How To Make The Most Of Outside Directors

Tweet

1 PLAN AHEAD

The beauty of boards of directors is that their function can be whatever a chief executive officer decides best suits the company. That can be based on immediate needs, such as how to control costs, or projected needs, such as how to carve out new markets. Ideally, before setting up a board, a CEO will have thought through the direction he or she wants the company to take, and its current and prospective strengths and weaknesses. Just as important to the overall effectiveness of the board, the CEO will have assessed his or her personal strengths and weaknesses so that the directors will complement rather than duplicate talents.

John Cross of Elphinstone Inc. (see main text) was very clear about what he wanted from outsiders when he set up his board. He identified four areas in which he felt his construction equipment and supply distributorship needed more information on a continuing basis. He wanted to keep abreast of the latest developments in management techniques; he wanted financial advice; and he wanted to understand better the viewpoints of his customers and suppliers.

Once he had defined what he wanted, Cross recruited four outsiders to match his needs. They are Douglas Walker, a management and turnaround expert who is on top of the lastest developments in management techniques; Karl Mullen -- former treasurer of one of the largest rental firms in the area, and now a CPA with a computer software firm -- who has the right financial background; William Hardy -- executive secretary of the Maryland Highway Contractors Association and an expert on the state highway market for equipment -- who could speak for customers; and Bernard Stang -- head of a division of Ingersoll-Rand Corp. -- who represents the suppliers' perspective.

2 SEEK THE BEST

Once a chief executive officer has figured out what he or she wants a board to accomplish, that person should seek out experts, not college roommates or the company's lawyer or accountant. Some CEOs set up inhouse nominating committees, rely on consultants who specialize in finding directors, or solicit recommendations from peers.

Chester Kirk, CEO of Amtrol Inc., in West Warwick, R.I., has an eight-member board that represents the kind of talent and experience that most entrepreneurs assume isn't available to them (See "A Board Even an Entrepreneur Could Love," INC., April 1983).Herbert H. Jacobi, for instance, formerly was an executive vice-president of Chase Manhattan Bank and is now a partner in Trinkaus & Burkhardt, a German bank. "The truth is, a lot of top-notch people are perfectly willing to sit on the boards of smaller companies," says Kirk, who founded Amtrol in 1946, when he was 29. "They're often very flattered to be asked, and they know that being a director at a small, growing company would be an education for them, too. But many entrepreneurs don't even try to recruit them. They're afraid those people will see their firm as unimportant. Entrepreneurs have more appeal than they think."

3 MONEY COUNTS

While the usual payment to directors of small companies is an annual retainer, a fee for attending specific meetings, or both, individual companies have worked out a wide variety of schemes for compensating their board members.

Rick Terrell, president of Microware Distributors Inc. (see main text) gives each of his directors a yearly payment equal to a certain percentage of the company's net profits after taxes. In 1984, this "bonus pool," as Terrell calls it, amounted to $1,800 each. "I want my board members to know how valuable they are," says Terrell. "I like the idea of tying their fortunes to the fortunes of the company. It makes them more committed."

Chester Kirk, CEO of Amtrol Inc. (see sidebar, "Seek the Best," page 82), pays each director a yearly retainer of $8,500, plus travel expenses and additional fees for attending special audit, compensation, or planning-committee meetings. Board members can also buy shares of the company's closely held stock. Though the compensation plan is generous for a small company, Kirk sees it as a "bargain."

Laser Engineering Inc., a $2.5-million manufacturer of laser tubes and systems, in Waltham, Mass., pays its board members neither a yearly retainer nor an attendance fee. Instead, Laser gives stock options. Each of the company's four outside directors currently holds an average of 2% in equity. "Equity makes directors more dedicated than money," says founder and president Robert Rudko.

Among the 31,000 companies surveyed in the 1985-86 Growth Resources Officer Compensation Report, an annual nationwide study of smaller-company officer compensation published by Growth Resources Inc., in Peabody, Mass., the average retainer ranged from $1,175 a year at companies with less than $2 million in annual sales to $4,643 a year at companies with annual sales of $25 million to $40 million. Meeting fees among all respondents ranged from $100 to $1,000, averaging $534.

Cash-short companies may lean toward compensating directors with equity. The disadvantage, however, is that once a director holds equity in a company, he becomes an "insider," and may lose some of the objectivity that was sought in the first place.

4 TAKE THE TIME

One of the most common mistakes is to underestimate the amount of time a chief executive officer will need to spend with board members. Quarterly meetings -- and the preparation that surrounds those meetings -- are the bare minimum, if directors are to get psychically and emotionally involved with the company. In fact, the CEO faces many of the same motivational issues with board members as he or she does with key employees: how to involve them in decision making; how to keep them fully informed; and how to make them feel an integral part of the company.

Robert Rudko, founder and president of Laser Engineering Inc., has pulled out all the stops in getting his four-member outside board involved. The directors meet every other month, and also serve on committees to tackle specific problems, such as incentive compensation. "Directors need a constant sense of purpose," says Rudko, who holds additional meetings with individual board members as often as once a week. He concludes, "They appreciate the fact that they're needed and given attention."