Pieces of Advice
Putting together an advisory board can be a daunting prospect -- and your smartest move. Here's why one CEO decided he needed advisers, how he went about getting them, and what they've brought to his business
Bob Hartman couldn't help being impressed, nor could he stop the sweat from building along the edge of his hairline. Here he sat, the president of a $30-million technical-training school, interviewing the former president of DDB Needham Worldwide, an advertising agency with $900 million in annual billings, for a post on his soon-to-be-formed board of advisers. "I kept wondering, 'How do you interview a guy of this caliber?" the 46-year-old chief executive recalls. " 'What kind of questions do you ask? How will I keep his interest?' " Still, Hartman persevered. He explained why he needed the board, what his expectations were, and the problems facing his company.
Then he sat back and waited.
The 60-year-old adman didn't waste any time on the niceties. Frankly he told Hartman that his approach was way off base. "Why would I want to serve on a board of advisers?" he asked. "I don't need to warm another seat." A board of directors is far more effective than advisers. Directors are empowered: empowered to make decisions, to affect the company, and, he added slowly, to make radical changes if necessary. Hartman shifted uneasily and nodded. "For example," Hartman recalls the adman's saying, "on the last two boards I served on we had to oust the CEO. Neither guy knew how to operate a company."
Hartman smiled and ended the meeting quickly but cordially. Then he shut the door to his office and thought, "Why am I doing this?"* * *
A reasonable question to ask, for sure. After all, isn't the beauty of owning your own business making your own decisions? "It's frightening to invite outsiders to peer into the finer workings of your private company," allows John M. Nash, president of the National Association of Corporate Directors. In fact, he adds, few people do. According to Nash, only 5% of closely held companies actually do allow their boards to be dominated by outsiders. Those that do typically face an intractable problem like a generational dispute within a family business or are gearing up for a public offering and the scrutiny to come.
Nash estimates that 80% of the private companies considering bringing on outsiders select a board of advisers, a more informal group than a board of directors. Such a board counsels the CEO but has no voting power and, generally speaking, no legal liability to protect shareholder interests.
Still, even a board of advisers takes an element of control away from the CEO -- offering a certain degree of second-guessing from seasoned executives or trusted confidants that cannot be easily brushed off by the founder who invited their inquiry. Why invite outsiders into the inner sanctum to peer over your shoulder, to poke around and ask questions?
The answer is simple. Who can afford not to? In a day when the fleet-footed and savvy among us are reengineering, retooling, and "right-sizing" quarter by quarter, no CEO can afford to simply inquire within. Consultants aren't necessarily the solution, either. Not only is their expertise costly and often slanted toward a specific discipline, but also -- unless your pockets are really deep -- consultants aren't likely to wait around to see what kind of tweaking is necessary once their suggestions collide with reality.
That's not true of a board of outsiders, however. Plus, such expertise generally comes at a lower price tag, typically costing well under $20,000. For that money, you can harness a variety of disciplines from men and women -- often former CEOs -- who've actually served in the top office and will stick around.
A board of outsiders isn't for everyone, though. Certainly, it's not for CEOs looking to make their letterhead sparkle with marquee names. Says Susan Shultz, an executive recruiter with a specialty in assembling boards, "Any board candidate who's worth their salt will run if they suspect they're a rubber stamp." Nor is a board for the faint of heart. "You'd better be ready to take their advice seriously," Shultz warns. And you'd better be ready for the shake-up bound to follow.* * *
Hartman wasn't ready, but he was committed, and he was hungry for fresh direction and for answers about how to preserve the company he feared was headed down a steep hill.
Hartman's company, Universal Technical Institute (UTI), is one of the largest and most respected technical-training schools in the country. It was founded in 1965 by Robert Sweet; Hartman took over in 1990. The for-profit school has three campuses: in Phoenix, Houston, and Chicago. Specializing in training for careers in automotive-diesel and air-conditioning work, with the longest program extending 63 weeks, UTI caters to the high school graduate who isn't interested in college. "Many of our students are the first in their family to go beyond high school," Hartman explains. Seventy-five percent of the 4,000 students that enter UTI every year are kids trying to struggle out of a lower socioeconomic position, kids trying to find something better than bagging fries for the minimum wage.
UTI offers them that chance. Starting salaries for a certified technician are between $15,000 and $20,000. According to the Bureau of Labor Statistics, between 1992 and 2005, jobs requiring technical training beyond the high school level will be growing at a rate 50% greater than the general job market. The chairman of the Crediting Commission for Career Schools and Colleges, a watchdog group for the industry, points out that "schools like UTI will be the critical link in creating a world-class workforce, employment security, and even individual security."
Still, Hartman isn't resting easy. His problem is not short-term -- UTI's revenues in 1995 will climb to $34 million, with operating profits hovering around 9% -- but long-term. "There are a lot of forces at work that could cause us trouble," he says. "Nearly a third of the schools like ours have shut down in the last five years. How do I keep ours from going that way?"
Like many vocational schools, UTI has many students who are unable to afford the school's tuition, which at UTI is $10,000. Typically, they come from families in which the total annual income hovers at around $22,000. Students applying for government-backed loans and grants make up about 75% of UTI's revenues, a dependence that makes Hartman uneasy. There's also new competition. Local community colleges are adding technical-training courses, subsidized by manufacturers such as General Motors and Toyota, at a third of UTI's tuition.
What's more, Hartman doesn't have a lot of wiggle room to reduce tuition, since UTI is supporting three campuses, and labor expenses are approaching 55% of revenues.
If Hartman was depending on his homegrown management team for a blueprint for survival, he was due for disappointment. Most of the 13 staff directors had been with UTI for 10 years or more -- some for all their professional lives. Like Kimberly Riordan, the director of marketing, who started as the school's receptionist in high school, all shared a fierce passion for UTI but an inability to break away from the old thinking. "We were too inbred to help Bob," she admits. Meetings called to talk about the future degenerated into discussions of the next day's problems. "I couldn't get people to look beyond the trees," Hartman says.
That was when he decided to enlist the help of people who didn't even know about UTI. "I needed a fresh perspective and some mentoring for me," he explains.
There was just one problem: Hartman wanted people he didn't know. "So if I didn't know them, how was I going to find them?" His answer was Susan Shultz of SSA Executive Search International. For a price tag of $20,000, Shultz agreed to comb the country for candidates.
Shultz and Hartman agreed that UTI needed to look for four different kinds of people: first, a strategic thinker to help draft a long-term business plan; second, a marketing expert for help on direct mail and infomercials; third, an industry veteran to help the school with the curriculum, resource issues, and industry contacts; and fourth, a human-resources expert, since more than 50% of UTI's costs are personnel related.
Plugging into her database, Shultz threw a wide net: in one case, she called 90 candidates for one post. After an initial lengthy phone interview, she'd follow up with a letter presenting an overview of the board and the company, and then another phone call. Most candidates, Shultz explains, were intrigued. Fewer than 10% rejected the idea outright.
To Hartman, hiring Shultz was money well spent. He didn't have the expertise and, more important, he didn't have the time. "I already work a 60-hour week," he says. "I wasn't about to add four hours a day making phone calls."* * *
Once prospective board members arrived at UTI's Phoenix campus, Hartman knew, they were not likely to be immediately won over. This was not the sleek, sexy site of the next biotech breakthrough. With 110,000 square feet of brick buildings enclosing a labyrinth of drab classrooms, there wasn't much to distinguish one room from the next -- except for the occasional carburetor or valve or transmission off to the side. No brightly colored posters announcing the next school dance decorated the hallways.
Appearances aside, Hartman also had to counteract other misperceptions visitors might have brought with them. "Many people still think of schools like UTI as stuff advertised on the back flap of a matchbook," Hartman observes.
But Hartman refused to do the hard sell, preferring that the candidates size up the business for themselves. He was prepared with a list of questions he kept tucked away in his coat pocket: To whom do you, as a board member, have an allegiance? What have you been able to achieve as a director for other companies? What role would you like to play? What committees would you like to serve on? What specifically will you contribute to the board? Good questions. But the real answers for Hartman lay in the glimpses he caught of the deeper, unspoken motivations of his candidates.
Motivations like those of a former vice-chairman for international operations at Kidder Peabody International, who kept steering the conversation toward the question of taking UTI public. Hartman worried that the investment banker was looking to earn a commission. "I wondered if we'd be operating from the same agenda," Hartman says. Another candidate spent most of his time questioning the adviser fees -- pressing Hartman to up the proposed fee from $1,000 to $2,500 a meeting. "He was just looking for additional sources of income."
Utterly different was George Aucott, the 60-year-old chairman and CEO of $500-million Motor Coach Industries International Inc., a bus manufacturer, who barraged Hartman with so many enthusiastic questions about UTI that the tour actually went overtime. "It's thrilling," says Aucott, "to see all these kids who would normally fall through the cracks getting an opportunity to do something meaningful with their lives."
In the end Hartman was drawn to the candidates who challenged him, people who made him "sweat a little" -- people like Shirley Richard. Knowing that Richard had orchestrated a cultural turnaround of Arizona Public Service (APS), a $1.6-million investor-owned utility, Hartman started the conversation eager to impress -- to show that he was a modern-day leader. He ticked off the signposts: UTI's "empowered employees" who owned a third of the company through an employee stock ownership plan; the routine employee surveys; and the mission statement. Richard fired back: What policies support the mission statement? Had the employees bought into the process? Had Hartman measured their response? Hartman sputtered uncomfortably that those were soft values unable to be measured. Richard shook her head. After 20 minutes Hartman stopped trying and simply said he didn't know the answers to her questions. "That's why we need someone like you."
The scenario was similar when he met G. Douglas Young, an Oxford-educated, Harvard Business School-groomed consultant and cofounder of the investment firm Young Warnick Cunningham & Co. Thinking Young wanted to glimpse where UTI was headed, Hartman offered financial statements for the previous two years. Young refused and instead requested a look at the strategic plan. Hartman sputtered again, rifled through papers, and finally presented Young with a list of 60 action items: everything from new training programs to a review of the auditing process. Young argued that those were merely tactics -- useless without an overall strategy.
All those questions, on top of the wear and tear of running the business, were taking a toll. Hartman swung between waves of jitteriness and sleeplessness. "He was on a roller coaster," Hartman's wife, Jan, recalls.
But three months and dozens of candidates later, Hartman assembled a star-studded cast: Aucott, to cover the industry; Young, to guide management and strategic planning; and Martin T. Walsh, a corporate psychologist and consultant for clients from Dayton Hudson to Grand Trunk Railroad, to oversee human resources. Marketing would be the domain of Shirley Richard and Edward Walsh, former CEO and president of the Dial Corp., the billion-dollar consumer-products giant. Although location was not a criterion, all were local except for Martin Walsh, who was from Detroit.
Ask board members why they agreed to hook up with UTI, and not one mentions the paycheck. Some, like Aucott, talk about a mixture of societal good ("nonskilled factory jobs are moving to Mexico; replacing these are posts for skilled technicians") and self-interest ("the buses my company makes are more complex, and we need skilled people out there fixing them"). Others mention their interest in helping companies succeed or the interaction that comes with board membership. But for all, the most persuasive reason was Hartman himself. "He's a rare one," Ed Walsh points out, "the leader who can admit what he doesn't know and go on."* * *
Jeff Muecke had his doubts, though. Sitting on the inside, looking out, UTI's vice-president of sales thought the entire search for a board was a waste of time. His take: "Look, we have strong management, phenomenal sales, low turnover, and great profit margins. I don't see what the chairman of Motor Coach has to bring to the table."
Others, like Kim Riordan, frankly worried for their jobs. The 30-year-old director of marketing dreaded the moment that the board learned she didn't have a marketing plan and, what's more, she'd never done one. "They'd say, 'Well, what the heck has she been doing, then?' " Riordan says.
And others worried that they would soon find themselves playing second fiddle to the more seasoned squad of outsiders. "It was hard not to think Bob was going to give a special ear to a guy who'd been CEO of a billion-dollar Fortune 500 company over us," says Muecke.
Hartman understood. He involved his top managers, soliciting their thoughts and opinions as he interviewed candidates and assuring them that the board's mandate was strategic and did not involve day-to-day operations. Ultimately, though, he couldn't cure his managers' anxiety. They'd have to wait and see.
Not that they had to wait long. Before the first board meeting, a casual conversation between the director of marketing and a board member led to a philosophical shift in the company.* * *
The Board's Influence
Historically, UTI had always been a sales-driven company. The vice-president of sales for 13 years had worn both the sales and the marketing hats, but to him sales was the heartbeat of the company; marketing was more of a poor stepsister. That had worked for UTI in the early days. But more competition from the local schools, along with pressure on revenues, made it a dangerous stance.
Marketing director Kim Riordan realized that and mentioned it in a conversation with Shirley Richard. Riordan explained that she would have liked to have a marketing plan, but there was no point. Her job had always been to respond to sales. "If sales asked for a new catalog, I made a new catalog; if they asked for a brochure with a race car on the front, I put a race car on the front," she explained.
Richard was shocked. "As far as I'm concerned, if marketing doesn't have a place at the table, UTI can never be a strategic player," she said. Hartman listened, and despite the discomfort of the sales department, he agreed to help Riordan stage a marketing turnaround that would give the department clout and independence.
Now instead of selling itself as "the technical school offering state-of-the-art equipment" -- a claim that presented no added value to potential students, Riordan had long argued -- UTI touts that "it receives more job opportunities each year than it has graduates." An impressive credential to a customer who thinks getting the job is job one.
For the first time Riordan, along with the vice-president of sales, conducted a formal study of UTI's competition. And less than a year after the turnaround, sales for the first three months of this year were up 24% over the same period in 1994.
Some board members had an immediate bottom-line impact. Ed Walsh's work for a local hospital sparked the idea that UTI save car shells that have been emptied of their engines and other mechanical parts and sell them to rehabilitation hospitals so recovering stroke victims could use them to regain the dexterity to open a car door or turn on an ignition key before hitting the open road. With each shell going for $8,400, says Hartman, "it's a perfect example of creatively squeezing additional revenue out of existing business." Similarly, George Aucott obtained a spare diesel engine for students to work on -- saving UTI $22,000.
Not that it's all been painless. In just three meetings the advisers have slaughtered their share of sacred cows. The first was UTI's sales expenses -- a whopping 26% of total revenues. "I nearly fell over when I first heard that number," Young declares, adding, "that number can't be maintained." The managers disagreed. Their arguments ranged from "You have to spend money to make money" to "That's always been our number."
Delving further, the advisers' collective eyes stopped at "the visitation program" sapping $400,000 annually. Every year 700 high school instructors enjoyed a nearly-all-expense-paid visit to UTI to tour the school and learn about the latest courses. The board wanted to know what numbers supported the value of the program. "I got a little defensive," Hartman confesses. "But then I realized that if it's working, there should be empirical evidence to back it." By tightening its requirements, UTI saved some money almost immediately.* *
Scenes from the Boardroom
To keep the board running smoothly, Hartman clings to some simple rules. At each meeting he schedules the next three meetings. He sets down each board member's paycheck where he wants that person to sit, making sure that the advisers don't sit next to one another but mingle with his own management. He begins and ends each meeting on time, and he plans lunches with each of the advisers between meetings. Ed Walsh verifies that those get-togethers are hardly social. "With all Bob's questions, I've found that it's best to order a salad; otherwise I'd never get a bite in," says Walsh.
As for the question of losing control, Hartman insists everything is a trade-off and "the potential for negative scrutiny is far less daunting than the risk of living in a vacuum when you do business in the real world and you don't have all the answers." Besides, he says, the board's focus is on strategic areas, and although some of its initial impact has been on tactical fronts, it will never fret about day-to-day issues.
That makes Hartman's managers breathe a little easier. "Nothing the board suggests is pushed down our throats," says the vice-president of sales, who adds that after each quarterly board meeting the managers gather to hash out which of the board's suggestions can actually be implemented. Individually, the advisers and managers are banding together -- whether it's Richard's supporting Kim Riordan through her marketing turnaround or Ed Walsh's reworking Jeff Muecke's sales presentation. Relationships are developing. "You should see Shirley's eyes light up when she sees Kim," Hartman declares. "Those two get a charge out of working together." Rather than fretting about the power lost to the advisers, the managers are beginning to appreciate the power to be had.
Of course, it's early. The tests for the managers and Hartman alike are down the road, and maybe not too far. Martin Walsh, for one, confesses that he's not happy to see how fast and hard some advisers are pushing UTI to change, particularly for a new strategic direction. He cautions, "Unless the company is in crisis, it's not our job to push Hartman before he's ready."
For now, though, only three meetings into their partnership, Hartman worries most about keeping the freshness alive, capturing the attention of his high-rolling sounding board, and not slipping into the sleep-inducing tedium all too common in boardroom meetings. He stages every meeting a little differently. At one an adviser showcases his vision of UTI versus the competition. At another Hartman and his vice-president of operations conduct a mock debate on future growth strategies for UTI. Hartman even varies the setting -- sometimes the group gathers at his home. "It's a little like a marriage," he muses. "You can court well, but the real job is keeping them interested."
At this point Hartman sounds like a happily married man: "It's absolutely the best decision I could have made," he says. "Sure, it's been disruptive to the staff, and it's created more work for me, but the contacts we're building are priceless, and the growth and stimulation are exactly what the company needed and exactly what I needed . . . but talk to me again in two years."