How three company builders turn to their outside boards for answers* * *
For Nancy Olsen, this was the last straw: two of her most experienced employees had walked out the door with no explanation, leaving half her dealerships without technical support. The past few days had been no better; her switchboard was lit up with calls from frantic dealers unable to get their point-of-sales computers working. And so far, six boxes of glass display cases for stores due to open within the next several days had arrived shattered.
But Olsen, the founder of Impostors Copy Jewels, a retailer/franchisor of costume jewelry, had to forget all that. Instead, she'd spent the past 20 hours preparing company reports for her newly formed board of outside advisers -- prominent businessmen she barely knew. And although she needed them to help navigate her company's fast-paced growth, on that November day she resented their demands. "I couldn't see the rationale of taking time away from the day-to-day crises to explain numbers I already knew inside out."
Today, more than a year later and with annual revenues of $17 million, Olsen considers the board her secret weapon. Hardly a group of yes-men, her advisers, who have since become a board of directors, take an active role in the future of her company, probing, guiding, and sometimes even stepping in to offer help. One board member, the president of a financial-services consulting firm, took over as chief financial officer for several months until a replacement was found; another, a founder of a local advertising agency, is choreographing a new ad campaign for the company. Now, Olsen asks, "How can any company afford to operate without an outside board?"
The answer is that few do. John M. Nash, president of the National Association of Corporate Directors, estimates that 60% of closely held companies have at least one outsider on their board, but only 5% have Nancy Olsen's courage to form a board dominated by outsiders. Nash sees outsider-run boards on the rise. The reasons? The demands of a more competitive marketplace, the high price of consultants, and the pressures of succession.
Outside boards are as varied as the chief executive officers who form them. Anxious about market shifts, Robert Syme, a Cleveland-based maker of hazardous-waste drums, put together a board representative of his customers. Clayton Mathile, CEO of The Iams Co., a pet-food company, stresses his desire for "seven-digit decision makers," especially as he looks toward global markets. Others look for help with their organizational structure, their product line, and often their bottom line.
Whether these outsiders sit on a formal board of directors or a less formal board of advisers also depends on personal preference. Some CEOs feel they'll take advice more seriously from a board of directors that shares the company's legal risk and its responsibility to shareholder interest. Others find that starting with advisers is a more informal and sometimes an easier way to set up a board, without committing to the strictures of (and insurance on) a board of directors.
What follows is a look at three very different partnerships of company owners and outside boards, partnerships built on intellect, trust, dedication -- and even friendship.
UNDER 30 AND IN THE BIG LEAGUES
After four years in business, Micro-Frame Technologies Inc. had 1988 sales of nearly $2 million, and the company was pulling in six-figure deals with such industry giants as McDonnell Douglas, Motorola, and Martin Marietta. But success didn't suit John O'Neil, the company's young CEO. "I knew I was going to need more experience to run the company. At 26, how much can you know?"
O'Neil did know enough to think his board of directors -- which consisted of himself and two other cofounders -- wasn't the place he could turn to for advice. "It was ridiculous to think we could take off our day-to-day manager hats, put on new hats, and magically transform into board members," he explains.
Frustrated and antsy for expert advice, O'Neil had turned to consultants. In one year Micro-Frame dished out more than $100,000 for such expertise, but O'Neil only felt poorer for the exchange. "One Big Eight firm gave us an accounting system fit for a billion-dollar company like Microsoft, but for tiny Micro-Frame it was overkill," he says. The very excitement that had helped O'Neil create his company was now beginning to hurt it. "I'm like a huge sponge, constantly soaking up new ideas," he says, "and I want to try them all out at the same time."
In late 1987, O'Neil had come up with the idea of starting a board of advisers to provide the experience and know-how that he and his cofounders lacked. A few months after calling on respected colleagues and a local entrepreneurial network, O'Neil assembled his private brain trust. Bob Cherry, the former president of Telecom Technologies during a major turnaround (having taken the company from $7 million in sales and 145 employees to $15 million and 125 employees), understands both the people and operational issues at Micro-Frame. Mike Mann, a consultant to Arthur D. Little Inc., covers strategic marketing and, as one friend says, has "more contacts in the defense industry than God." Chuck Morrissey, a professor and a founder of three software companies, burrows into the financial and market-planning questions. Behavioral-sciences consultant Brad Spencer acts as chairman, pulling all these sometimes divergent voices together into one that is committed to Micro-Frame and its CEO.
What the Board Does
O'Neil's board was eager to learn about the business, but he didn't make it easy. Despite repeated requests for financial reports, O'Neil arrived at meetings exuberant but empty-handed. "John's talk was of the future, yet the company was in trouble today," recalls Cherry. "There were no financial controls and the company was hemorrhaging cash." Morrissey adds, "Given a few real bad months, Micro-Frame would be out of business."
With neither balance sheet nor income statement to guide them, O'Neil outlined the month's results. The advisers didn't like what they heard: company expenses were not fluctuating with sales volume, and a mainframe project was on its way to eating up more than half a million in cash, despite uncertain market potential. O'Neil believed the investment would pay off, but the advisers were not convinced.
At the end of 1988, sales were starting to decline, and the company had lost $600,000 on sales of $1.7 million. O'Neil was ready to listen. He abandoned his mainframe dream, fired six employees, and slashed expenses. He also asked his board for an appraisal of his performance. "I needed a sanity check," he recalls. "I couldn't tell what was going wrong."
O'Neil gave himself five months to implement the plan that he and the board had agreed on. Then they'd grade him, paying particular attention to his ability to focus effectively on realistic marketing targets, product planning, and financial controls.
By then the board had learned not to rely solely on O'Neil's firsthand account of the company's activities, and several took their own measurements. Chuck Morrissey, for example, arrived at a Micro-Frame presentation unannounced and seated himself in the audience of potential customers to get his own reading of Micro-Frame's message. Brad Spencer worked with the staff at Micro-Frame to assess attitudes and morale.
When the report card arrived, opinion was divided down the middle. Half the advisers thought O'Neil was doing a good job. The other side of the table disagreed. "We beat John up badly, no malice intended," Spencer recalls. "Just straight, honest feedback. Few owners would invite this; I have to credit John."
Given the division, the board decided to send one of its own, Chuck Morrissey, into Micro-Frame as a visiting chief operating officer for five months to see what the problems were and to work with O'Neil to solve them.
His advice was both practical and personal. "I noticed that in meetings, John would often answer questions directed at other people." Morrissey worked to change that, since he considered such actions destructive to the other person's self-image. He also went to work on systems problems, helping O'Neil build an easy and reliable accounting system. He instituted a weekly managers meeting and helped mold a cohesive marketing strategy.
However difficult it may have been for O'Neil at the time, he now says, "Chuck has lifted a huge burden off my shoulders."
What's in It for the Board
It's 9 o'clock on an August night, and Micro-Frame's board of advisers has just completed a three-hour strategy session -- a session with none of the apprehension of those first few meetings 16 months ago. Sales are up to $4 million, expenses are down 25%, and strategic partnering has been the talk of the meeting. Afterward, at dinner, O'Neil tells of the 100-hour, four-day, all-out effort he and his team made to win one of the company's largest customers to date. Everyone at the table has a similar story of odds overcome in nursing Micro-Frame to health -- and the fun they had in doing it. Morrissey, who teaches entrepreneurism and technology-management courses at Pepperdine, sees Micro-Frame as a welcome respite from his textbooks. "It's a living case," he says. Bob Cherry claims he gets "as much if not more than John does from this experience."
They've come to be friends in the process. Board meetings are often interrupted by contests for the best new joke or the most unusual electronic toy. "We're a better board today not just because we have a better understanding of the company's operations or even a better understanding of the market, but because we're all so much more comfortable with one another," Cherry says.
But for all its help, this brain trust believes the ultimate challenge is knowing when to stop helping and walk away from O'Neil and his company. "We have a sunset clause -- meaning we'll all be out by May after serving two years," explains Spencer. "By that time the company will need a fresh perspective, and it won't be awkward to decide who stays and who goes."
Meetings: Eight to 10 times a year. Usually gather off-site for three hours; then continue over dinner.
How recruited: Beyond turning to people whom he admired in his industry, O'Neil tapped two other sources: a local entrepreneurial network and a trusted consultant. Only two of the seven candidates who were asked to join the board declined -- both for lack of time.
Compensation: O'Neil picks up the dinner tab, and the board shares options on 1% of Micro-Frame's stock.
CEO's average preparation time: Three to four hours
A NOVICE AT MANUFACTURING
If there's one thing Don Beaver, 37, understands, it's service. Whether cleaning the grime off a factory floor or changing storm windows, all his early business ventures relied on an uncanny ability to make "Aunt Millie feel I was there holding her hand, understanding her problems," Beaver explains.
But hand-holding didn't seem to count for much when Beaver suddenly found himself thrust into the manufacturing business. After toiling away in the industrial cleaning business, in 1985 Beaver and his partner, Ben Stapelfeld, now 39, invented the Pig sock, an affectionate moniker describing a long tubular hose that slurps up dripping oil from leaky machinery (see "High on the Hog," March 1987). As Beaver recalls, the question wasn't whether they had a product, but rather how to make the product they had: "I hardly knew where to begin. Time clocks, unions, production lines, all this was new to me."
For help, Beaver turned to two local manufacturers, Dan Hoover, one of the owners of a $30-million fifth-generation paper converter, and Don Snyder, president of a $14-million lighting-fixture manufacturer, and invited them to be on the board of New Pig Corp. It didn't hurt that these manufacturers were also potential purchasers of the Pig sock and therefore would keep Beaver tuned into his customers' needs. Later Beaver recruited the talent to fill other needs. LeRoy Metz, a CPA and attorney, brings expertise on tax matters, and Mike Kranich, owner of a $3-million chain of jewelry stores and a director of Mellon Bank Central, tackles financial and retail questions.
If expertise was one credential Beaver sought for his board, the other was familiarity. "I wanted time-tested relationships," he stresses. "Ben and I aren't in this just for profits. This business is as much about our personal and theological beliefs. It's critical that the board understand our philosophies and know us as people, not just as businessmen."
What the Board Does
It's hard to point to a decision the board wasn't involved in during its first eight months in 1985, from pricing to suppliers to packaging. As Beaver says, "The only thing I didn't have to do was raise my hand to go to the bathroom."
When Beaver disagreed with president and CEO Stapelfeld about how to raise $400,000 in initial capitalization, the board came to the rescue. Where Beaver was wedded to a corporate sponsor, his partner favored investment banking. Into this deadlock, the board introduced a third option: a private stock offering for a total of $400,000. The board members' own investments comprised one of the largest blocks of stock outside what the founders and their families had purchased. Beaver figures this advice alone saved 26.5% in equity potentially parceled out to investment bankers.
Before Beaver opened his manufacturing facility, Dan Hoover leased out part of his own plant to New Pig for a year. "It was a laboratory where they could debug and test ideas with our factory foreman before stepping out on their own," explains Hoover. Beaver also tested out new uses for his star product at Snyder's plant. One of those tests resulted in a "new and improved" Pig sock that gulps not only oil but also water, protecting expensive machinery from water damage.
But Beaver cautions that the advice of a board, however wise, should never supplant the founder's gut intuition. In particular, Beaver remembers when Hoover and Snyder -- two old-line manufacturers -- advocated that New Pig sell through established distributor channels. Both men had long depended on this approach in running their own businesses. Since it worked for them, they figured, why shouldn't it work for New Pig? Beaver, however, was not convinced. Rather, he contended that interaction with the end-user was critical, asking, "What is manufacturing but service in a box?"
The decision? For three months New Pig would use distributors for 95% of its business, and 5% would remain direct. Month after month the results were irrefutable, as direct sales outperformed distributor sales by at least 40%. Beaver still recalls when the board turned to him with one question: "Why are you messing around with all these distributors, anyway?"
Five years later, with New Pig's revenues topping $14 million, the board focuses less on the factory floor and more on foreign markets. In 1989 international sales climbed to 11% of total revenue, and that's without spending a cent to foster that market. Beaver suggested going after foreign sales with gusto, setting up a New Pig Corp. in Europe rather than hassling with foreign distributors. The board came down with a resounding no, cautioning that such a move would drag the company into the "transportation and translation business" and distract it from its core and still-undertapped market: the United States. "Sometimes the board's job is to remind me what business I'm in and how small we still are," Beaver admits.
What's in It for the Board
"The first time I met Don he was washing my windows," one board member offers. "Yeah," chimes in another. "Don built an addition to our house -- by the way he worked I knew he wasn't your average guy." There's pride in this boardroom. New Pig is a home-grown success, and these guys believed in Beaver and his partner long before that was obvious. As Kranich, the jewelry retailer, explains: "I'd rather invest in New Pig, where I'm on the inside, than pick a stock on the Big Board and not know what's going on."
As New Pig grows, so too do the potential returns to the board. In the early days the board acted as mentors guiding a new kid on the block. "I looked at my board and I wondered why they even consented," Beaver recalls. "I just wanted to be worthy of tying their shoes."
But today New Pig has 180 employees and is as large as most of the board members' own companies. When Don Snyder had a question about setting up his own in-house marketing team, he consulted Beaver.
Privately, one board member wonders if New Pig will soon outgrow this board, forcing Beaver to reach for Fortune 500 muscle. But Beaver scoffs at the notion: "This board got New Pig in shape for the minor leagues; now, together we can help one another play in the majors."
Meetings: Monthly. Phone conversations between meetings.
How recruited: All members are local businessmen who had known one or both of New Pig's founders for years. Dan Hoover and LeRoy Metz had also advised another Don Beaver venture. Mike Kranich was a New Pig investor who later joined the board.
Compensation: Each board member gets $200 per meeting attended, a monthly retainer of $300, and $150 for any additional committee obligations.
CEO's average preparation time: Three to seven days before a meeting, New Pig's CFO sends board members a packet containing minutes of the last meeting, P&Ls, and balance sheets. After reviewing the numbers, CEO Ben Stapelfeld puts together an agenda and runs it by Beaver before presenting it to the board.
BROTHERS WITH SUCCESSION PROBLEMS
After running their $27-million family business for 20 years, Donald F. Dew, 65, and his brother, B. Jarvis, 68, were approaching retirement, but it was hard for either of them to rest easy.
Each brother owned 50% of Diemolding Corp., a second-generation custom automotive and medical products molding company founded in 1920, and each had a son working in the business. The questions: was either son qualified to take over the business? And if they both were, how would the two share ownership?
"We needed a nonfamily ear, a relief valve to turn to in this impasse," Don explains. Diemolding already had an outside board of advisers, but the brothers wanted it to have more of a voice, so they invited some of the advisers to sit on the board of directors and disbanded the advisory board altogether.
The newly formed board was composed mostly of local manufacturing company presidents, "no second- or third-string guys," Don says. Three members run privately held companies; one also heads a 40-year-old family business. The only nonmanufacturer is Richard Oliker, the former dean of the School of Management at Syracuse University, who was a consultant to Diemolding before joining the board and adds a theoretical, more academic point of view.
What the Board Does
In early 1986, after considering at least one non-family candidate, it was apparent to the board that Don's son, Donald H., now 38, had the makings of the next CEO. He joined the company in 1974 and had worked in all the major divisions, moving from foreman to manager. He was eager and ready to take over.
Unfortunately, this didn't please his uncle Jarvis. What about Jarvis's son Bruce? "Dad was very concerned," recalls Bruce, who turns 28 this month. "He saw the controlling interest shifting to the other side." One board member remembers Jarvis voicing his displeasure: "Family matters were clouding the waters."
After discussing the deadlock, the outsiders agreed on a compromise. "We in effect promised Jarvis that should anything happen to him we would protect his son's interests," explains board member Chet Amond, president of Syracuse China, a $70-million commercial chinaware manufacturer. "If his son proved he had what it took, we'd make sure he got the opportunity to take a leadership role in the company." Jarvis was satisfied.
Next the board set in motion a full-scale plan to get both sons in shape to run Diemolding. The training stressed lessons internal as well as external. Even though the younger Don Dew had a valuable cross section of experience, the board designed assignments for him "to make sure he wasn't a one-dimensional manager," explains Oliker. For the next year, task after task was thrown at him, from negotiating credit lines to working with key customers to developing capital equipment budgets. The outsiders next got the elder Don Dew to abdicate his CEO position -- a few years shy of retirement -- to his son. Not only did this allow the board to measure the younger man's ability to oversee profit and loss for the entire company, but should anything go awry, his father, as chairman, would be there to help out. And the board encouraged the new CEO to attend executive management programs. "Anyone who grows up in a company ends up with that company's point of view," Amond warns. "Sometimes it's accurate and sometimes it's not."
While the younger Don Dew conquers the operations side, the board is grooming his cousin Bruce for the financial side. Bruce attends all the banking meetings and works closely with the treasurer. To hone his managerial skills, he is general manager of the die-tooling division, a small, autonomous unit of 25 employees.
"It's a crack at managing all the major elements of a business, like manufacturing, marketing, and sales, just on a smaller scale," explains Bill Savage, president of a $5-million textile-machinery manufacturer and an outside board member. This spring Bruce begins an M.B.A. program that will emphasize financial skills, and, as an independent study course, will fit his work schedule.
But as much as the board cares about results, it also wants to know how the younger Dews think. To that end, one of the board members sits on the operational committee and another sits on the finance committee, both of which meet monthly. This allows them to see how the younger men interact with employees and wrestle with the company's day-to-day problems. As Amond stresses, "It's just as important how the decision is made as what decision is made."
What's in It for the Board
"As much as we protect the business, we're also sensitive to family concerns," explains board member Samuel Lanzafame, whose company makes filters for the electronics and pharmaceutical industries. As tricky as this can get, these board members think it's worth the trouble: "It's gratifying to help a family take their business to the third generation."
One member says he speaks more freely on this board than in his own business, where office politics force him to hew to the company line. All the board members enjoy seeing their advice put into practice.
"Diemolding's is by far the most exciting board I'm on," says Oliker, who sits on five others. "Rather than hearing about events after they happen, we're in there getting our hands dirty." And there is the comfort of knowing the advice is well taken. "Here I get to help someone else avoid all the mistakes I made," says Amond, who at 63 sums up his work as a board member simply: "It's a second chance."
Meetings: Six times a year for half a day; two of the board members sit on committees that meet monthly.
How recruited: Don F. Dew met the board members during his tenure as president of the local manufacturers association.
Compensation: Each outsider is paid a confidential annual fee and $400 per meeting.
Chairman's average preparation time: Don F. Dew spends 8 to 10 hours pulling together the agenda, monthly financial reports, operations numbers, and a cover letteranalyzing the results. This packet usually is sent out 10 days before the meeting.