Hambro International's Art Spinner says most CEOs don't know how tomake good use of boards. Here he tells you how

Although Inc. has examined boards of directors in the past, we've always tackled the topic from the entrepreneur's perspective. This time we wanted to hear an experienced director's view. Meet Art Spinner, a founding general partner of eight-year-old Hambro International Venture Fund, sponsored by London-based Hambros Bank. He has been a director of 11 companies and on the boards of advisers of 2 others. When you count the collective experience of his nine colleagues at Hambro, he's had a bird's-eye view of the operations of 88 boards of directors.

Spinner grew up on Manhattan's Lower East Side, attended Claremont Men's College on a scholarship, graduated from Harvard Business School, and worked as an intern at the White House in 1972. A keen listener who constantly experiments with personal time-management systems, he prides himself on getting to the point. Here, interviewed by Capital Strategies editor Ellyn E. Spragins, he gives some plain talk on how to get the most out of your board.

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Entrepreneurs almost always worry about the wrong thing with their boards of directors: that the boards are going to steal their companies or take them over. Though entrepreneurs have many reasons to worry, that's not one of them. It almost never happens. In truth, boards don't have much power. They are less well equipped to police entrepreneurs than to advise them.

Chief executives often don't understand why they need to have a board at all or what value directors add. People are multidimensional, and their greatest strengths are often their greatest weaknesses. Some of the best operators we have worked with are effective precisely because they are inward looking, single-minded, and focused on their company.

Very often, however, those individuals have little experience or interest in dealing with the outside world. They are not outward looking, and they have little interest in strategy. The board can play an important role in complementing the CEO's strengths. When a company falters or gets into trouble, that's when a board can be very effective.

Treat your directors as individual resources. The greatest contribution directors can make is adding credibility to your company. Today virtually no product is unique. So when you're approaching a prospective major customer, what you're really trying to do is convince him or her that your company will be here 10 years from now. A lot of entrepreneurs are mystified by their competitors' success. They say: "Gee, I have a better product. Why is someone else selling more?" The reason is, the other company is able to present a coherent concept and a management team that has stature and credibility.

As a director at Lotus Development Corp. and Compaq Computer Corp., Ben Rosen of Sevin Rosen Management Co. created among opinion leaders perceptions that would have been difficult for the entrepreneurs involved to establish on their own. That's a lot of what I do. I call somebody, a potential customer or partner, and say: "I believe in this company -- go with me on it. And if I let you down, don't ever do business with me again."

You can leverage a director's credibility even more directly. One of our companies is Vertex Semiconductor Corp., run by Bruce Bourbon. Apple Computer Inc. is one of his target customers. So he wrote a form letter with the top and tail of the letter left blank, and he asked one of his directors, a guy from Venrock Associates, which helped fund Apple, to send one to John Sculley, Apple's president and CEO.

Another important contribution that board members can make is to bring with them the company-building "technology" they have observed in other companies over the years. That is a responsibility every director has and every CEO should make good use of. I have a loose-leaf binder that contains, among other things, the financial-reporting packages used by Joe Rodgers at Quantum Corp. and the management-by-objective techniques developed by Irwin Federman at Monolithic Memories Inc.

One of the things Federman discovered, for instance, is that the classic Christmas bonus has a kind of negative value. People are never quite sure if they're going to get it. If they do, it's more or less what they expected. If they don't, they're upset. Instead, if somebody accomplished something great, Federman would hand the person a check for $10,000 the next day. He found that the unexpected bonus has a powerful effect on an employee.

Always be honest with your directors. I think openness with your directors is advisable in every instance. I recently spoke to the CEO of a failed company in our portfolio. He told me that if he had it to do over again, he would be tougher with his employees and more open with his board. In a misguided attempt to protect his company and his cofounders, he for too long gave his board a picture of optimism that did not conform with the company's underlying problems. As a result, he cut himself off from valuable advice and set himself up for a big fall.

As a corollary to this, I believe no board should receive all its data about a company from the CEO alone. Board meetings that include all of a company's vice-presidents are useful in providing a range of perspectives on the company's operations. Rarely have I found that a CEO who refused to let me speak to any other member of management had a good reason for doing so. Either the CEO was trying to hide something or it was a manifestation of personal insecurity.

Set up a compensation committee. The compensation committee serves as a conduit between the CEO and the board. It screens and approves the CEO's suggestions about compensation for the company's senior management and makes its own recommendations to the board about the CEO's compensation. People give you all kinds of fancy reasons for such a committee, but the real reason is to depersonalize the money issue -- get it away from a you-versus-me negotiation between top managers at a company. Smart CEOs will come to such meetings well prepared with compensation surveys on their industry. Those meetings should be the culmination of annual performance and salary reviews that have been conducted at every level of the company.

It's best to have on this committee an outside director who is completely neutral -- someone who has had a lot of management experience. That person has the credibility to say, "What you're asking for is too much," or, "You really don't need to reward this person," or, "You're not rewarding this person enough."

Set up an audit committee. A tough audit committee of directors is a good way to establish an appropriate corporate financial culture early on. This is not the place for on-the-job training. It's too easy to get into trouble.

I'm going to get all kinds of grief for saying this, but frankly, the quality of auditing work is generally not very good. That's why the best people to have on your committee are people who have been burned by auditors and management in the past -- world-class cynics.

The audit committee should meet at least twice a year, and as always the best questions to ask are the open-ended ones, such as, Is there anything more you think I should know? What is your biggest area of concern? What was your biggest difference of opinion with the company's chief financial officer?

Never set up an executive committee. I have never found that executive committees are a good solution. It just sets up a two-tiered board where those directors not on the committee begin to feel like second-class citizens. You are better off simply having a smaller board. You should never attempt to play one board member or a group of board members off others. That almost always leads to ruin.

Finally, I would say you can gain much from your board by being sensitive to directors' needs. Most directors invest their ego and image -- and sometimes their money -- in your company. They want a return on all three. Although you have a lot to do in running your company and you are not doing it for the purpose of making your directors look good, being aware of their professional and personal concerns is not a waste of time.


How to get the most out of yours

The key to using your board effectively is a well-run board meeting. Most packages of information sent to the board members before a meeting are lousy. And too often you get the package the moment you walk into the meeting instead of well beforehand.

A board package should cover all of your company's vital signs: backlog, revenues, profitability, inventory, cash, and head count. A good one also flags all the problem areas, particularly the accounting issues. It'll say that the numbers that may look good this month aren't really that good because of the following reasons.

Also, CEOs should tell their directors what the really significant "inside" numbers are. For example, a board package might alert directors that when the company's salespeople book less than 80% of their quota, it's a particularly worrisome development.

Prepare for the board meetings as if you were preparing for a presidential news conference. You don't want to get stumped by a question. Then what happens is, the board jumps all over the CEO. A CEO who handles it well, Steve Johnson of Komag Inc., walks into a board meeting and says, "These are the six things you've been wondering about: dropping prices, our yields, and so on, and here's what's happening in each area." Few people do that. I often see CEOs talk for hours about everything but the company's most glaring problems. Directors can't be much help there.

As a CEO you also want to prepare your directors ahead of time. The best meetings are not exactly rehearsed but are stage-managed to the extent that they won't be seriously derailed. Directors have been briefed about what to expect. One danger here is that it is quite easy for a board to fall into the habit of groupthink and avoid decisions that might be viewed as offensive by others. So it's not a bad idea to cultivate at least one board member who is a renegade and will consistently play the role of devil's advocate.