How outside boards give CEOs what they can't get anywhere else.
I'm my own boss," is the entrepreneur's credo. At least it's the credo of Kenneth Hendricks, chief executive officer of ABC Supply Co., a building-materials distributor in Beloit, Wis. ABC, founded by Hendricks in 1979, did $82.3 million in annual sales in 1984 -- a 76,075% five-year growth rate, placing it #2 on the 1985 INC. 500 list of America's fastest-growing private companies. Despite the size of the company -- and the challenges that come with such fast growth -- Hendricks sees no reason to establish a board of directors at ABC.
"The energy that goes into setting up a board, and then periodically sitting down with them, is a reduction in productivity," Hendricks says. "A board is a convenient way for an entrepreneur to shift responsibility to other people. I like being responsible for this company. I'm a hands-on kind of guy, and the buck stops here. I love the independent environment at my company, and I don't want to change it. Every day, it feels like a party around here." The 44-year-old Hendricks owns 100% of ABC, and there are no procedures, implicit or explicit, governing such long-range policies as succession. "I haven't thought about it," he says when asked who might take over should anything happen to him. "That's too far down the road. I'm having fun and satisfaction now."
Most people who start their own companies side with Hendricks when it comes to naming outsiders to a company board, even though the benefits to the business go well beyond planning for succession. In fact, the reasons to have a board are so sensible sounding that they are hard to dispute. Boards are an inexpensive way to get hardheaded, expert, objective advice. A board forces a CEO to drop back from day-to-day operations and to think strategically about the direction the company should take. Why, then, the reluctance on the part of so many CEOs? The answer seems to lie less with business tactics than with individual style. The very personality traits that lead people to start successful companies in the first place -- a passionate concern about control; a bias toward action, not rationalizing and explaining; a desire to create a management style that is appropriate to the business, not one learned in an MBA program -- are the same characteristics that make company heads chary of boards. When the subject comes up, the feeling that is voiced most often is fear of losing control of the company.
John Cross, chairman and former president of Elphinstone Inc., a $1.7-million Baltimore distributor and renter of construction equipment, has some strong opinions about why most heads of privately held companies shun boards. Cross, who joined the company in 1937 and became president in 1962, didn't set up his own board until 1979. "Entrepreneurs," he says, "tend to be secretive and trust no one. At the top of the corporate flow chart is the word 'me,' and underneath that is 'everyone else.' It's logical for entrepreneurs to have a board, but entrepreneurs tend to be ruled by their emotions, not by logic. That's why so many firms fail when the founder or driving force dies. The entrepreneur tends to put great faith in his own powers. He subscribes to the John Wayne image -- the longer battling against impossible odds, the macho achiever. I've talked to many of my colleagues who don't have boards, and they say it's because outsiders are a threat. They're afraid they wouldn't be able to run their company the way they want."
David Boyd, associate professor of organizational behavior in the College of Business Administration of Northeastern University, finds much the same attitude. "For [the entrepreneur] to seek advice from something like a board is to admit weakness and vulnerability," Boyd says. "Entrepreneurs tend to compete with themselves. Relying on a board of directors is anathema to their desire of projecting an image of strength and omniscience."
Many small companies do have boards. But, as Leon Danco, president and founder of The Center for Family Business, in Cleveland, points out, most are rubber stamps. "The CEOs of most small businesses," he says, "either do nothing or pack their courts with shills. It's because successful entrepreneurs worship flexibility, i.e., 'freedom,' more than anything else -- including, it would seem, survival."
That is a lesson that Victor Pomper learned well when he was head of marketing at H.H. Scott Inc., in Cambridge, Mass. For two decades, the company, founded by Hermon Scott in 1947, was a standard-setter in the high-fidelity stereo equipment industry. "Hermon Scott was a genius," says Pomper. "He had an incredible, towering intellect. But he never shared his feelings, and he always refused to take advice. When imports started to eat away at our market share, and we started to get into trouble, he just couldn't cope. We'd come out with another brilliant engineering innovation, and we'd do well at first. But, invariably, our competitors would copy the technology and then undercut our price. Instead of cutting prices right along with them, he kept our prices up. He consistently traded market share to maintain profit margins. He was obsessed with our prestige. It was folly.
"Many times, I suggested we set up a board. But trying to get him to follow any advice was a knock-down, drag-out fight," says Pomper. "He was a strong man, but some strengths carried too far can become weaknesses." In 1972, the company finally went bankrupt. Scott, a broken man, died within a few years.
"I learned from Scott's mistake," says Pomper, who founded his Bedford, N.H., company, Satellite Data Corp., in 1981. "And what I learned was that a company is much better off with a board, preferably one that has a good number of outsiders sitting on it. A CEO needs a steady source of unbiased, outside advice."
William H. Chisholm, president of Boardroom Consultants Inc., a New York City consulting firm that helps companies recruit directors, agrees. "It's like putting inexpensive management consultants on retainer," he says. "But, typically, small firms have not resorted to outside directors, although that's finally starting to change." The change, though by no means a groundswell, is taking place most often at maturing start-ups. And it is giving birth to some boards that are as diverse as the companies that have created them.
We hold over 10 meetings a year," says Rick Terrell, president of Microware Distributors Inc., describing the board at his $15.3-million Aloha, Ore., company. "That's an extremely high frequency for any kind of firm. But I depend on that many meetings. We're a fast-growing, dynamic firm, and we need to sit down and talk a lot. Not so much to discuss day-to-day operational stuff as to look at the strategic opportunities that are constantly presenting themselves." Terrell founded Microware -- a distributor of microcomputer hardware and software, and #350 on the 1985 INC. 500 -- in 1979.
Microware's board has six members, who include three top officers and three outsiders. One of the key outsiders is Lou Manrique, a buyer for PacTel InfoSystems. "He's a retail man," explains Terrell, "who knows the buying patterns of our customers. He'll say: 'You don't want to start buying that. You won't find customers for it.' He's saved us from making many costly mistakes. This industry is changing every day, and I would have trouble keeping up with it without my board."
