The Board of Directors-Tough calls and good advice: Corporate boards keep the business on track

By most accounts, it seems Ready Pac Produce Inc.’s chief executive officer should hate his corporate board. It persuaded him to back out of a promise to deliver jobs to an economically depressed city. It got him to take a hit on his personal real-estate portfolio. And it second-guesses every move his management team makes.

By LYNN COWAN Wall St. Journal Special Report

If that sounds like a board that has been more of a hassle than a help, you’re probably not viewing it from the right perspective, according to Ready Pac CEO and Chairman Dennis Gertmenian. From his point of view, a strong, independent corporate board has forced him to make some tough decisions that ultimately have improved his business, a produce-packaging company based in Irwindale, Calif. It also has helped his top executives focus on important issues.

"I was on the floor and in the plants," says Mr. Gertmenian, who founded the company in 1969 and is its sole owner. "And I wasn’t taking the time to formally structure some of the areas of my company that needed attention from a long-term point of view, such as: What are we doing with our banking relationship a year from now? What is our strategic plan? I had a plan, but it was in my mind, not written down."

As head of a private company, Mr. Gertmenian isn’t required to have a corporate board, unlike publicly traded companies. With about 2,500 employees, Ready Pac isn’t so big or complicated that the CEO and his management team couldn’t manage its future unassisted.

But small, private companies in particular can benefit from the assistance and advice a good corporate board can offer. Their founders usually are too focused on running the business to look more than a few months ahead, and can lose sight of strategic issues. They’re also less likely to have a management staff with decades of outside experience to draw upon, and less likely to have a network of corporate colleagues they trust to offer connections and advice.

"Generally, the smaller and younger a company is, the more value the board of directors can contribute to them," says Ralph D. Ward, publisher of the Boardroom Insider newsletter, based in Riverdale, Mich., and author of several books about corporate boards. "I can’t imagine a smaller company in a position where it couldn’t use a fatter Rolodex and more contacts."

Tough Calls

In Ready Pac’s case, Mr. Gertmenian’s decision to hire a corporate board nearly two decades ago has resulted in valuable advice that caused him to reverse decisions that were well on track to completion.

In one case, he told the board of the need to expand Ready Pac’s operations with a new processing plant. He hired a project manager and entered into negotiations with the town of Soledad, Calif., to construct the plant there. He signed an economic-development agreement with the town that gave him a discount on land in exchange for bringing a certain number of jobs to the area.

But when he presented the deal to the board, one member asked a question that Mr. Gertmenian hadn’t considered: Weren’t there any existing plants in the area that he could buy for less than it would cost to build one? It turned out there were, and if Ready Pac moved into one in nearby Salinas, the cost would be half that of building a plant in Soledad, and the facility would be ready in a quarter of the time. It was a smarter business decision, but not an easy one to explain to Soledad politicians. Ready Pac would have been the town’s largest employer.

"That was one of the toughest business calls I’ve ever made in my life," says Mr. Gertmenian.

The board hasn’t flinched from other tough calls, either, and neither has Mr. Gertmenian. About 10 years ago, Ready Pac’s chief operating officer presented the board with a plan to open an eighth facility in the Western U.S., saying the company was in danger of losing market share if it didn’t expand. One board director disagreed, saying Ready Pac had too many plants and was having trouble managing them all. What it needed, the director said, was to consolidate its operations in a single large plant.

There was one problem with the director’s suggestion: Mr. Gertmenian personally owned the seven locations Ready Pac used in Southern California and Arizona, and was leasing them back to the company. Consolidating operations would mean a loss of income in his personal real-estate portfolio. On the other hand, Ready Pac could buy an empty facility at a steep discount: California was in the midst of a recession, and large companies in the pharmaceutical and aerospace industries that had occupied major chunks of commercial real estate were fleeing the state. Ready Pac bought a plant in Irwindale; two years later, with the recession over, the property’s value was appraised at more than three times the purchase price.

"I was going to take a personal hit on properties that I was going to have to sell off or find a lot of tenants for," says Mr. Gertmenian. "But from a company stance, it made sense. My biggest asset is Ready Pac. Since I own 100% of the stock, it would be foolish not to pay attention to that kind of advice, because it ultimately added more to my portfolio."

Staying Receptive

Indeed, the fresh opinions and expert advice that flow from a good corporate board are priceless for a CEO, who may not be able to get that kind of feedback from anyone else within the company, says Ted Jadick, vice chairman of Chicago-based executive-search firm Heidrick & Struggles International Inc. and head of its board-of-directors practice.

An April survey by the National Association of Corporate Directors found that the average total remuneration per director at U.S. companies with $50 million to $200 million in annual revenue was $45,309. That includes annual retainer payments as well as attendance fees and stock and option awards. But that expense is easily justified, Mr. Jadick says.

"My philosophy on good board members is it’s the cheapest help you can get," he says. "To have them thinking about your problems from quarter to quarter and getting their access to information and resources is invaluable."

But for a board to be effective, the CEO has to be open to outsiders’ views, as Mr. Gertmenian was. Robert Rollo, a managing partner at TMP Worldwide Executive Search who heads up the firm’s global board practice in Los Angeles, says the usefulness of a board is directly related not only to how well an executive heeds its advice, but also to how independent and respected the board members feel.

"The better boards I’ve seen are those where the owner really pretends as if that board is representing something other than himself," says Mr. Rollo.

Picking members who have expertise on issues that a company faces also is key. Mr. Gertmenian has a five-member board, including himself. Its other members are Dann Angeloff, an investment banker who runs his own firm, Angeloff Co., with expertise in finance and corporate governance; Jack Davis, the CEO of Ventura Foods LLC, a maker of edible oil-related products, including Hidden Valley salad dressing; Howard Marguleas, who has an extensive background in produce development and real-estate issues, and is founder and chairman emeritus of Sun World International Inc., a produce-development company; and Jules Tragarz, president of Management Systems Development Co.

It also pays to be aware that as helpful as corporate boards can be, they don’t come without drawbacks. One of the primary surprises in store for newly minted CEOs or for private companies that form boards is the amount of time involved in managing a board. While the uninitiated might imagine half-day meetings four times a year and cocktails afterward, preparation for the meetings can take a week or more as the agenda is set and information is collected. Keeping members abreast of issues that arise between meetings is also important, as is fielding their requests for information. TMP Worldwide’s Mr. Rollo estimates CEOs can spend as much as 20% of their time on board-related activities, a commitment that can come as an unpleasant surprise to a leader who has become successful primarily through hands-on work within the company.

"Most of the time, the reason a senior executive who has been promoted to CEO doesn’t work out is because they totally misjudged what it takes to manage the board," Mr. Rollo says. "It’s not as much that they’re mismanaging the company as they are mismanaging the board. Many talented executives are unable to make the transition."

— Ms. Cowan is a reporter for Dow Jones Newswires in Washington.