Building the High-EQ Board

By Howard Fischer, Jane Stevenson

To create the ideal board for your company, you need outside directors who will hold you accountable. You should have the right mix of talents, personalities, and experience. Above all in a family company, you need people with high emotional intelligence.

Peter A. Benoliel was in his mid-30s when he became CEO of the Quaker Chemical Corp., a family owned maker of specialty chemicals just outside Philadelphia. At the time, the company, bought by his father, his uncle, and another partner in 1930, was still private and small, with under $20 million in revenues. Quaker’s board consisted of four or five insiders, and there was little enthusiasm for bringing in outside directors.

Benoliel knew that he would benefit from the counsel of older, more experienced business people. Just as important, he realized that the company’s future growth depended, in large measure, on developing professional management and introducing greater accountability throughout the organization, from top to bottom.

He made creation of an outside board a condition of his taking the job in the 1960s. Soon after taking over, he recruited two outsiders, and by the time the company went public in 1972, it had a majority of outsiders on the board. With their help, Quaker expanded its facilities, product lines, and geographic coverage. Today Quaker is a $300-million operation supplying specialty chemicals for worldwide markets in steel, metalworking, can production, and hydraulic power. The board consists of 11 directors, all but three of whom are outsiders. In building the company, Benoliel, now nearing retirement, leaned heavily on the counsel of such experienced, respected business leaders as the chairman of ESB Inc. (the former Electric Storage Battery), the chairman of the American Meter Division of the Singer Co., and the vice chairman of a major Philadelphia bank. “I had a board that was as prestigious as that of any bank or company in Philadelphia,” the 65-year-old Benoliel, now chairman of the executive committee, recalled in an interview.

A board is a conscience, a memory, a forum, and a support system. Many family companies, like Quaker Chemical, realize that having outside directors can be an enormous asset in achieving the owners’ dreams and strategic objectives. Recruiting such a board and learning to use it effectively, however, is a major undertaking that requires time and commitment.

When a family business is young, its owners may have little need for an outside board. In the early years, management is limited to family members. The range of skills needed by the company is relatively narrow, and most major issues are tactical rather than strategic. The family leaders’ concerns are as straightforward as, “How are we going to make payroll next week?”

As a company starts to grow, however, it faces difficult new issues such as, “Should we expand our product line or enter new markets?” “Should we grow internally or should we acquire other businesses?” “Should unprofitable segments be dismantled?”

Although outside directors should not make strategy, they should contribute to the strategic process and, in some cases, facilitate strategic deliberations. Peter Benoliel believes the best reason to create a board with outside directors is “to place bona fide accountability for results and for policy and strategic planning.” Companies may pursue policies that once made sense, but times change and it is possible that no insider will notice that those policies are out of date. “It’s the ‘Emperor’s New Clothes’ syndrome,” says Benoliel, “and it goes undetected unless you have outside directors looking in.”

If management’s job is to manage the company well, then the board’s job is to make sure that the company is well managed. Simply put, the board’s job is to remain focused on the company’s goals and not let management forget what it said it was going to do. Management sometimes loses sight of goals because there are too many details or because execution is inconvenient. The board’s job is to say, “Wait, you said you were going to do that three months ago. How come you’re not doing it yet?”

“I probably use the board more than most CEOs,” says Benoliel. Discussions at board meetings are substantive, with very little “boilerplate.” About half the meeting time is devoted to management issues and other matters characterized as strategic in nature. “They get a look at our strategic planning process. They have a chance to offer input and raise questions. We talk management succession and human resource reviews.”

Benoliel has also used his outside directors extensively in one-on-one meetings to get their help in areas where he thinks they can help him. “The CEO job is a lonely one, and you often can’t go to your colleagues when you have concerns. You need someone who has the experience—the stature—to listen to the problem and offer advice.” Benoliel believes that this advisory function is as important as the board’s more normal fiduciary responsibilities. He meets with directors somewhere between 10 and 15 times a year, and talks to them on the phone about the same number of times.

 

Recruiting the right people

 

In 1991, J.M. Huber Corp., a large, diversified family company in Edison, New Jersey, that started out as a maker of pigments and printer’s inks, undertook a study of the effectiveness of outside boards. The board’s nominating committee interviewed 15 to 20 family companies. All but one or two of them felt that having outside directors was important.

Not surprisingly, the common denominator of success appeared to be the quality of the directors added to the board. The Huber study concluded that the process of adding an outside director should begin by defining the characteristics of a good director. It was clear to the nominating committee that a poor selection process would compromise the potential value of having an outside board. Just as important, the committee concluded that to maintain quality, the company needed to periodically reassess the company’s needs and the directors’ contributions.

J.M. Huber developed a comprehensive system of evaluating director performance, described by Peter Huber, chairman and CEO, as follows:

“Each director completes an annual survey of the performances of the individual directors and the board as a whole, as well as the effectiveness of the management team’s interaction with the board. Each also assesses his or her own performance during the year. The CEO and chairman then meet with every board member to discuss their comments. The entire board receives an unabridged compilation of the findings of the survey questionnaires. The annual data are used to track the performance over time of the board and its members as well as the top management team.”

What are the characteristics of a good director? What factors need to be considered in recruiting the “right” people for the board?

Before considering candidates, make a list of the kinds of skills and experience that would support management’s short- and long-term strategies. Which ones are already available within the company, and where would the expert knowledge of an outsider be helpful? Identifying what you need but don’t already have will give you a good idea of the kind of people to look for.

For example, it is unlikely that the management of a company that has operated strictly in the domestic market will have all the knowledge and experience to carry out a strategy of international expansion. A technology company in a fierce battle for market share may need to supplement its engineering talent with marketing know-how. Or a company that needs to fund an expansion through financing or the raising of venture capital may need to add specific expertise in those areas. And, of course, a company that plans to go public now or some time in the future will find it extremely useful to have a director who’s been through it and is familiar with public company issues.

While many of the criteria for selecting directors of a family business are similar to those for public companies, directors of family firms should possess six special characteristics:

Emotional intelligence. They need to have a fine sense of boundaries that enables them to know when the board should get involved and when it should not. Many issues that arise are right on the edge. Where to draw the line becomes especially problematic if there is no process like a family council to deal with issues arising in the business that affect the family. This kind of boundary management is a question not only of when to get involved, but also of when to exert influence.

For example, if you can see that a particular issue should be handled in the family council or somewhere else outside the board, do you simply stop it from coming into the board, or do you, after the meeting, try to use your influence to see that it does get resolved? The correct answer often depends on what you have learned about the family style. If the style is to rant and rave and not actually work toward a resolution of the problem, a wise director may need to take on the role of informal counselor.

Sensitivity to conflict, and willingness, if necessary, to help resolve it. A good director for a family business needs to understand the nature and value of conflict and not be overwhelmed by it. Families deal with conflicts differently, depending on their history, culture, and style. In some families, the appearance of an important issue may be signaled by everyone becoming very quiet; in other families, the issue might cause everyone to become loud and animated. But even here there are nuances. Taken to extremes, if a family routinely throws things against the wall during disagreements, an outside director sensitive to conflict may be able to deduce the importance of the issue on the basis of the value of the hurled object!

In general, outside directors intervene in family matters only at their own risk. If the intra-family conflict spills over into performance and disrupts the company, however, the board has to get involved. The outside directors certainly have the standing to advise feuding family members that they need to “get their act together.” But in dealing with interpersonal conflict between siblings, for example, they should be wary of plunging, unasked, into the role of arbitrators. Ideally, senior family members should be the ones who seek a reconciliation. If the conflict isn’t resolved, the board may need to take the next step and appeal to the parents to resolve it. If that doesn’t work, the board might go one step further and recommend that the feuding siblings no longer work together in the business.

Willingness to test for, and compensate for, missing competencies. The entrepreneur may know nothing about marketing or finance, for example. The board must figure out how to compensate for that by hiring an executive, recruiting a director with such expertise, appointing special committees, doing some coaching, or some combination of all these.

Commitment to professionalism. This means not “dumbing down” the board agenda and the level of discussion for the sake of achieving peace among the family owners. But it also means understanding that it takes a while for other board members to get to the level where they need to be, and being committed to getting them there.

Willingness to act as mentors. This is often one of the most critical roles that directors can play. Some owners of family businesses have neither the time nor the temperament to mentor their offspring themselves. Because of tensions between generations, moreover, young successors are often more willing to accept guidance from experienced outsiders than from parents. Outside board members serve a valuable function in mentoring young family members. The owner’s children may have viewed their parent as mentor because he or she was the only role model available when they were growing up. Outside directors can thus expose them to different approaches to managing business problems that may be more effective.

Willingness to monitor and facilitate succession planning. This could entail chairing a committee on choosing a successor, helping to define the criteria for the selection, or establishing a process to deal with generational transition. Whatever their role, outside directors must act as a positive force on the issue of succession.

 

Uses of a search firm

 

Too often the chairman and nominating committee of a family business limit their director searches to people they know personally or are recommended by their immediate network. A search firm can cast a wider net. That can be particularly important when the leaders do not meet people with the skills and experience they need in the normal course of their business.

A $200-million, public manufacturing company that was family controlled wanted to add a female director to its board. Besides adding a strong director with excellent strategic and global experience, the chairman wanted to provide a role model and senior adviser to the company’s many female employees, who were not yet at the senior levels in the organization. Although he could have approached nearly all the women of high visibility in the immediate area—at least some of whom would have welcomed the opportunity—he didn’t see in their profiles anyone who had been a general manager with profit-and-loss experience. A search firm was able to identify a candidate with the required qualifications who was eventually appointed to the board.

Some business owners point to the risks of recruiting total strangers, arguing that the chairman’s relationship with outside directors must be based on mutual trust, which is only built over time. The chairman and other directors do not have to be fully acquainted with the candidates, however, so long as they get to know them before deciding to invite any to join the board. Interestingly, when a search firm is used, the chairman and other directors tend to devote more time and thought than they otherwise would to defining what they need in a director. Because the candidates are usually strangers, the leaders of the business are inclined to be very thorough in weighing their qualifications. A good search consultant, moreover, establishes a formal process which requires the full participation of the chairman and the nominating committee. This time spent up front is well worth it when one considers that a board member typically serves for at least 10 years, and that it is much easier to add a director than to get rid of one.

Recruiting outside directors can be especially complex for a troubled company. For example, a rapidly expanding public high-technology company had fallen out of favor with Wall Street because of some well-publicized financial problems. Following several forced resignations, the new chairman and CEO sought to add a director who could send a message to customers and the financial markets that the company was now financially sound and stable. The candidate he was seeking also needed to appeal to the company’s two primary vertical markets—higher education and municipal government. Hence the decision to use our executive search firm. We recruited a nationally known figure, legendary in both of the company’s major marketplaces. He was willing to join the board of this troubled company largely because the chairman and other board members had done an excellent job of explaining the company’s potential and given him a complete and candid appraisal of its difficulties. The new director has lent credibility to the company and has personally opened many customer doors for the business.

 

The right mix of directors

 

Deriving the greatest possible benefit from an outside board requires more than having the right people. It also requires the right size and composition, including an optimal mix of family members and outsiders.

The composition of the board should be tailored to the particular needs of the company. Benoliel of Quaker Chemical suggests that a smaller business with no experience with outside directors should start small. “Get two, or even one,” he recommends. “Learn to live with the board, learn what kind of questions they ask and what this means to you and your people, and go from there.”

Generally speaking, however, the board needs to attain a critical mass of outsiders if it is to be effective. Our firm recommends that a family business start with no fewer than three outside directors, and end up with no more than seven. Over the years, we have observed that board size typically varies with the size of the company. A board consisting of more than 11 members is usually too unwieldy for deliberation and effective decision-making.

More important than the size of the board is its mix of talents, experience, and personalities. To be effective, a board must operate as a balanced system with healthy group dynamics. Each individual’s personal and professional qualities must be aligned with the company’s strategic objectives. The ideal directors are neither dominant nor reticent. They are candid yet tactful, always mindful that the role of a director is to help the owner of the business realize his or her dreams.

Directors can be chosen from four populations: family members who both own stock and have a managerial role (owner-managers); family or nonfamily owners who are not active in the business (passive shareholders); nonfamily senior managers (inside directors); and outsiders chosen for their experience and expertise (outside directors).

Conventional wisdom in today’s publicly held companies is that insiders on the board should include only the CEO and those family members who have the skills and experience to help the company achieve its goals. Having other inside managers on the board is generally viewed as a bad idea, in part because they are not likely to go head-to-head with the owner on any important issue. In addition, their support for the owner’s positions can create a solid roadblock to the expression of outsider opinions that are opposed to the owner’s. After being outvoted or just plain ignored on a number of issues, an outside director may not be so eager to share his or her wisdom with an unreceptive board.

For this reason, it is generally not considered a good idea to include friends, spouses, or other relatives on the board. In fact, there seems to be an almost reflexive disdain for family directors: If they’re family, many outsiders conclude (sometimes prematurely), then they can’t be competent. This attitude often becomes a self-fulfilling prophecy; the family directors are excluded from the board’s decision-making process. When outside professionals patronize the owners in this way, in order to neutralize their participation, that’s a sure sign that the composition of the board needs an overhaul.

There is nothing wrong with appointing relatives to the board, so long as they are competent. Family members must, at minimum, be able to distinguish strategic issues from operational issues, to read basic income statements, and to follow the discussion in meetings and know when to speak up and when to remain silent.

All of these skills can be acquired through training. For example, a woman who inherited a large block of stock in a major Philadelphia business sat on the board without saying a word until a female MBA was hired to train her. It took this board member only about six months to learn everything she needed to know to participate constructively in board deliberations.

Inbred thinking is not a feature peculiar to family businesses. The boards of public enterprises also become inbred when they are dominated by inside managers. While it is true that this condition may be more endemic to the boards of family firms, the solution should not be focused on getting rid of family directors, but on getting rid of inbrededness.

What about including nonfamily minority shareholders? Here, too, there could be a problem. An investor’s interests are rarely identical with the company’s, no matter how much experience and good judgment the individual may bring to the table. Investors seek to maximize their return, whereas the company may need to plow some cash back into operations. Long-term strategy may be the key to a company’s success, but from an investor’s standpoint, strategy may finish a distant second to a speedy recouping of an initial investment and realization of capital gains. In practice, however, this tends not to be a problem because most nonfamily investors understand that the family owns most of the shares; for that reason, they are usually predisposed to go along with the family majority’s interest.

 

Leadership and organization

 

A key structural issue for any board, but one likely to have special repercussions in smaller, family owned companies, is whether to place the functions of CEO and chairman in one individual or to split them. Historically, the assumption has been that the business owner also serves as board chairman, but there may be good reasons for breaking with tradition. If the CEO genuinely desires an independent board, free to engage in open, frank debate that may be critical of management, he or she may wish to underscore this objective by vesting the power of the chairman in someone else.

One option is to make a non-executive the chairman, and to let the president of the company be the CEO. “We have an ongoing discussion on our board about splitting the CEO and the chairman,” says Peter Benoliel. “Some of the board, including myself, have felt all along that the chairman should be the non-executive and the president should be the CEO. You get better accountability that way. It’s certainly neater.” (Benoliel’s successor as CEO has a different philosophy; he has combined the two roles once again.)

The issue, of course, remains one of control. Many family business owners feel that bringing outsiders onto the board is concession enough to ensuring review of their decisions and are unwilling to split the two roles.

There is no one right way to use an outside board. Experience suggests, however, that boards that tend to get the most from their outside directors follow a number of similar procedures:

• Invest a great deal of thought in the assimilation of new directors. The better the assimilation process, the more quickly and effectively the outside director will contribute to the board’s deliberations. Provide new directors with a package of materials that includes company brochures, past business plans and reports, product information, and biographies and performance appraisals of key executives. Take new members on visits to key facilities and organize activities that give them a chance to meet with directors and officers of the company. New directors should receive a continuing flow of company information, including press releases and progress reports.

• Prepare directors for upcoming board meetings. Provide them, at least several weeks in advance, with a package of information and an agenda of topics to be covered. That gives them plenty of time to familiarize themselves with some of the key issues to be discussed and to formulate questions they may wish to ask the CEO prior to the meeting. Many directors, in fact, discuss sensitive agenda issues with the CEO by phone before airing concerns at the actual meeting.

• Schedule board meetings a year in advance. Sufficient notice means directors can organize their schedules around the board meetings. There are generally no fewer than three meetings per year and no more than eight, although this may vary depending on the special needs of the business. For most companies, quarterly meetings are ideal.

• Include outside directors on committees. Generally, outside directors participate on the audit committee, the compensation committee, and the nominating committee. The audit committee selects or recommends the external auditor for the preparation of the annual financial statements. It reviews the corporation’s statements and any disputes between management and the auditor. It considers the adequacy of the corporation’s financial controls and reviews the corporation’s major financial risk exposures with management and the auditor.

• Make compensation decisions based on recommendations of the compensation committee. The committee reviews and makes recommendations to the board on the annual salaries, bonuses, stock options, and other benefits of senior management. The committee also reviews new executive compensation programs as well as policies in the area of management perquisites. The compensation committee should comprise only non-management directors. This is particularly helpful in closely held family businesses for assuring non-employee owners that the compensation of family members in management is fairly determined.

 

Becoming a world-class company

 

In an age of global commerce, economic and political upheavals, and quantum leaps in technology, even modest business expansion will test the knowledge and resources of a family business. Having access to wider experience and greater wisdom will become even more critical in the next century.

Owners of family companies who create an outside board and go to the trouble of ensuring quality in their choice of directors usually have few regrets. Many cite the numerous benefits, among them increased professionalism and accountability; greater credibility with the company’s various stakeholders; a clearer sense of corporate mission and strategy; access to top-quality advice at a fraction of the cost of consulting firms; and broader perspective on top-level policy decisions.

Some family business owners may feel that their business objectives and management styles are better suited to a less formal board structure than would be called for by the introduction of outside directors. In most cases, however, the addition of outside directors can take a company to the next level, helping it grow and move into new markets, giving it access to an expanded network of contacts, and making it more aware of new opportunities.

Looking back, Peter Benoliel of Quaker Chemical sums up his advice to companies considering an outside board this way: “Someone may legitimately say, ‘I have this business, I want to keep it small, I made a good living from it, I don’t want people asking any questions about what I do and how I do it, and that’s the way I want it.’ ”

On the other hand, Benoliel says, “To be accountable only to yourself is not to be accountable. If you say, ‘I want to build this business into a world-class organization, and I want it to be a paradigm of how you treat people and how you go about building the business,’ then you better get outside directors.”

 

Howard Fischer is chairman and CEO of Howard Fischer Associates International Inc. in Philadelphia, one of the largest executive search firms in the United States. Jane Stevenson is president of Howard Fischer Associates International Southwest. Both authors have recruited outside directors for many family businesses. They were assisted in this article by Sheldon Bonovitz, senior partner in the law firm Duane, Morris & Heckscher, and John Eldred, CEO of Transition One Associates Inc.

 

Duties of directors

• Participate in policy formulation, and financial and strategic planning.

• Serve as sounding board to CEO on major decisions.

• Play appropriate role in helping to resolve conflicts between family members.

• Evaluate performance of senior management.

• Determine compensation of officers.

• Ensure adequacy of financial controls and monitor compliance with laws and regulations.

• Advise family leaders on succession and monitor progress of succession plans.

• Counsel and help develop next-generation leaders.

Qualifications for outside directors

Emotionally intelligent: Knows when the board should get involved and when it should not.

Sensitive to conflict: Understands the value of conflict and is not overwhelmed by it.

Willing to compensate for missing competencies: Recognizes where gaps exist in management and helps devise approaches to filling them.

Committed to professionalism: Demands standards of performance for both managers and other directors, but does not look down on family firms.

Willing to act as a mentor: Takes personal interest in the development of successors.

Neither dominant nor reticent: Can offer opinions and advice tactfully. Helps the family owners realize their dreams for the business.

Steps in selecting an outside director

• Define the company’s strategy, long- and short-term.

• Define skills available in the company for fulfilling the strategy. Where are the gaps?

• Use immediate network of board members to identify candidates with the needed expertise and generate leads.

• Consider using an executive search firm, if the board’s network is not sufficiently broad to find suitable candidates.

• Assess the potential contribution of candidates according to the strengths and skills on the list of the company’s strategic needs.

• Evaluate the “chemistry” between prospective director and the chairman and other board members.

• Provide information about the company and the owners’ vision for its future.

-- H.F. & J.S.

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Summer 1997

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