Starting and Building the Private Company Board
Three veteran directors on the building of an effective board
By Barbara Spector
The Private Company Governance Summit 2016 opened with a panel discussion that focused on board basics. Three veteran directors offered their views on the value an independent board can bring to a company, how to recruit directors who can help your business reach the next level and the keys to effective board processes.
Family and private companies tend to “take the path of least resistance” by appointing as directors friends or others who tend to agree with them, said Steven Walker, general counsel, secretary and director of board advisory services at the National Association of Corporate Directors and a director of Objective Interface Systems and Contract-Room. Companies whose boards are prone to “groupthink” are at a disadvantage, Walker said. “You’re competing with public companies who have strategic asset boards that have been developed based upon their unique skill sets,” he noted.
“Too many closely held companies are afraid to bring someone on who would actually get them to step outside their comfort zone,” said Pascal Levensohn, who in August was named chairman of C. Mondavi & Family Inc. Levensohn is also managing partner of Levensohn Venture Partners, chairman of ShotSpotter Inc., managing director of Dolby Family Ventures L.P., and a director of Mixed Dimensions and Cure Network Dolby Acceleration Partners LLC.
Levensohn said that in addition to identifying prospective directors who possess skills the company needs, business owners should assess interpersonal dynamics — whether the candidate has the right personality “to challenge the family and help the family step outside the comfort zone in charting the path forward.”
Larry Siff, CEO of Neptune Advisors and a director of Kayem Foods Inc. and Mason Companies Inc., said a major mistake he’s seen business owners make is “not clearly defining what you want from a board — the roles, the expectations — and how you want the committees set up.”
The case for an independent board
Siff explained that business owners who form an independent board do not cede control of their companies. “You control the board, you control who to put on the board, you own the stock,” he said. “So you ultimately have control.”
Moreover, in family companies, Siff said, independent directors “can be a buffer.” Based on his experience working with family businesses, Siff said, “Sometimes not everything is shared between family members, or there isn’t transparency between members, or sometimes there are issues that need to be addressed. And this is where you can often use outside board members to help with this.”
Watch out for red flags
Levensohn identified some red flags that should signal to a business leader that the company either needs a board or needs a different kind of board from the one that’s in place.
“The big issue is the absence of rigorous process in defining a long-term, forward-looking business strategy,” Levensohn said. “And that can be highlighted by poor communications between the company owners and the professional managers.”
Other problem areas, according to Levensohn, include:
• Significant turnover among the second layer of senior executives in the company, along with very long tenure among the senior top executives, particularly if business performance has been weak in the past three to five years. This signals that the junior-level executives are leaving because they don’t see a future at the company, Levensohn said.
• Meetings that “always follow a familiar pattern … nobody challenges anybody in a board meeting on any topic that actually matters.”
• A board that’s composed entirely of family members, service providers such as the family accountant or estate lawyer, and close friends.
A high level of accountability
Boards that hold business owners to a high level of accountability can help the company achieve better results, the panelists said.
Levensohn said greater accountability can be achieved by:
• Establishing a compensation committee that has no members of the ownership group serving on it.
• Clearly defining job descriptions for any owners who are also employees.
• Ensuring that an owner-employee does not report to another owner and that family members do not review other family members.
• Requiring twice yearly formal, written performance reviews that include a board member’s written self-evaluation.
• Establishing a rigorous review of owners’ expenses.
• Establishing a process, controlled by independent directors, that can lead to dismissal of owner-employees for poor performance or for cause.
“If you actually want to make changes, you have to do things like this,” Levensohn said.
Finding the right independent directors
The panelists offered suggestions for finding effective independent directors. “It starts with identifying your long-term strategy,” Siff said. “Where do you want the company to go? Where do you want to be three to five years from now [and] 10 years from now?”
The next step, Siff said, involves identifying the skills needed to achieve the long-term strategy. He suggested creating a matrix of skills currently lacking on the board. Once candidates who possess these skills have been found, “interview them really carefully,” Siff urged. “As you interview them, you’ve got to make sure they have the right communication skills, they’re great listeners, they’re not preachers.” Ideal directors are those who are unafraid to tell a business owner things that the owner does not want to hear, Siff said.
Even after the right people have been found, “you still have two other hurdles to get over,” Siff said. “One, are they going to be the right fit for you? Because they can look great on paper, but in an interview, you may feel like they’re not going to fit in your company or in your culture; they’d be disruptive. And the second thing is, you want to feel proud. When you go out there and say, ‘I’ve got XYZ as a board member,’ you want to feel pride in that.”
These talented people must be compensated appropriately, Siff said. Many companies, he said, put board members on retainer and also pay for each meeting a director attends as a way of encouraging meeting attendance. In addition, he said, companies offer long-term incentives, generally in the form of “shadow” stock.
An effective director, Walker said, “is someone who’s studying the competition, someone who’s keeping abreast of the industry trends, who’s a student of the business, who is constantly thinking about what could potentially disrupt us [and] what competitors are out there.” A great director, he added, comes to board meetings having read the advance materials and is “prepared to talk about strategy, risk oversight and how we are going to achieve the metrics and the goals we’ve set for ourselves.”
The chairman’s role
It is essential for the chairman to set the right tone for board meetings, the panelists said. “Board meetings really need to be strategic in nature,” Siff said. He recommended that the chair or CEO start by listing the two or three issues where the board’s input is essential. What should be avoided, Siff said, is a lengthy run-through of PowerPoint slides. “You really want to focus on what is going to move the business forward and on the strategy,” he said.
Levensohn noted that in some family companies, it might be expedient to give the patriarch or matriarch the title of “chairman” but to appoint an independent “lead director” who fulfills the chairman’s role in all but name.
Levensohn said he prefers that an independent director serve in the chairman’s role in family companies. “The chairman really needs to be able to communicate freely with different shareholders,” he said. Especially in a multigenerational family ownership group, “It’s possible that not everybody’s on the same page,” Levensohn said. The chair, he said, “needs to be able to reach out to management, reach out to family members who are both owners and employees, communicate freely with all of them, find out where people agree [and] where people disagree, and then set the stage for the meeting. So this is a very delicate role.”
Ensure appropriate turnover
Particularly in family businesses, it can be challenging to bring new blood onto a board. A nominating and governance committee should regularly engage in board succession planning and create a skills matrix to ensure the company remains competitive, Walker said. “Look at your board composition right now and see how that aligns,” he suggested. Walker also recommended asking board members to confidentially rate themselves and their peers for proficiency in the areas that are critical to ensure the company’s success. Board evaluations, Walker added, can provide confirmation to individual board members that it’s time for them to step down.
“You have such freedom in a privately held company or a family business to grow the board as big as you want,” Walker noted. “You don’t necessarily have to eliminate folks to get the assets you need.”
“I found it useful to have some time limit on consecutive terms and enforce a one-year rotation off the board,” Levensohn said. Directors who rotate off the board are often permitted to come back on after a year’s absence, he said. This process provides “a way out” for directors who might want to leave but are hesitant to do so because of their long history with the company, Levensohn said.
Siff recommended that companies honor directors who leave their boards with a plaque and a dinner thanking them for their service. “I feel that this is a missing piece,” he said.
Characteristics of a good board
Levensohn identified several qualities of a good board:
• Directors should receive a full meeting agenda and all supporting materials, in writing, at least five business days before the meeting.
• Meetings should not be excessively long and should not be devoid of substance.
• Directors should be fully engaged, properly prepared and respectful of each other’s time.
• Directors should communicate outside of board meetings.
• The board should welcome and invite differences of opinion and successfully resolve the differences in a timely manner.
• Directors should not be allowed to engage in emotional outbursts during meetings.
Independent directors of family businesses who recognize an underlying issue beneath the surface should “call a time out,’ ” Levensohn said. The issue should be brought into the open at another time, or a family business consultant could be engaged to help resolve it.
“You cannot just say, ‘Ugh, there’s a problem; they’ve been fighting about this forever; let’s not do anything about it,” Levensohn said. “You have to actually deal with it.”
Levensohn said a major problem that often occurs in boardrooms is “the presumption by the board members that there is consensus when it actually does not exist.” It’s a director’s job, Levensohn said, to figure out what the other directors think before the meeting begins. “And if you can do that,” he said, “that’s going to massively improve your board experience.”
“If you find the right people to be on your board,” Siff said, “outside directors can be instrumental in helping you get to the next level of profitable growth.”