While the usual ratio of outsiders to insiders favors in-house directors, a number of small companies have taken a chance on a broader view from the outside. Richard Parker of Richard Parker & Associates, a $15-million direct-mail fund-raising company in San Francisco, recently set up a board composed of three outsiders and himself. "I don't want to live in my own little universe," says Parker, who is founder, CEO, and sole owner. One of the outsiders is an attorney. The other two are Aaron Adler, retired chairman of the board of Stone & Adler, in Chicago, and Pat Connolly, a vice-president of Williams-Sonoma Inc., in Emeryville, Calif., both recruited for their direct-marketing sophistication.
Parker says his four board meetings a year help him organize his thoughts and actions. "Just the process of meeting, and having to prepare ahead of time, helps me think more clearly," he says. "From having a board, I've discovered that if you can't logically explain what you want to do, it's probably not worth doing. Many entrepreneurs are too insecure about themselves to have a board. They're afraid they'll look naive in front of them. But I've gone into that boardroom and shared bad quarterly statements and bad moments with my directors that I wouldn't want to share with my mom. A board helps you face things a CEO would be tempted to deny or sweep under the rug."
George Clement, CEO of Clement Communications Inc., says straight out that before he created his outside board five and a half years ago, "I wondered if, under scrutiny of a board of sophisticated businesspeople, I could measure up. I wasn't so sure I wanted to be put to the acid test." Clement Communications, in Concordville, Pa., is a $10-million producer of posters and publications that help businesses communicate with their employees. The company, founded by Clement's grandfather, is closely held and family owned. "When I thought about forming a board, I was afraid of losing control," he admits.
Despite his anxieties, Clement plunged ahead and set up a board consisting of himself and four outsiders. As his outside directors, he chose the company's legal counsel of 20 years for his long-range view of the firm; the CEO of a similar (but not competing) company for his knowledge of the publishing industry; a financial expert; and another CEO for his business savvy. Within a year, the board had convinced Clement to set up a system of bad-debt management that saved the company $190,000 before two years were up. The board also helped Clement Communications improve its financial reporting and, according to Clement, kept him from making foolish acquisitions. "My board has made me a better CEO," he says. "CEOs who don't use outside advice run the risk of internalizing too much. They never realize their full potential, and they miss a lot of opportunities."
Elphinstone's John Cross says the major reason he set up his board in 1979 was to establish continuity. "I'm 68 years old," he says. "It would be irresponsible and selfish of me to not plan for the future. I don't want this company to fall apart after I go. I want a smooth succession. A company is a living organism, not an appendage of the leader's ego."
Cross set out very methodically to choose the four outsiders who would join three of his company's top managers as directors. First, he identified the areas in which he wanted advice from the outside. Then he and his management team drew up a list of candidates, which they pared down to four names. Cross sent each and invitation to join the board, along with a prospectus, a brief history of the company, a full set of financial figures, and a one-year and a five-year marketing plan. A sheet describing the duties of directors was also enclosed. Cross said he then phoned the candidates, explained what was on the way, and waited. All four accepted.
Cross's wife, Mary, a vice-president, attends every board meeting and lends her advice, even though she is not a board member. "Who cares more about your best interests than your spouse?" asks Cross. "She knows me better than anybody alive, and I trust her. It helps cure some of the loneliness that comes with being in charge. She doesn't have much marketing or financial knowledge or anything like that, but she has remarkably good hunches about personnel matters. We're a small company, with only 16 employees, so she knows everyone here."
Recent hikes in directors and officers (D&O) liability insurance -- and the difficulty in getting coverage -- may put a damper on some small business's attempts to recruit outside directors. Premiums are from 3 to 10 times higher than they were last year, and in most cases, higher premiums are buying less coverage.
A company can set up an advisory board, however, an effective alternative that also skirts the insurance and litigation problems that formal boards may face. "Many people in high positions are reluctant to serve on a formal board of directors because of possible legal hassles," says Howard Anderson, managing director of The Yankee Group, a consulting firm in Boston. "A board member is stuck with a hell of a lot of legal responsibility. If a company screws upo, a stockholder, supplier, or customer can name that company's board of directors in a lawsuit. And an outside member of that board, even if he only attends a few meetings a year, is just as liable. Advisory boards, on the other hand, generally carry no legal liabilities. That means experienced, influential people are more willing to serve on them."
HoltraChem Inc., a $30-million chemical distributor in Natick, Mass., set up an advisory board of two outside members last year, partly in response to the D&O insurance problem. The company was founded nine years ago by president Herbert Roskind and executive vice-president Ery Magasanik, who are co-owners. Roskind and Magasanik chose for their advisory board two men who have specific talents that they themselves lack. One is John Remondi, vice-president of finance at Fidelity Investments, in Boston, and the other is Glenn Petersen, retired president of a manufacturing company. Remondi's expertise in structuring deals is particularly valuable right now as HoltraChem tries to expand by acquiring other companies. Current plans, for example, call for the acquisition of a chemical-manufacturing company, in order to -- in Magasanik's words -- "integrated backwards." Remondi already has helped HoltraChem engineer a 1% reduction in the lending rate charged by its bank, a maneuver that might never have occurred to Roskind and Magasanik.
Such money-saving maneuvers have convinced many CEOs that they were smart to appoint outsiders to their boards in the first place. Increasingly, as John Cross predicts, the practice of setting up a board, formal or informal, is likely to become a matter of survival. "The rapid change in today's economy, the influx of computers, and the expanding information base are making entrepreneurs realize that they can't live in their own little universe," he says. "I think small-business people are becoming less and less provincial. From now on, companies run by the seat of their pants will either see their market share shrink, or get destroyed by their competitors."
