A Board with Independent Directors - A Strategic Growth Step...if You Dare!
Introduction to SignalsFromTheOP
Guide to episode
- Many privately held industrial manufacturers have grown because of determination
- That determination and self-reliance may preclude adding a valuable strategic board
- A board of directors skills matrix shapes a gap analysis of skills your board should have
- Then you can deliberately add them, improve governance, and drive growth
Transcript follows:
Hi, I’m Ed Marsh. Welcome to this episode of Signals from the OP.
Building Machines and Building Companies
I love entrepreneurs. I love manufacturing and capital equipment. So it stands to reason that I love privately held companies – often closely held by family. Many of these companies were founded 30 – 40 years ago as automation started to come of age in US manufacturing. There are a lot of them in the middle market industrial manufacturing space.
Many build machines or make durable goods, while some are distribution operations. And while some are a bit older, and others like systems integrators newer, they’re almost all the creations of people who actually did stuff, saw a problem, and bent steel to fix it. They had a solution, were honorable and hard-working, and built an inspiring business.
Our Way or the Highway
Their irreverence, cockiness, enery, and can-do spirit are contagious. The flip side of those attributes is that they often dismiss important alternative perspectives. The world is different now than when they founded and grew their firm. Often the second generation, or even G3, is focused on preserving the business. Nobody wants to be known as the one that damaged the family legacy. So risk aversion is very high – among a group that tends to be pretty conservative anyway.
This is also a group whose first instinct is DiY. After all, that’s the origin of the company. They envisioned and built something no one else could. But I’ve seen that extended in some ways that are honestly pretty silly – and WAY outside of the domain of their expertise. For instance, creating their own website CMS and hosting it locally, and building their own CRM from excel sheets and macros.
It's also a group that holds tight to control. They’re quite certain that nobody else understands their company, their buyers, their industry, etc. Some of that reflects experience with “experts” who didn’t. Some is the control impulse of founders who went out on their own, and then succeeded, because they were determined nobody else would tell them what to do.
The DiY and control instincts cost them growth because they steadfastly refuse to embrace the proven top line revenue growth methods that have been developed and refined for other markets like SaaS software. Sometimes they’ll cherry-pick one tactic, “adapt” it to what they want, and then proclaim the lack of applicability because it didn’t work. Well, of course it didn’t. It’s kind of like drinking whey daily while sitting on the couch – and deciding that supplements don’t work because you didn’t bulk up.
These attributes also mean that they are naturally resistant to oversight. They’ve made a lot of bold and correct decisions along the way – often when told by others that they’re wrong, crazy, going to fail, etc. They feel comfortable operating autonomously. In engineer-founded companies, manufacturing best practices are often adopted. But marketing and sales best practices are not. Especially when family, friends, and long-time employees are in roles of leadership in those functions.
Uncomfortable and Challenging - but Valuable
All of this is background to frame and understand why a private industrial manufacturer might resist having a robust strategically strong board with independent directors. Many founder CEOs don’t like the idea of sharing or ceding control. A board with the right skills can complement the passion and domain expertise of a talented founder with perspectives that will help unlock opportunities for the company.
Strategy Informs Board Skills Gap Analysis
In a perfect world, the company would have a well-developed strategy. Working from that strategy, a nomination and governance committee of independent directors would create a board skills gap analysis using a board of directors skills matrix that identifies the strategic skills the board should have versus what it actually does. That gap analysis informs board member recruiting as part of a strategic plan to strengthen the board.
But it’s often not a perfect world. Frequently the strategy is a bit casual - something along the lines of “let’s keep doing what we’ve done.” Often the board may not have any independent directors, and it may not have a formal nomination and governance function. That means that building a robust board is an iterative process.
Gradually Improving Board Independence and Performance
For instance, it could start by adding a couple of independent directors when prompted by lenders, a consultant, major non-executive shareholders, etc. Those directors could begin to gradually introduce some governance best practices including collaboration with executives in creating strategy, and steps to improve board performance. That in turn might lead to discussions around the ideal board size, how many independent directors, and what they should contribute. At that point, a board sills matrix becomes a natural next step.
But what sort of skills should be on the matrix? Obviously, that depends on the products you sell and the market that you’re in. So, let’s use an example that’s common across many of my clients. Food manufacturing. If you’re a middle market company that sells capital equipment to food manufacturers and has a long-term growth orientation, what skills would be important for your board to have? I’d suggest the list should include the following in no particular order:
- global business expansion (including tax, regulatory, sales, FCPA, transfer pricing, etc.)
- food safety and production regulations
- nutrition
- institutional food operations (restaurants, cafeterias, distribution, etc.)
- retail (grocery, consumer, distribution)
- M & A (every company should always be open to strategic opportunities for acquisition and sale - but with realistic expectations)
- business models (e.g. subscription services, recurring revenue)
- technology (e.g. 3D printing, IIoT)
- sales growth
- digital marketing
- tax, accounting, and finance
- ingredients and trends (e.g. clean label, sustainability, alternative protein)
- talent management (finding & retaining top talent, compensation, benefits)
- partnerships (e.g. sales channel if applicable, related technologies)
- machinery manufacturing
- and of course, food manufacturing
- generational and geographic perspective (to interpret trends, provide perspective during cycles, etc.)
Strategically Adding Folks with Clusters of Skills
Where would you go to find these? Well, let’s take a subset – business models, sales growth, digital marketing, partnerships and generational perspectives. A machinery company could add a technology executive – like a SaaS CRO – who might fill all of these.
Or another example – tax and finance and M&A could also be combined as could ingredients, nutrition, and food safety.
Imagine the richness of discussion and quality of decisions that would come from a board with that breadth of experience. Sure, the company still bends and welds steel, but they’re functioning as an integral member of their target market ecosystem.
And it works because the board helps create strategy iteratively, incorporating that experience. Then independent directors turn to the gap analysis revealed by the board of directors skills matrix to recruit new members, and that creates a virtuous cycle of improved board governance and improved company performance.
Reasons to Avoid a Strong Board with Independent Directors
Of course, there are downsides. The CEO must report to the board. It can’t be a rubber stamp, and in some cases, the board will have to replace the CEO. That prospect can dissuade companies from taking the step. There’s also a cost. Although private company independent director compensation is minimal, the aggregate cost for several, plus travel and meetings is a material number.
If a company is operated as a lifestyle business it’s probably not appropriate. But if there’s genuine intent and family buy-in to the idea of profitable, long-term growth, then a board with independent directors built around a skills matrix, can be an enormous asset.
Intersted in some publicly available board skills matrix resources from NACD (the National Association of Corporate Directors)? Here's a link to general resources and another to a sample matrix. I’m an NACD Certified® Director and they have a lot of substantive private company resources for directors and boards.
I’m Ed Marsh. If you found value in this episode of Signals from the OP check out the full playlist and maybe even like it, share it and subscribe – either to my YouTube channel EdMarshSpeaks.TV or at the related blog SignalsFromTheOP.com.
