A Board Even An Entrepreneur Could Love
In the second-floor boardroom of Amtrol Inc. on this December morning, Chester H. Kirk, founder, chairman, and chief executive officer, is sitting at the head of a large conference table, surrounded by his management team and the company's four outside directors. They have gathered at the headquarters of the privately owned manufacturing company, in West Warwick, R.I., for Amtrol's final meeting of directors for 1982. Scattered on the table before them, between the coffee cups, are budgets and projections for the next 12 months and through 1985. But today, not unexpectedly, many of the people seated around Kirk reserve their closest scrutiny for the company's actual performance in the midst of a sagging economy.
As a maker of plumbing, heating, and water-system equipment, Amtrol's fortunes have always risen and declined with the health of the housing and construction industries. As a result, nobody is a bit surprised to see the revenues of the 36-year-old company slump from $62.1 million in 1981 to about $56 million in 1982. For many of its competitors, the long, deep recession has brought both contraction and failure. But even though Amtrol's sales have shrunk, the company has never been healthier. Net profits are soaring past the $2 million mark for the first time. There is no need for any new debt -- indeed, there is an unprecedented problem of what to do with a growing pile of cash. And, in most product areas, market share has continued upward, even after 1981 price increases.
Results like these during 1982 would hardly have been possible if Amtrol hadn't seized some major opportunities to pare costs and ensure profits even before the recession hit. Its strategy over the previous two years had included eliminating product lines that weren't meeting profit goals, consolidating manufacturing plants, and thinning the ranks of salaried personnel. Amtrol also adjusted its prices for inflation. And while the steps themselves may not have been all that unusual for a well-managed company to take, the inspiration behind many of them certainly was.
As signs of a sputtering economy began to appear in 1980, Kirk and Amtrol's other top executives, in a practice familiar to them but rare among most privately owned companies, had listened carefully to criticisms by outside directors about Amtrol's weaknesses and excesses and had acted upon them. Many of the directors ideas, in fact, had been advanced at board meetings in this very room more than two years earlier.
Amtrol's board has long played an influential role in helping management set the overall direction of the business, unlike the boards at most private companies and esspecially at businesses still run by the founders. At such companies, in fact, the idea of an outside board challenges the very independence many entrepreneurs cherish. "Entrepreneurs are used to taking all sorts of risks, but about 95% resist the idea of a board," says C. Roland Christensen, a professor at Harvard Business School who has studied companies and their boards for 30 years. Although this resistance may be strong, Christensen says, "the return on investment for managers can be tremendous. Outside directors are the most underappreciated and underutilized asset available to any business."
It was exactly such a respect for outside views that seemed to come naturally to Chester Kirk. Founding his business in 1946, at age 29, Kirk began very early to bounce business ideas off top Amtrol executives, as he weighed decisions, particularly in areas other than product development and marketing, his own strong points. He tested his gut feelings on people whose opinions he respected.
Operating first under the name American Tube Products Inc. and then American Tube & Controls Inc. (the name of the company was changed to Amtrol Inc. in 1973), Kirk -- an engineering graduate of the University of Rhode Island -- and a few associates had worked untiringly during the 1950s and '60s trying to establish a market for what, in effect, was the company's sole product: a technologically advanced water tank designed by Kirk to work with home heating systems that used hot water. The company was competing in a rough-and-tumble market that was saturated with dozens of outdated but accepted tank designs.
By the late 1950s, Amtrol had made inroads in selling plumbing and heating equipment to wholesalers with its tank, built around a flexible diaphragm to maintain heating-system pressure and thus boost efficiency and durability. Within a few years, moreover, a prolonged campaign to win large orders from big homebuilder manufacturers would start to pay off. Meanwhile the company was beginning to exploit promising markets in Western Europe.
To allow himself as much time as possible in the areas he enjoyed most, Kirk handed responsibility for manufacturing and operations to his brother, Ken, and relied on another younger associate, Al D'Amico, to take charge of finance. "From the very start," says Kirk, "my idea hadn't been to build a reputation but to make some money.
Amtrol's financial worries were increasing, just as the business started to see its first real market successes against scores of old-style tank makers. As sales of its heating-system products propelled revenues from $4.4 million in 1964 to more than $9 million in 1969, the company was using its retained earnings and all the credit it could lay its hands on to add new manufacturing facilities in Texas, Tennessee, and Europe. The need for more capital back in the early 1950s had driven Kirk to take on a partner (although not as an active member of the management team). But now, as Amtrol attempted to expand and diversify into two new tank-based products -- one, a derivation of the first tank for use in residential water well systems, and the other, a cylinder for storage and distribution of refrigerant gases -- there were renewed strains on the company's finances. Finding the money to support these activities was becoming a major headache.
The problems didn't end with money, either. Many of the time-worn ways of doing things were no longer working. In the old days for instance, with only a single basic product to build and promote, it was easy for Kirk to communicate ideas and objectives about marketing by chatting casually with a few people or calling an impromptu meeting. "Communication took place on a daily basis," says D'Amico, now 51, who is Amtrol's chief financial officer. But as growth exploded and new products were integrated into Amtrol's lineup, along with the personnel to support them, the informal system began to burst at the seams. Without a written company plan to follow, the signals Kirk and other top management sent out didn't always reach the ranks. For example, notes D'Amico, sales and marketing personnel would continue to place priority on the established products they were used to selling instead of redirecting corporate resources to the newer ones.
In the early '60s, with sales of nearly $3 million, Kirk felt that one way to improve how things were done was to invite some Providence-area businesspeople to form a board with selected Amtrol insiders. In addition to wanting experienced people who could advise him on such business matters as real estate transactions and insurance, Kirk felt management, busy as it was, would benefit from ongoing review by interested outsiders. Up to that point, he felt he had been accountable only to bankers and the Internal Revenue Service. Kirk says, "We weren't even doing quarterly reports." With a board, Amtrol now had a legal body that was responsible for approving all contractual obligations, budgets, and major capital expenditures.
Within a short time, Amtrol's performance in basic housekeeping areas improved. As Kirk views it, "The board forced us to do the kinds of things we should have been doing." Numbers that had been scattered all over the company now were being gathered and assembled into reports for directors to examine at quarterly board meetings. For Kirk, however, the involvement of outsiders wasn't modifying his powers as a CEO or making him feel like less of an entrepreneur. "The board gave me more confidence in what I was doing," he says. "The directors had expertise we didn't have."
By 1970, however, the nature and scope of Amtrol's activities had shifted dramatically. During the '60s, Amtrol hadn't only grown in revenues from $1.7 million to $10 million, it was also devoting more of its resources to future products and was building a manufacturing and sales organization overseas. These were areas in which the members of the existing board could make only minor contributions.
Given the company's new challenges, Kirk felt the time had come to revamp the board and appoint people who had strong backgrounds in such areas as finance and international business, fields in which he reckoned management could use all the input it could get. These areas of expertise hadn't been stressed much when he had formed the original board, Kirk noted, because he hadn't foreseen how valueable they would become. But as business boomed, there could no longer be any doubt. "We knew our products and markets," says Kirk, "but I wanted knowledgeable people, especially in the area of finance. I needed people who had experience with growing businesses and had good contacts."
More than any specific expertise related to plumbing and heating, Kirk wanted to find people who had seen successful bigger companies up close and were interested in learning about Amtrol. Although he knew the company's growth would necessitate hiring more and more sophisticated managers and consultants during the 1970s, he also felt the contribution of new board members would be quite different. Experienced directors would help management set the company's overall direction in the coming years and help evaluate opportunities through objective, but sympathetic, eyes. "I wanted people who could ask, 'Have you looked to the left and to the right?" Kirk explains. "And if we didn't achieve a goal we said we could, I wanted them to ask, 'Why haven't you measured up?" While the decision to go after high-caliber outsiders might have ruffled some feathers within, Al D'Amico, who had studied management and finance, found no reason to object. "We were thinly staffed, and we always had too many balls in the air,"he says.
For his first two new directors in the early 1970s, Kirk may have had to look far, but he didn't have to look all that hard. As Amtrol's business had expanded in West Germany, Kirk was spending a lot of time there. In the course of those visits, he had become acquainted with Herbert H. Jacobi, a Dusseldorf-based vice-president for Chase Manhattan Bank, and Hanns H. Winkhaus, a respected corporate attorney. In American-educated Jacobi, Kirk saw a first-rate financial professional who was not only well-connected on both sides of the Atlantic, but was also someone with whom he felt personally compatible. "He was young and aggressive and quite smooth," recalls Kirk, "and we related." Winkhaus had trained with law firms in both New York and Washington, was already director of Johnsons Wax GmbH, and had close family ties to two of West Germany's largest steel companies. "I saw him as Mister Germany," says Kirk. "And he knew how to get things done."
As Amtrol's overseas business had grown, Kirk had appointed Jacobi and Winkhaus, both around 40 at the time, to be advisers to the European subsidiary. They were already involved with many of the business decisions that had led Kirk to invest heavily in West Germany and, to a lesser extent, in Japan. When Kirk invited them to become directors, he felt the advantages would flow both ways. He was offering the young men a chance to expand their business experience in exchange for their expertise and judgment. "Chet Kirk just wasn't concerned about ego," recalls Jacobi. "He wanted to explore ideas for the business. And for me as a banker, I saw it providing major structural advantages to my work."
The benefits of having people like Jacobi and Winkhaus on hand began to accrue almost immediately. And, in time, these men would put Kirk in touch with two other highly talented board candidates. Jacobi would suggest that Joel M. Stern, a Chase Manhattan Bank vice-president who advised companies on financial policy, was an ideal person to help Amtrol design solutions to its chronic money problems. Besides being experienced at identifying maneuvers the company might take to maximize profitability, which is what he did for clients, Stern knew his way around Wall Street, an asset if Amtrol wanted to raise money in the public markets. Stern, who was in his early 30s, was impressed with Amtrol's record as a product innovator and Kirk's unmistakable business and leadership skills. From his earliest encounters, Stern says, "it was obvious he knew how to make a decision and that he wanted to do things right, without becoming any less of an entrepreneur."
Later, in 1975, with Stern in place, Jacobi and Winkhaus would encourage Kirk to recruit an old friend, John B. Rhodes, a New York-based business consultant who, after years of working in Europe, had become president of Booz-Allen & Hamilton International, a leading consulting firm. His own specialty had been advising foreign-based companies on general organization and strategy questions, but his firm's client list included some 300 of the Fortune 500. "I had a lot of respect for his broad experience," recalls Kirk. But the attraction wasn't one-sided. "I liked the idea of working for a company that was doing some interesting things but wasn't as big as companies I normally see," says Rhodes. "They [Amtrol] were a leader in their niche and were seeing pronounced growth. And Chet seemed very willing to hear a lot of different opinions."
By 1973, then, when Kirk had three of his outside directors in place, Amtrol's management was grappling with a host of problems that had mounted as the company had grown. The most appropriate solutions weren't always evident to the internal management. Kirk was convinced that there was no shortage of business opportunities for Amtrol, but the financial resources at hand were extremely limited. The company turned to the new directors for help in establishing investment priorities. And it also turned to them for guidance in presenting its financial needs to lenders and, perhaps, to investors. "We were novices in this game," says D'Amico. "We knew we needed significant amounts of capital in the 1970s -- not hundreds of thousands of dollars, but millions -- but we didn't know what to do."
One of the first things the new board did for Amtrol was to help sort out the financial options. As an alternative to more and more bank debt, which had become increasingly difficult to secure, the board felt Amtrol's best bet would be to raise a shot of equity through an initial public offering. "It was a way to create financial flexibility," explains Stern. But even though the plans for the stock sale seemed appropriate, the board had to come up with other options when, in the spring of 1973, Wall Street registered one of the steepest and broadest market collapses it had ever seen.
The equity offering was to have fed Amtrol's voracious appetite for working capital and to have helped pay for plant expansions in the United States and abroad. Without it, however, the company was forced to depend once again on loans, earnings, and whatever other tactics it could find to maximize cash. An early board suggestion aimed at increasing cash flow was for Amtrol to shift its inventory accounting method from first-in, first-out (FIFO) last-in, first-out (LIFO). While Stern and other directors noted that the change to LIFO would mean lower reported earnings, they calculated that the conversion would enable the company to shave well over $100,000 from its yearly tax bill.
"We adopted LIFO in the early 1970s, before inflation was much of a worry and really before many bigger companies had even heard of it," D'Amico remarks. "Joel Stern encouraged us, as he always has, to think about our financial decisions in terms of aftertax cash flow and operating earnings." That way of thinking would pay off. (By D'Amico's calculations in 1983, Amtrol had saved at least $1.2 million on its tax bills by using LIFO.)
In 1974, Amtrol's management proposed the creation of an employee stock ownership plan. Board members saw the ESOP's chief corporate benefit as that of providing the business with an on-going new source of capital in the years ahead. The value of annual stock contributions to the plan would be deductible for corporate tax purposes, and it would generate some $2.5 million in working capital over the next six years -- money Amtrol wouldn't have to borrow.
Even though the original idea for the ESOP had been Kirk's, it was board members Jacobi and Stern who opened management's eyes to the resulting possibility of larger credit lines. From their vantage point as financial professionals, they noted that the sums Amtrol was accruing annually under the ESOP and in a special reserve fund for LIFO should be considered as corporate assets equivalent to other tangible net worth shown on the company's balance sheet. If the lenders agreed, it would substantially boost the level of total indebtedness the company was allowed, since loan covenants in the mid-1970s required that the ratio of debt to equity be maintained at 2.5 to 1. "I asked the bankers about it, and they accepted our reasoning," D'Amico says. "At the end of 1977, the adjustment meant we were entitled to another $5 million of borrowing."
Although many of the board's early contributions to Amtrol revolved around money, directors soon began encouraging Kirk to step back and think more methodically about where the business should be going. As successful as Kirk had been without any formal plans, they argued that a plan would help management see the best opportunities in the future. From 1970 to 1974, net sales had nearly tripled to $28.9 million, but most of what Amtrol was hoping to achieve in the coming years was still being battered about by three people -- Chet and Ken Kirk and D'Amico. "Chet would have maybe a dozen or more new products at various stages of development, but there weren't any priorities or what you'd call schedules," recalls D'Amico. "And we had no idea what our market share was or even the size of our markets."
Accustomed as they were to the more precise goal-setting procedures of professionally managed organizations, outside directors began to press Kirk to put his ideas into a more visible planning document. "They told me they needed to know where we were going," Kirk recalls. Along with the basic recommendation to Kirk to develop a plan, the board referred him to consultant John Van Slyke, of American Management Co. in Harvard, Mass., who was soon hired to assist in the production of an initial plan and to teach management some basic planning techniques.
While the planning process wasn't resisted by top management, Kirk and D'Amico both concede that it wasn't easy for everyone to embrace. Middle managers, for example, were annoyed at the amount of time and documentation the consultant wanted from them and at the implication that the changes were necessary because they weren't doing their jobs adequately. "A lot of people felt they were educating the consultant," Kirk admits. But throughout the lengthy period, top management supported the overall direction and looked forward to the benefits.
Amtrol's first corporate plan, delivered to the board in the summer of 1977 after nearly two years in the making, was 1 1/2 inches thick and included a lengthy analysis of the company's markets and its competitors. While the sheer bulk of it may have been excessive -- subsequent plans have been reduced to 20 pages or less -- the report pulled together for the first time basic industry data that, until that point, management had only been able to wonder about.
For example, it showed market share information for each of the company's products according to both the nationwide and regional markets. This enabled everyone to see that, among other things, Amtrol seemed to be ignoring major opportunities to sell its technologically advanced water-well tanks in the southeastern United States. With the new document, says D'Amico, "we could see not only how well we were actually doing, but also how well we could and should be doing."
For Amtrol's outside directors, the adoption of new planning disciplines created very visible by-products. Management was now generating a full set of numbers from which management and board members could analyze with greater clarity both the business and where it was heading. At board meetings in March, May, and August, the directors could ask questions and make comments on the next year's three-year plan while it was still being formulated, several months before they were asked to approve Amtrol's annual budget in December. "A plan let everybody stand back and look," says Rhodes, the director from Booz-Allen. "It was a baseline from which you could measure progress." Moreover, directors began receiving monthly a 13-page package of information that, in addition to reporting income on a consolidated basis and by product area, compared everything -- including profit margins for each product -- with targeted budget goals.
During the late 1970s, the availability of such detailed information enabled management and outside directors to focus more sharply on Amtrol's problems. The European subsidiary in West Germany had lately become one of the bigger ones. Whereas early in the decade close to half of the company's net earnings had been generated from products it made and sold overseas, the European operation in which Amtrol had invested so heavily to nurture from 1965 to 1972 had become the source of nothing but red ink. "It had been very romantic to build the business in Europe," says Kirk, "and we made a lot of money there." But in recent years, competitors in West Germany had become increasingly aggressive, labor costs and the expense of benefits had soared, and the foreign operation was occupying more and more management time. In the judgment of Jacobi and Winkhaus, the steep costs of doing business there wouldn't abate soon. Nor did there seem to be much promise for exporting manufactured goods from Germany to other European countries. Stern, who earns his living as a business economist, pointed out that the approach would be almost hopeless in light of the deutsche mark's strength against other world currencies; it would result in high-priced products. "I was also forecasting that the mark would be getting stronger," recalls Stern.
The discussions, which took place over a few years, culminated in a 1981 decision to sell the German subsidiary and participate in the European market only indirectly through licensing and royalty agreements on the company's products. "We looked at it in terms of return on assets deployed," says banker Jacobi. He and Rhodes introduced management to an overseas-based businessman, who subsequently bought the operation at its book value of $1.4 million. For Kirk, who had been the architect of the overseas expansion, the choice to leave Europe highlighted a difficult but important turn in the company's approach to business. "We were in the business to earn money," he notes, "not to build monuments."
The same type of thinking was beginning to shape Amtrol's approach to decision-making throughout its business. In 1978, for instance, the company had seized the chance to buy its own steel service center in Woburn, Mass., as a way to obtain a less expensive supply in a relatively tight steel market. But by the time a fire destroyed the facility in March 1980 a serious overcapacity among steel millers had developed. The fire, Kirk notes dryly "hadn't been in our business plan." Even so, it allowed the company to evaluate its supply strategy under vastly changed market circumstances. Amtrol chose to go back into the steel service business in a scaled-back way -- something directors strongly favored -- and then pocketed the rest of the insurance money.
It was this same commitment to maximizing profit that spurred management, beginning in 1980, to start mapping out a defense strategy for an anticipated recession in 1981. For some time, Kirk notes, the outside board members, particularly Rhodes and Jacobi, had been dissatisfied with Amtrol's gross profitability. They urged management to introduce operating efficiencies before the economy weakened. Instead of offering only vague criticisms, though, they offered real suggestions, Kirk says. "They were saying things like, 'Why don't you cut $1 million from your G&A and then another $1 million from selling expenses."
The comments were taken seriously. Amtrol took steps in mid-1980 to begin consolidating its three manufacturing plants in Rhode Island into a single facility adjoining its West Warwick corporate offices. With everything under one roof, the company, in turn, restructured several administrative areas, permitting a reduction of about 20% from its salaried work force of 200 over a 2 1/2-year period. These actions were reinforced by Amtrol's decision to drop several products, including a line of automobile air-conditioner condensers and home baseboard radiation units that had been losing money. Kirk also went ahead with price increases ranging from 2% to 12% as protection against inflation and higher costs. "If I didn't raise prices," notes Kirk, "it would be no different from a price reduction on the bottom line. don't have an airline-pricing mentality."
Yet even in the midst of a sweeping campaign aimed at ensuring profits during recession, Kirk didn't want to delay in exploiting a new market area. During the last quarter of 1980 and the first quarter of 1981, with signs of recession everywhere, Amtrol, with the blessing of outside board members, introduced a major product for the first time in more than a decade. Like the company's other offerings, the application was rather mundane: It was a durable and fuel-efficient 40-gallon water heater, aimed at residential users. Yet in contrast to earlier Amtrol products, in which launch decisions had been based on Kirk's intuitive reading of the marketplace, the market for water heaters had been thoroughly researched by the company over a five-year period. Any new product introduction is a gamble, Kirk concedes. But the amount of planning that went into the new premium-priced water heater made the decision a lot less reckless.
"We looked at the competition, and we saw that the state of the art was rather poor," says Kirk."We knew we could make something better." To oversee this new marketing plan, Kirk hired John McCann from Crane Co., to serve as executive vice-president. He joined Kirk, Ken Kirk, and D'Amico as the insiders on the board.
Over the years, Amtrol's directors have assisted in something as general as planning to something as specific as choosing a new computer system. "We try not to have them involved with management," says Kirk. "We mostly listen, and then explore the parts that seem to fit." In an episode in 1982, the board simply wasn't impressed with management's justification for a new computer system -- and said so quite emphatically by rejecting the $600,000 capital expenditure request. Having heard countless horror stories of businesses writing off huge costs of information systems they should never have purchased, directors Rhodes and Jacobi were concerned about Amtrol's plan to develop much of its own software.
The solution Amtrol's computer people described at last May's board meeting had been "hardware-driven, not need-driven, as it should have been," explains Rhodes. "The proposal just didn't hang together." The directors asked management to cease negotiations on the purchase contract then and there and, once again, pointed the company to a consultant. For about $35,000, the companywide study concluded that the proposed system was indeed the wrong one, and it showed Amtrol a solution more in line with its needs, requiring about $350,000 less in initial outlay.
Such instances in which the board actually reverses management decisions have been extremely rare. "At first, I was a little bit bruised," admits D'Amico, who had been responsible for the rejected proposal. "But I can't argue with the outcome, which is that we'll be getting what we need." For Kirk it was one more example of the benefits Amtrol receives from its outside directors. "They asked what they were supposed to ask," he says. "They wanted to know if we had considered where the approach we had selected would end up."
Over the years directors have developed a good deal of personal loyalty to Kirk. But their commitment to the company goes beyond friendship. "With Chet Kirk, there's always been a very strong sense of direction," says Rhodes. "And one of the reasons the company has done so well is that he's brought in a lot of advice and different perspectives. It's enjoyable working with people you respect." Through Amtrol, the directors say, they have had direct exposure to the range of problems affecting all growing businesses -- and they have been able to return to see how the strategies work. "I get the feeling of impact as well as input," says banker Jacobi. "It's given me a real inside feel for the kinds of things that are happening in industry. This sharpens my focus on other businesses."
Whatever the benefits Jacobi and others feel they are getting out of their decade-long relationship with Amtrol, Kirk, who at age 65 has no plans to retire from the company he founded as a young man, can't really imagine running the closely held business any other way. "I really don't enjoy making reports any more than anybody else," he admits. "But when I consider how much better it is to have good people thinking about this company and how we can improve things, I know it's worth it." Pausing for a second, he adds, "I know lots of people with rubber-stamp boards, and I'm always wondering how well they sleep at night or if they really care."