.
• The board has been deeply involved in two leadership transitions.
BLUE DIAMOND GROWERS
(Fiduciary Board, over $1 billion in revenue)
Unique to this list, Blue Diamond Growers’ board is a co-operative board, representing 3,000 family almond growers who are considered shareholders. The board was formed when the co-op was built in 1910. A decade ago Blue Diamond was the biggest almond producer, but wasn’t seeing the returns other producers did. The board started with “asking the hard questions,” says independent director Don Yee, and then dove into more rigorous planning, engagement and talent development, particularly in the next generation of growers/shareholders.
Part of the reinvigoration of the board included grooming future shareholders and leaders. The current chairman of the board, Dan Cummings, is a product of that program.
Blue Diamond governance highlights include:
• There are 11 board members (two independent) serving 3,000 shareholders.
• There is a democratic process for selecting the “inside” board members (all shareholders and growers vote for their regional representative) with no members of the management team on the board.
• There is strong alignment between the board and management. A strategic plan was developed together, while adjustments are made when necessary.
• The board opened to new points of views and insights when it recruited its first independent director based on skills and diversity, as well as fostering open discussion and debate in governance. A second independent director was added recently.
• The board participates in ongoing education, skills inventories and annual board assessments that include input from management.
• CEO and chair roles are split; the chairman position is elected annually.
$130 million revenues)
Diesco Ltd., a large group of diversified companies including everything from beverages to real estate, was facing efficiency and scaling issues, and as a result decided to create a board in 2013.
“I knew the board was going to create a lot of shock in the system. The businesses had never had a board,” says Manuel Diez, CEO and chairman of the Dominican Republic-based company’s advisory board. “As a family business, it was a follow-my-lead kind of place.” Things changed for the better after the board came on. In four years' time, he explains, the business grew about 150% and earnings tripled in all the company’s units.
Diesco governance highlights include:
• The company has a majority independent advisory board, with six outside advisors.
• The advisory board brought strategic focus and helped the company streamline from 12 operating companies into four vertical companies. The business has grown 150% in four years, and the company’s performance tripled in all four verticals.
• The advisory board holds executive sessions without management present, has formed a compensation committee, and plans to implement an audit committee.
• The advisory board helped attract Goldman Sachs’ first investment ever in the Caribbean Basin, with board members assisting in every step of the transaction, including reviewing term sheets, identifying legal resources and assisting with final negotiations. Goldman officials noted confidence in the governance and management of the company.
• The board is diverse, with two women and three native Spanish speakers.
Here are the 2016 winners. In this competition boards were not broken down by revenues.
HAGERTY HOLDING CORP.
Based in Traverse City, Mich., Hagerty is the world’s leading insurance and service provider for classic vehicles and host to the largest network of classic car owners. This family-owned company’s board was formed in 2010, and the board members include three family members and four independent outside directors. The chairman is a non-family member who was the former COO of the company. There are three standing committees: Nomination/Governance, Human Resources and Compensation, and Audit and Finance.
Hagerty governance highlights include:
• Majority independent fiduciary board.
• Separate Chairman and CEO.
• Board has been instrumental in succession planning and implementation at the senior executive levels, has helped oversee a change in organizational structure to better focus the business, and is deeply involved in the company’s strategic planning — which is distilled into a one-page document annually that is shared with all employees and whose performance metrics the board monitors.
• A robust process for onboarding of new directors.
• The board assists with compensation design.
• Meets in executive session, both with the CEO to discuss succession and then in an independent board member-only session.
MEAD & HUNT
Founded in 1900, Mead & Hunt employs nearly 500 civil, structural, mechanical and electrical engineers, planners, historic preservationists, environmental scientists, architects, technicians and support staff in more than 30 offices located across the nation. The company consists of experts in planning, design, engineering and architecture serving markets nationwide that include aviation, bridges, education, food and industrial, highways, military, infrastructure, energy, and water. Mead & Hunt generates more than $90 million in annual revenue. From its beginning as a partnership, the company was incorporated in Wisconsin as a C Corporation in 1949. After beginning to expand nationally in 1994, Mead & Hunt has grown to generate more than $90 million in annual revenue.
The company wanted to grow without outside investment, and began to expand ownership among employees. Employees now self-nominate to be a shareholder based on meeting a minimum of 6 of 8 characteristics of a shareholder—their technical excellence, long-term growth potential, contribution to the success of the company, mentoring commitment and more. The company now has 152 employee shareholders; the top 31 shareholders hold 51% of the ownership and no single shareholder is allowed to own more than 10%. The company expects to exceed $100 million in revenues in 2016.
Mead & Hunt governance highlights include:
• Board members serve staggered three-year terms. Even the chairman and CEO stand for re-election every three years.
• The board consists of up to seven internal shareholders and three external advisory directors.
• Diverse board with three women, and one minority board member.
• Board recently articulated and approved new board member orientation procedures.
• Board excels in employee engagement, promoting the company’s culture and values, and with its continuous striving toward excellence and governance best practices.
• Over the past few years, the board has expanded the roles and impact of committees. Governance and Compensation committees are chaired by independent directors. Committee charters were created, and strategic committee goals created.
Pelstar, LLC designs, manufactures and markets a comprehensive line of professional products under the 90-year-old venerable brand of Health o meter™ Professional Scales. Originally formed in 1919 as the Continental Scale Works, its heritage is as the inventor of the “doctor’s” beam scale. Today, Pelstar maintains the tradition as one of the leading producers of weighing instruments for professional health care and medical uses, along with market-leading innovations such as their ELEVATE EMRscale™ and multiple EMR connectivity solutions.
Pelstar was created when a group of private equity investors bought a small division of the former Sunbeam. Initially, there were 15 shareholders plus a venture fund; over time, the fund was bought out, though the head of the fund reinvested in the company as an individual. There are now 20 shareholders, including 10 employee shareholders. With strong governance, the company now commands more than 50% market share, and its growth rate outpaces its industry peers. While Pelstar is governed by a small board, with four members, it models itself after public company board best practices.
Pelstar governance highlights include:
• Two committees—Compensation and Audit—composed only of independent directors.
• Audited results with auditors reporting to board during executive session. Audit firm also comments on SOX-oriented internal controls, rare for a private company.
• Periodic succession planning.
• Periodic cyber threat and cyber defense discussions.
• Management attends board meetings, other than during executive session.
• “Our board doesn’t just go down the agenda and tick boxes,” says CEO Dan Maeir. “It promotes a transparency that goes throughout the whole company, encouraging our people to take risks and make decisions. Rick Crandall, our Chairman, is a cheerleader, a team leader and a culture setter.” N
What Independent Boards Bring to the Table
By Barbara Spector
Private and family-owned companies are the backbone of the American economy, and their prosperity drives the country’s fiscal health.
That was the consensus of a panel of veteran directors speaking at a program presented by the National Association of Corporate Directors’ Philadelphia chapter. At the session, moderated by Eve Tahmincioglu, executive editor and digital director of Private Company Director and Directors & Boards, panelists described the many ways independent directors can help private and family firms to grow and thrive.
Julia H. Klein, chairwoman and CEO of C.H. Briggs Co., a family company that’s one of the largest U.S. independently owned distributors of specialty building materials; Ivy Silver, founder of Sparkplug Innovations, a consulting firm, and a founder of Mily-on, an architectural design firm; and Stanley W. Silverman, founder and CEO of advisory firm Silverman Leadership and the former president and CEO of PQ Corporation, served as panelists.
Tahmincioglu opened the session by noting some success factors common to the 2017 winners of Private Company Director’s Private Company Board of the Year awards. These companies’ independent boards hold the CEO accountable, take drama out of decisions, build trust in the boardroom and offer proven experience in key areas like cybersecurity and supply chain management, she says.
Here are some of the key takeaways from the program:
• Independent directors must understand the history of the organization and the dynamics among the owners, and how these affect the decisions that have been made.
• An independent board holds the management team to a higher level of excellence and scrutiny. The board holds management accountable for making important decisions on a timely basis.
• The board composition must be refreshed to match the company’s needs at different points in its life cycle.
• Some directors’ strength lies in the ability to build consensus. Others’ strength lies in asking provocative questions.
• It’s essential for the board to assess the “tone at the top.” Is the CEO bringing the right tone to the organization? As stewards of the company, the board must ensure the CEO is doing the right thing.
• More so in a private company than in a public company, a director’s role includes coaching, teaching and encouraging the CEO.
• Directors must consider the interests of all shareholders, including minority shareholders and those who do not work in the business.
• In startup companies, an independent director plays a key role as a “door opener” but must also oversee strategy and help stave off management burnout. Directors of startups must ensure that policies and procedures are in place to foster sustainability of the company.
• Board refreshment tends to be faster in startup companies, since a different mix of director skills will be needed as a company matures.
• The board’s role in a startup includes coaching and counseling to help the CEO grow into the job as the company grows larger. (Some CEOs are unable to evolve and must be replaced.)
• In a family company, having independent directors at the table can help keep family dynamics out of the boardroom.
• Directors can help resolve conflicts in family businesses by shifting the focus to what is in the long-term interest of the company rather than what benefits family owners in the short term.
• The appropriate place for a director to provide counsel and coaching to the CEO is generally behind the scenes, at a breakfast or lunch, rather than at the board meeting.
• Advisory board service is just as essential as fiduciary board service; it offers an equal opportunity for a board member to help a company succeed.
• There are three spheres of operation in family companies: what’s happening in the business, what’s happening with the shareholders, and what’s happening in the family. Often, independent directors are best able to recognize where these spheres overlap and where they need to be separated.
• Directors must keep “noses in, fingers out.” They must be careful not to undermine the CEO.