SI Review: September 2010

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The Value of Corporate Boards, SI Review September 2010

For staffing executives who are wary, or weary, of steering the ship alone, there are several options. There are networking groups, where you get a chance to interact with your peers in the community. There are member associations, such as the American Staffing Association, and its various statewide chapters.

Another option is the corporate board. This can be done in several ways, including a board of advisors, or, more formally a board of directors. The advice, input and accountability these boards can provide may take your business to the next level.

SI Review spoke with Kenneth Marks, one of the authors of the newly released The Handbook of Financing Growth: Strategies, Capital Structure and M&A Transactions (Wiley, second edition) about boards and their benefits.

Marks is the founder and managing partner of High Rock Partners, Inc., and has been involved with over two dozen emerging growth and middle-market companies. The following is a Q&A with Marks and then
an excerpt from his book.

KM: Technically, there are two types of boards: (1) a board of directors and (2) a board of advisors. The board of directors has voting authority as granted by the shareholders, and it has fiduciary responsibilities. The board of advisors has no legal authority or fiduciary responsibility. It's really never too early to have a board of advisors and begin to establish the discipline of holding yourself (if you are the owner/operator) and your management team accountable. Formalizing the board of advisors shows a level of commitment and accountability to outsiders like the bank, suppliers and potential employees. Moving to a board of directors depends on the reason for doing it. It's okay to have both in some instances. For those new to it, I would start with a board of advisors.

Q: The authors mention the danger of 'loading' a board with friends. ... Can you elaborate and talk about the 'right mix'?
KM:
The danger of loading the board with friends is that you (the CEO and your team) may just hear what you want them to tell you ... and not what you need to hear to be successful. Individuals [who] are afraid to jeopardize the friendship may 'soft pedal' issues that would offend you. It is one thing to have people on the board that care about you as individuals ... it is another to have those that care about you and can be objective and directly address the tough issues. We all have blind spots or ignore things at times. I have found the ideal balance of board participants has someone that cares about you personally and can look out for your best interest as the CEO ... then add talented board members that have a mix of industry, financial and customer perspectives as well as similar CEO experience. Depending upon the industry and stage of the company ... the mix of backgrounds will vary and may include other specialties.

Q: The staffing industry (our audience) is highly competitive. Would staffing firms be missing out by not having a potential rival on the board? Is this ever done?
KM:
I can't say that it is never done, but what does make sense is getting executives from similar or adjacent markets and companies to participate on at least a board of advisors (if not the board of directors). Direct competitors will likely have a conflict-of-interest issue. An alternative is to get an industry-leading customer on the board (and they may know more than the competitor).

Q: What are the biggest mistakes you've seen in creating boards?
KM:
Not establishing expectations and tasking ... showing up for a meeting is only part of the role of a board. As one of my mentors (and past board members) said, 'If I can't add value to the company ... I don't want to be on the board.' For us this meant recruiting a board with experiences, skills and relationships that were relevant and useful ... then asking them to take action to support strategic needs of the company; for example -- in fundraising, recruiting key talent, opening potential customer doors.

Q: What are the main advantages to having a board?
KM:
A formal mechanism and team that helps management see the forest for the trees [and] stay on track, provides a check-and-balance for key decisions, bandwidth for strategic initiatives (see the prior question), and to help hold the management team accountable. In emerging growth and middle-market companies (i.e., revenues from startup through several hundred million), the CEO is often 'in the trenches' with the rest of the management team. At some point, it's hard to separate daily camaraderie and professional bonds with clear-headed accountability and performance. Periodically having the management team directly present to the board of directors answering the tough questions can keep the level of accountability high.

Q: Any other advice/suggestions?
KM:
If a company doesn't have a board, start by establishing a small board of advisors with experience in areas that are key. Find one or two members [who] are on other boards [who] can assist in getting up to speed. Establish expectations, ask, listen, process and learn. I have found boards to be invaluable.



The following is an excerpt from The Handbook of Financing Growth: Strategies, Capital Structure and M&A Transactions.

The authors of this handbook have cumulatively served on several dozen boards of both entrepreneurial and public companies, and can offer opinions based on our personal experiences. We believe CEOs not only heavily influence the composition of the board but also set the tone for how it functions. How a board is composed and what the CEO expects of the board is important. We have been on boards where CEOs load the board with friends and discuss company issues at the surface level. In these situations, we have found the board well compensated but rarely challenging or constructive. These CEOs tend to avoid criticism and advice. Generally, these CEOs want feel-good accolades from others. Notwithstanding, the boards appear independent and have members with influential titles; but the members are not fully engaged from a business perspective. However, with Sarbanes-Oxley legislating board independence, audit committees and management/director accountability, this type of board will not be the norm in the future, even for private companies where Sarbanes-Oxley is not applicable. CEOs will have to take a serious view to
composing and managing their boards.

How should a CEO compose a board, and what should be expected from the board? The board should be composed of individuals who can help the company through a rich network of potential customers, investors, vendors and partners. It is very helpful to have a truly independent board made up of experienced industry managers who are willing to discuss issues frankly and openly. Many boards meet quarterly to review corporate performance, but these meetings do not normally focus on specific operating issues concerning the company. Members will focus on issues that arise at the board meeting and freely discuss these issues, but we have found a lot of the advice to be more generic and strategic in nature than specific to the situation at hand. What you want from your board has to be thought out in advance in order to ensure that the board members address issues relating to their particular areas of expertise.

Here are a few dos and don'ts that we believe CEOs should consider:
  • The board's role is to establish parameters for acceptable corporate performance; management works for the board. They are not buddies, and it is imperative to maintain a professional relationship with each member. Never forget they are being paid to manage CEO and company performance and assess the managerial skills required to lead the company. We have seen CEOs display feelings of betrayal when directors have questioned their skills or abilities to build teams. Building the confidence of the board in management is critical to CEO success. While not always a negative, if the CEO uses individual board members as confidants, they are aware of his mortality, periods of indecision and personal motivations that may conflict with corporate needs. CEOs often cast the seeds of their own demise despite reasonable performance.
  • Try not to overwhelm directors with day-to-day details. Board meetings are not the time to display vast technical knowledge of the business or the product. Remember, the board establishes operating performance and strategic issues, and that presentations generally should relate to issues surrounding the management team, company strategy, financial performance, capital formation or major issues that impact performance. In concept, stay out of the weeds and try to focus on the big picture; the board should establish policy and allow management to execute. Within this context, details are important in discussion of how they could affect the whole and what strategies are required to assure the well being of the company.
  • State clearly what is needed from the board before each meeting and gear the meeting appropriately. Board packages should take on a format that is consistent, states corporate and departmental objectives, and gives the right level of detail and tools to establish and evaluate corporate objectives. Provide information that supported prior strategic decisions, as well as historical financial information, in checking your budget. Each department presentation should reflect the managers' work and assessment. Presentations should be practiced and critiqued to ensure essential content and clarity. Working on presentations as a team allows management to have a consistent strategic view and offer potential solutions. Preparation for board meetings can consume large chunks of time, so plan accordingly.
  • Compensate fairly. Good people want to be helpful, but it's important not to take advantage of them. When compensated fairly, the board will feel an obligation to work in your interest and to think about the issues. Provide equity incentives as well as current remuneration when possible. Some of your other professional advisors may be able to provide industry benchmarks so you know your compensation is competitive.
  • Anything sent to the board should be pre-approved by the CEO. This is essential to ensuring consistency and not being surprised by a board member's own interpretation of what someone else has said.

If a CEO wants an independent board with great expertise applicable to the business, the CEO must develop a plan and actively work to bring on the best talent available. Remember, the sign of a good manager is the ability to delegate to subordinate managers and to rely upon directors' knowledge and experience complementary to the CEO's. Utilize the expertise and develop roles for your directors to better assure compatibility. Be professional in all interactions with directors.

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