Independent Board Members are a Key to Success
In 2017, at the beginning of a challenging year for Kiolbassa Smoked Meats, the San Antonio, Texas-based, family-owned sausage maker formed an advisory board with independent members. Previously, the board was made up entirely of family members.
The payoff was so swift it surprised Michael Kiolbassa, the third-generation president. “Very quickly, we latched onto some really good strategies that have helped us emerge from a very difficult 2017 into a record profitability year in 2018.”
Samaritan Medical Center, a family business that owns and operates medical office buildings in San Jose, Calif., has had an independent fiduciary board for 30 years.
“If you have the right profile of board members on your board — meaning skillsets — they can speak to things that either can cause a redirect for your thinking or firm your thinking,” says Dave Henderson, Samaritan’s president and CEO.
Whether you have an advisory board or a fiduciary board, adding independent members can boost the fortunes of your company and help manage or prevent conflicts among shareholders. Independent board members also provide objectivity that’s critical for closely held and family-owned businesses.
For Kiolbassa, “The biggest impact that the board has had for me, as the family member operating the business, has been to give me really clear and objective advice on some large strategic questions that we face. And without the emotion — just expert, objective advice. We simply didn’t have that insight with any of the family board members.”
Kiolbassa’s advisory board has three independent members, four family members and a family business adviser who serves ex officio. The board, Kiolbassa says, “has really given us a lot of objectivity as we transition the ownership of the family business from the second generation to the third generation. And that kind of objectivity, I think, is really important.”
At Samaritan there are currently four independent directors and four family directors on the firm’s board.
“The market continues to evolve, and we have some very, very bright people on our board who understand the medical community at the local and national levels,” Henderson says. “They have been invaluable in providing advice and counsel.”
If you’re ready to go down the independent director road, here’s some planning advice.
Determine your goals
Before you begin to look for your first independent board members, it’s a good idea for the ownership group to clarify the reasons for having an independent board, says Keith Alm, who has served on the boards of nine privately held family businesses.
“For some reason, you’ve decided that you need a board. What is that reason?” Alm says. “You’ve got to really explain it, and make sure that everybody’s on the same page.”
The next step is to determine what the shareholders expect from the board, Alm recommends. For example, owners might be seeking improved financial oversight, better management practices, overall strategic guidance or help with succession planning.
“Document what you want from the company — we call it an owners’ plan — and what your expectations are of this board, so that you can really target what skillsets you’re looking for in your board members,” advises Christie Lloyd Ernst, second-generation vice president of property management at Lloyd Companies, a regional development, real estate and property firm based in Sioux Falls, S.D.
Lloyd Companies established an advisory board in 2011 and shifted to a majority-independent board of directors in 2015. The board now consists of five independent directors and two family directors.
The family “knew that we needed to speak with one voice,” Ernst says. “And so we spent a lot of time on documenting what our shared vision, values and goals were for the organization. That is what our board uses as a roadmap.”
When reviewing strategic initiatives, directors assess whether those initiatives represent what the owners want from the organization, she explains. “And if not, then we need to have further discussion.”
The family should also determine the resources they plan to commit. “There is a cost to having a board,” Ernst points out. “Make sure that you have a clear understanding of that.”
It’s important to pay board members for their time, energy and effort, advises Henderson. “And if you recognize them appropriately, they’ll be more than willing to extend themselves back to you over and above whatever it is you’re paying them.”
Start with a leader
Consider making the first board member hired the person who will assume a leading role — perhaps holding the title of chairman, lead director or lead independent director, Alm suggests. A person in that position should have 10 to 15 years of proven excellent performance as a chairman, CEO or COO, as well as several years of board experience, he recommends.
“I think that person could be a real asset — an objective asset — in the process of building the board and working with the shareholders in ensuring that the board is really built properly and meeting the shareholder expectations,” Alm explains.
It’s necessary to have “a balance” between shareholders and independents on a board, Alm says, Although he believes an independent board is ideal, he recognizes that many private companies — particularly family companies — will be reluctant to have independent directors in the majority at first.
“That’s OK,” Alm says, “because eventually, over time, as confidence is built in a board, there is more of a tendency to rely heavily on the independent directors and a little bit less on the shareholders, because you’re all too close to the business.”
Henderson says independent board members can help family business leaders address issues that are difficult to discuss within the family, such as compensation. “Being able to go to a non-family member for counsel or decision making is just invaluable,” he says. “It takes it from a family environment to a business environment, and that’s where certain decisions need to be made.
“In our case, we’ve set up a structure that the outside directors deal with compensation related to family members.”
Independent directors also serve on the nominating committee to ensure objectivity in the selection of new directors for Samaritan’s board, Henderson says.
Seek a balance of expertise
One of the biggest mistakes in establishing a board is hiring longtime friends and associates, or the company’s accountant, attorney or other professionals serving the business, as “independent” board members. These people are not truly independent, board veterans point out.
“They might not feel comfortable asking the right questions, or probing in certain areas, because of concern over compromising existing relationships over many years,” Henderson says. “You really want people on [your board] who are going to ask the questions that make the business smarter, not just make the CEO and the president more comfortable.”
Linda Doyle, who has served on about a half-dozen boards, says it’s important to have board members who can envision problems that might come up or unintended issues that might arise. “A lot of times, if you just have your friends and family on the board, there’s nobody who’s going to do that,” she notes.
Alm recommends hiring an independent board member with CFO experience, whose skills include mergers and acquisitions as well as all aspects of financial and accounting management.
“This is where I’ve seen boards fall short,” he says. “They tend to be dependent on the corporate CFO, as opposed to putting a CFO type on the board.”
An independent board member with a CFO background can provide guidance to management “in assessing what their audit practices are, what their financial planning practices are, what their cash flow practices are,” Alm adds. “The board needs to be able to challenge the [corporate] CFO.”
Companies should consider an independent board member who has a strong background in both logistics and technology. “I’m seeing, more and more, the real need for having a solid technologist who brings that aspect to the board,” Alm says. “The world has really changed and has become much more of a digitized world, and a much more vulnerable world to cyberattacks. So I think you need a strong individual in that sphere.”
Doyle recommends a board member with a background in talent management and organizational design. This expertise is especially helpful in organizations that are going through growth and change. One example she cites is the transition from a founder who makes all the decisions to a scaled-up company. “As that progresses up, oftentimes there are a lot of organizational issues that arise, and there’s nobody on the board to help give perspective,” she says.
It’s valuable to have a variety of industries represented on a board. Boards composed exclusively of members from one industry may be useful for solving today’s problems but may not have the experience to anticipate the problems of tomorrow, she says.
Listening to a board member describe disruption in another industry can be helpful, Doyle explains. “Oftentimes it will start someone thinking, ‘Hmm, I hadn’t actually seen around that particular corner, and that’s a good point.’ ”
“I believe that industry experience can be as dangerous an inhibitor as it can be beneficial. And I say that largely because everybody gets too close to their industries,” Alm says. “Board members are there to provide fresh eyes.”
Board members with the right skillsets, Alm says, “will learn the business very quickly, and they’ll be effective contributors in a relatively short period of time. I’ve seen this repeatedly, where we have brought people in that didn’t know anything about the industry, but they brought a perspective from their other business experience. And that’s very transferrable.”
“Make sure you give the process the time and attention it deserves,” Ernst says. “If you end up with a bad board member, it’s uncomfortable to get rid of them. You invest a lot of time into them, and they are getting a lot of access to a lot of [company] information. So you need to make sure that you’ve properly vetted the candidates.”
Open up to your board
Business leaders shouldn’t be afraid to speak candidly in board meetings. “The one thing that I had to really lean into, never having had an outside board — especially because we were having a rough year — was being open and vulnerable,” Kiolbassa recalls.
“And you’ve got to be comfortable with that, because that will yield the greatest feedback and information for you,” he says. “Sometimes your tendency is to window dress, and say things look better than they do. My advice is to just lay it out there, and bring your toughest problems to your board. And then really listen.”
One of the biggest mistakes Henderson has seen involved a business leader who created a board but didn’t want to listen to the board’s advice.
“What I’ve learned over my 30 years working with a board is that everybody wants to win,” Henderson says. “Nobody’s trying to embarrass anybody. But if you play too safe, sometimes it gets harder to win, because you’re not asking the right questions, or the right answers are not being provided.”
At Samaritan, Henderson says, “I have absolutely no regrets with the way we’ve structured the board. Each season is always a little bit different, but you keep getting these fresh perspectives that hopefully make you smarter as you move forward.”