Entrepreneurial Start-up Article

an important article about Board of Director selection, courtesy of "Garage.com"

From Wall St. Journal Interactive: June 14, 1999

By ELEENA DE LISSER

When Catalyst Consulting Group needed to build a board of directors, Arvind Talwar, the company's CEO, designed it with deliberate precision.

He wanted a board that could unearth business opportunities for his small information-technology consulting company.

He wanted a team of directors with compatible personalities and business styles. And he wanted a board that gave his company "instant credibility" in Chicago. "We are trying to develop a brand name in the city of Chicago, but to be able to do that we need to have people involved in our company who are essentially brand names themselves," says Mr. Talwar.

So Mr. Talwar tapped fellow entrepreneur Arthur Velasquez, head of a Mexican-foods company, to be his "anchor" director-the one who "starts attracting others." Mr. Talwar relies on Mr. Velasquez's deep contact list to drum up introductions that lead to new business.

Mr. Talwar sought out Clifford L. Olson, who has deep financial knowledge, to be the go-to guy on credit lines and banking ties. And he selected Marjorie L. Schaffner, a former chief of staff operations for the Chicago public-school district, to help navigate municipal bureaucracies. (The city of Chicago is a Catalyst client.)

"You name the issue, and I can pick the board member whom I can turn to," boasts Mr. Talwar.

Selecting a board of directors may be one of the most crucial steps a small, growing company can take. "A properly composed board can extend the reach of a company," says Ram Charan, a Dallas management consultant who advises companies on recruiting directors.

Of course, not every closely held company needs to have a board. Liability insurance for directors can be expensive. And there's the issue of control. An entrepreneur who establishes a board of directors hoping to get meaningful business insight may end up setting himself up to be outvoted by a bunch of outsiders. Especially in family-owned companies, "you want the wisdom and guidance, but you want the freedom to say, 'Thank you very much, but I'm going to do it my way,'" says Will Sogg, a Cleveland attorney who advises family businesses.

Still, at its best, a board can play the multiple roles of guidance counselor, salesman, booster and negotiator. So, how to set up the board? Here are some ideas.

Wish List

The proper mix of directors is important. Start with: "What are the objectives, aspirations and goals of this company, and how do we get there?" says Grant Heidrich, a venture capitalist based in Menlo Park, Calif.

Lennox "Bim" Black, CEO of Teleflex Inc., a manufacturing firm in Plymouth Meeting, Pa., suggests this multi-step plan: "Scope out economic and industry trends for the next five years, assess the prospects for your company, determine your most critical needs, then conduct your search based on those needs."

Beyond that, entrepreneurs should compile general categories representing skills that will be needed (marketing, financing, business development, etc.) and then build a list of names of potential candidates.

Then take a deep breath, and don't be afraid to ask people to join you- especially those who are already successful. "The business community is filled with executives who see board membership as a way to experience the thrill of growing a company while maintaining the security of full-time corporate life," says Susan Pravda, a Boston mergers-and-acquisitions attorney. "Others are attracted by the prestige and networking opportunities associated with directorship."

Go Beyond Who You Know...

By reaching out, you immediately avoid a common mistake made by many small-company owners, particularly family businesses: stocking the board with company insiders. Tapping primarily senior management becomes redundant and pointless. Says Howard Fischer, an executive recruiter in Philadelphia, "The CEO gets to pick the brains of the insiders every day."

Another frequent pitfall is putting professional service providers on the board, like the company's accountant or lawyer. "If they're a good lawyer, you can always hire them," Mr. Fischer says. "They don't have to be on your board."

Dick Wood, chief executive officer of Wawa Inc., a Wawa, Pa., convenience-store operator, sought out a headhunter's advice to find prospective minority and female outside directors.

"The big advantage in running a search is that you get to talk to people you'd otherwise never meet," says Mr. Wood, who represents the fifth generation in his family to run the closely held business. "The second advantage is that if you use the 'old boy network' and you approach someone, it's very hard to interview them for the job" because of the personal connection.

While it may sound simple, another important consideration is to look for experienced people who are going to have a genuine interest in helping your business.

...and Big Names

That point can get overlooked in the rush to snare big-company people with flashy job titles or industry connections but who can become ineffective directors. "The disconnection is that they don't understand the dynamics of a small, high-growth emerging firm," says Mr. Heidrich. "They may be operating in a domain where they know all the players, but the problem-solving issues, scale issues, financing issues [that pertain to small companies], they just can't relate to and so they can't contribute."

Business executives who are about to retire or have recently retired, say within the past year, can make ideal candidates for a board. "That person can devote a tremendous amount of time to your company, and their networks are still fresh," says Mr. Fischer.

Consider people from the nonprofit sector, like college presidents and senior-level administrators, since they are in many ways running a business although their profit and loss statements may not be identical to their corporate brethren.

Research materials like Standard & Poor's Register of Directors and Executives as well as the National Association of Corporate Directors can be resources to uncover possible contacts. Other potential sources of directors are your suppliers, who know your industry from another perspective, and up and coming managers at growing companies.

Also look for what one venture capitalist calls "sharpshooters." These are people who don't have a lot of sacred-cow beliefs about how the industry works or doesn't work-and are willing to speak their mind and shake things up a bit.

At Teleflex, Pete Retzlaf, a former football player for the Philadelphia Eagles, falls into that category. Mr. Black, the company's chairman, says he recruited Mr. Retzlaf, who is currently chairman of a cotton and grain exporting company, for what he calls his "leadership skills and Midwestern values" and because he felt the board was getting "a little too East Coast."

Beyond weighing the board as individuals, you'll want to consider how they work together as a group. Is there chemistry between the board members? And are they capable of delivering feedback as informed dissent or will they merely be rubber stamps?

Then you'll have to weigh the board's chemistry with you-and what you want the working relationship to be.

Mr. Talwar, the Chicago entrepreneur, learned the hard way that you can compromise your authority very easily in choosing a board. In his previous venture, another consulting firm that he launched in the early 1990s, Mr. Talwar sought out directors to provide him with insights into funding and business development, because "we needed our board to be very active in helping us gain clients."

But as the business started to grow, Mr. Talwar realized that his seven directors had gotten too intertwined into his daily operations. Instead of acting as directors, they were now acting as part of the management group. For instance, if Mr. Talwar wanted to purchase equipment, he had to run that by the board. If he had an opportunity to "do some public relations," like be quoted in a trade-publication article, he had to get permission from the board.

Mr. Talwar says a big part of the problem was that of his seven directors, he only knew two of them. The others were strangers who had been recruited to join the board by one of the other directors. Mr. Talwar, not wanting to rock the boat, agreed to run everything by the directors.

"They were so integral in the founding of the company, so by definition, they were involved in the day-to-day decisions of the company," he says. "In the long run, that's not what you want."

The experts agree: Consider building in safeguards in your directorships to give yourself the flexibility to remove a director who loses interest or isn't making a contribution. Granted, this has to be done gingerly, but there are formal steps that can be taken, like making it a rule that directors can face "term limits," such as having to resign if their job situation changes, or that directors must submit to a kind of work evaluation.

"This is not like hiring a CFO who you can summarily dismiss," says Russell S. Reynolds III, managing director of Directorship Group, an executive research and recruiting consultancy in Greenwich, Conn. "The CEO has got to spend a lot of time on reference checks, a lot of time checking out how these people operate."

Once you've identified a list of candidates, don't go crazy trying to sign up everyone. The experts say that a small board, of about five to seven directors, is a good size to get the job done. Anything more than nine can lead to difficulty reaching consensus.

But even small boards should divide into subcommittees, with audit, compensation and strategic planning being the most likely subjects. "Even with a small board, it is helpful to segment in order to confront particularly important issues in-depth," says Ms. Pravda, the Boston attorney. That means monthly committee meetings during critical periods, versus quarterly meetings of the board at large.

And when it comes to pay, Ms. Pravda says granting options in the range of ½ % to 1 ½% of total equity would be reasonable. She recommends having these options vest over a period of three to four years.

Are boards for everyone? Probably not. As Mr. Sogg, the Cleveland lawyer, notes, many family businesses really aren't interested in risking their authority. In that case, they should consider forming a board of advisers instead. An advisory panel often acts as a sounding board or information resource for the CEO who in turn is under no structural pressure to take the advice.

"They get to share ideas, bounce things around without the obligations or formality of a vote or doing it in the context of corporate governance," he says.

Indeed, Jeff Susbauer, a small-business professor at Cleveland State University, believes most small-company CEOs are better off with just an advisory board because they aren't up to having a true board of directors. Mr. Susbauer speaks from experience: He has sat on several boards, including the board of a closely held manufacturing company he declines to name. Mr. Susbauer says that the CEO, the majority shareholder, is sometimes resistant to taking the board's advice.

"I'm the maverick of the board, and I always ask the questions that nobody else wants to ask, and I sit at the far end of the table" away from the CEO, Mr. Susbauer says.

For example, this CEO wanted to hire a new chief financial officer a few years ago. But the candidate he presented to the board, an accountant with a local certified-public-accounting firm, didn't pass muster with the board members. The accountant's references came back "very negative, and we advised [the CEO] not to hire him," says Mr. Susbauer. The CEO did anyway. After the new CFO was in the job a while, the CEO started "bad-mouthing" his hand-picked CFO and then fired him.

• Ms. de Lisser is a staff reporter in The Wall Street Journal's New York bureau.