Make picks of effective directors a top priority

To assemble a board of directors that would carry his family-owned business into the future, Dave Juday, chairman of Ideal Industries in Sycamore, faced the most undesirable of tasks: firing his mother, who had been a director for 53 years.

By Ann Meyer, Special to the Tribune. Ann Meyer is a Chicago-area freelance business writer

She was not the only one Juday asked to leave the company’s board of directors, which had been dominated by family members for decades. He also axed three other relatives, who he says were having a hard time keeping up with board duties.

While Juday’s actions may seem callous, he did it for the good of the company–and ultimately the family. Even his relatives recognized that, he says.

"It came clear that if we’re going to be successful longer term, we have to have a level of public accountability and responsibility like a public company," he says. And that required a board made up of a majority of outsiders, who could look objectively at the midsize manufacturer of electrical supplies and ask the right questions.

Indeed, it takes more than just any board to provide effective corporate governance. Board makeup is paramount to success, and finding the right people to serve as directors is no small feat for owners of small and midsize privately held companies.

Before you begin the search for qualified outside directors, you need to spell out what you want from the board–your expectations.

Many small businesses have trouble making a board work because the owners have not laid the groundwork for successful governance, experts say. For a board to live up to your expectations, you have to clearly define its role.

Next, list the qualifications that will be most helpful in fulfilling that role. While it may be tempting to stock the board with friends and colleagues you are comfortable with, these people are less likely to provide the objective criticism necessary to effectively guide the company, says Norb Schwarz, a managing principal at the Family Business Consulting Group in Chicago.

If you want an objective board that is going to function like one for a public company, you need true outsiders, agrees Juday, whose eight-person board includes two insiders, four outsiders and two family members who do not work for the company.

But small companies do not need huge boards, says Roger Raber, president and chief executive of the Washington-based National Association of Corporate Directors. In fact, too many directors can slow down discussion and be counterproductive.

Small companies can start with one or two outside directors and gradually add more, Raber says.

For established midsize companies, most experts recommend five to nine directors, with a majority from outside the company.

The board shakeup at Ideal Industries began about seven years ago, as Juday became concerned about succession.

"Too often, people think of succession as `I don’t know which kid to pick,’" he says. "But that’s got nothing to do with running a business.

An outside director will force you to ask more relevant questions," he says, such as: Where do you want to go with the business? What’s the company’s key to success?

"Those are the kinds of business questions you’re not going to get from your wife or cousin," he says.

Guiding long-term strategy should be the board’s mission, even when succession is not on the front burner.

As a result, it is important to look for big thinkers, Schwarz says.

All directors also should be honest, trustworthy, independent and good communicators, he says.

Specific qualifications

In addition, companies should come up with a list of more specific qualifications based on the needs of their particular business.

For example, if you are planning an international expansion, look for at least one director who has international experience. If you want to branch out into a new distribution channel, look for someone with that experience.

In general, a board will be more effective if members have experience with a business several stages beyond yours. A young company might look for seasoned executives at companies with a similar product or service but a slightly different market.

But business owners should also look for people in other industries with expertise in areas in which your company is lacking experience, Raber says.

"You look for the breadth of experience. You look for character and integrity and willingness to challenge you on the stuff you ought to be challenged on," Juday says.

Even when you know what you’re looking for, putting together a board can be a daunting task.

"That’s the hardest thing I do–recruiting directors," Juday says. "Anyone you want doesn’t need the job. And you don’t want anyone who needs the money," he explains.

While some small-business owners hire professional recruiters to find directors, fees can add up fast. And because trust is so important, many owners prefer to do their own headhunting.

Most, like Juday, rely on referrals, primarily asking business associates they trust for recommendations. Family business centers at universities, executive groups and small-business consultants also can be good resources.

Don’t worry that your company is too small to be worthy of interest, experts say.

"One of the myths is, `Nobody’s going to want to serve on my board of directors; I can’t pay that much,’" Schwarz says. "It is amazing how many people are willing to serve if they know they can add value to the process and make a difference."

Compensation is another sticky issue for privately held companies that are not able to provide the type of stock options common for directors of public companies.

But most directors are not in it for the money anyway, experts say. At the same time, by compensating them competitively, you increase the odds that they will take the job seriously.

Director compensation often depends on the size of the company and how much it can afford to pay.

Some companies pay a per-meeting stipend plus an annual retainer, while others simply pay a flat annual fee.

Formula for pay

One formula involves taking the number of days per year that you expect the executive to devote to board work and multiplying it by a fee that is roughly equivalent to the executive’s daily salary.

It generally ranges from $500 to $2,500 a day, or a stipend of $10,000 to $25,000 a year.

Most boards meet quarterly, though some conduct conference calls if in-person meetings are too difficult. In addition, directors should spend two to three days a quarter focusing on the company and preparing for each board meeting, Schwarz says.

When boards fail to meet expectations, "it’s often because the commitment is played down," Schwarz says.

If a director isn’t fulfilling his or her commitment, it is important to address the matter as you would with any poor-performing worker.

Directors should be evaluated each year. And those who are no longer the best candidates for the job should be asked to leave–even if that means firing your mother.

Copyright © 2003, Chicago Tribune

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