IECG Newsletter, Issue 3, December 2016
- Message From the Executive Director
- Recent Happenings
- Corporate Engagement
- Corporate Governance Focus
- Upcoming Events
- Contact Us
There are several ways in which IECG differentiates and provides value. One is our quarterly meetings that focus on board dynamics and future trends; the last one on strategic foresight was unique and set a new standard, even for us. Another thing we are focused on for you is recommending you for paid board service. We are working on five placements now, and if you have not gotten us a current résumé and skill set list, then now is the time.
And here is the latest. We have scheduled 16 sessions in January/February to have five or six of our members come together for two hours to really get to know one another. You will bring copies of your résumé for everyone, and you will get time to talk about your desires, your talents and what boards you might best fit on. This will be intimate networking on steroids because most board seats are still filled by referrals from people you know. I look forward to seeing each of you in January and February — and don’t forget our nonprofit series this spring and our annual conference on April 12.
Before I close, I would like to introduce you to our newest IECG Advisory Board member, R. Brad Oates. Chairman of Stone Advisors and a director on the CIT Group Board, he already may be familiar to many of you from his days in the National Football League, where he played for the St. Louis Cardinals, Detroit Lions and the Green Bay Packers. Brad has quickly become a contributing member, having written the article on “What Corporate America Can Learn About ‘Self-Governance’ from Championship Teams” in this issue.
Executive Director, Institute for Excellence in Corporate Governance
Excellence in Private-Company Governance
By Michael Grant
Director of Marketing and Strategic Planning
Institute for Excellence in Corporate Governance Advisory Board Member
The Institute for Excellence in Corporate Governance recently convened a thought-leadership luncheon, “Excellence in Corporate Governance: A Foundation for Success,” featuring three panelists who all had experience as CEOs and board members of multiple private companies. Jackie Kimzey, a Jindal School of Management innovation and entrepreneurship faculty member, has served on several private- and public-company boards and is a partner at Sevin Rosen Funds. David Michel is president and CEO of Catapult Health, a national preventive healthcare practice. Toni Portman is CEO and executive chairman of DHISCO, a hospitality technology company. They shared their experiences as to why excellence in corporate governance was an important goal and had helped their companies be successful.
At the table discussion afterward, each table came up with the top three takeaways.
Here are three of those takeaways:
- Seek alignment of the board and management with the vision and mission of the company. Often a board fails to think about this potential problem until troubles occur, but at the least, an annual short session to align or confirm alignment can be powerful in assuring that the strategy is understood and agreed to by all.
- The one thing that CEOs consistently list as the main advantage of an outside director is that he or she provides them with an objective sounding board not available from any other stakeholders.
- CEOs want board members to participate, and yes, what a director knows can be most helpful; however, most often, it is the quality of the questions that they ask that drives value for the organization.
It was also noted that the CEO study, the Private Company Corporate Governance Survey, was in progress. Analysis of the responses was just starting, and the institute was working on a dashboard.
Why Form a Board of Directors… and Why Not?
By Dennis Cagan
Principal, Caganco Incorporated
Institute for Excellence in Corporate Governance Advisory Board Member
There are many good reasons to consider the formation of a fiduciary board, traditionally referred to as board of directors and/or an advisory board. However, there are also a few risks. As the owner or leader of a private company, how well you understand both, and move forward, can have a dramatic and material long-term effect on the success of your company.
What Problem Does a Board Solve?
For most people who own the controlling interest in a private company, the bulk of their knowledge comes from business-press stories about the actions of large-cap public company boards. There is much more to understand.
One of the more dramatic evolutionary trends in American business over the last couple of decades has been the pressure on public companies — both regulatory and investor-driven — to upgrade their governance practices (for example, with boards). A smaller but important result has been private companies quietly moving to emulate — where appropriate — the governance practices of their public counterparts. A board completely composed of either owners or management is technically a board. However, this does not meet the true intent of a fiduciary board because it lacks a majority of independent directors, which is mandatory for a public company under Sarbanes-Oxley.
What problem does a board solve? Many would comment, “I am doing just fine without one.” When they want advice, they may rely on their attorney, CPA or fellow business owners. Many private-company leaders are realizing that beyond licensed legal and accounting advice, the general business counsel they are getting is not worth the price. Is it really the wisest choice to rely on your informal network, or even your attorney or accountant, for advice on serious strategic issues in your unique industry? Or, what about acquiring a competitor or expanding internationally? A carefully created, balanced and well-managed board can offer inexpensive and invaluable counsel in a broad range of critical areas. The objective is to add to the breadth of expertise beyond what is already available in the company.
In addition to strategy and practical advice, an experienced board can have other benefits, like improving your company image in the eyes of customers, vendors, bankers and employees. A board can be a valuable asset in raising capital or other financial transactions. One important byproduct of a board is increased accountability of management.
Why Would I Give Up Control?
A typical comment from the owners of any closely held company is, “I don’t want to give up control.” In most cases creating a board with independent directors does not cause owners to lose any control.
The reporting dynamics of a fiduciary board are that the board reports to the shareholders — or even the sole shareholder/owner — of the company. The board’s sole responsibility is to protect the interests of the ownership. One way or another, all employees, including senior management, report to the CEO. The CEO in turn always reports to the board. In the case where the CEO is not the sole owner of the company, for example a public company, the reporting is very straight line — very simple. He or she can be directed and even fired by the board. But in the case where the majority owner of the firm is the CEO, there is an additional element. The CEO reports to the board, and since the company ownership elects the board, they ultimately work at the will of the CEO. As the owner, he or she will always have the final say. The board should provide a platform for a critical analysis of management’s actions, and objective feedback, but the CEO can ultimately reject the board’s views. If that makes board members uncomfortable, their fiduciary and legal recourse is limited to their resignation.
So, Why Take the Time and Spend the Money?
We have reviewed the upside of forming a board. What is the downside? If things are good, one might question the need for a board. On the other hand, could things be better? If that is possible, then, why not?
Initially, forming and maintaining a board is very time-consuming. Ultimately, it is the owners who undertake this. If the owner and CEO are one and the same, then where does the time come from? Like anything else, it has to be recognized as a priority. Yes, it will initially take valuable time away from your other management responsibilities. It is the board’s potential for dramatically upping your company performance that makes it worth the trouble.
Another issue is cost. When forming a board for a privately owned company that intends to stay closely held, it is most often not desirable or feasible to compensate a board with equity — for example, stock options. Some form of phantom-stock or synthetic-equity recompense is possible, but ultimately it boils down to paying the board in cash. In addition, there are travel expenses for attendance at meetings, the additional hard and soft costs of preparing board materials for meetings, and of course, the cost of liability insurance for directors and officers.
The biggest reason for not forming a board is usually the cost in management time, focus and resources, and the monetary costs themselves. Beyond that, forming a board is not for the thin-skinned. If you have well-qualified and experienced directors, they will question your judgment. They will press you for your reasons and expectations at every turn. If you do not want anyone arguing with you, even if it is for the betterment of your enterprise, then pass. Lastly, another good reason for not pursuing a board is simply not understanding how they work and how the governance process in general is meant to build a stronger corporate infrastructure.
Back of the Envelope
- Gain first-class advice from experienced experts
- Get fresh innovative ideas, competitive advantage
- Raise/improve company image among customers, vendors and investors
- Best governance practices and processes
- Puts a strain on management’s time and resources
- Costs too much money
- BOD may question your judgment
- You don’t understand the BOD process
In conclusion, a good board of directors can be a powerful asset for any company, but it is not for everyone.
Dennis Cagan is a high-technology industry veteran and entrepreneur, having founded or co-founded more than a dozen companies. His sat on his first board in 1968 and his first public board in 1981. Dennis has served on 54 company fiduciary boards, both private and public, predominantly in early and mid-stage technology companies. In 2013, the National Association of Corporate Directors and the Dallas Business Journal selected him as one of 12 Outstanding Directors of North Texas. Dennis is a member of the advisory board of the Institute for Excellence in Corporate Governance. He can be reached at email@example.com.
What Corporate America Can Learn About ‘Self-Governance’ From Championship Teams
By R. Brad Oates
Chairman, Stone Advisors; Guest Lecturer, Brigham Young University
Institute for Excellence in Corporate Governance Advisory Board Member
Corporate governance in America is most often associated with the “governance” responsibilities of a board of directors. This traditional top-down governance model is built around (1) shareholders electing the directors, (2) directors hiring and overseeing management, and (3) management hiring and managing employees who perform tasks prioritized by management. Basically, a “top-down, command and control” governance model. But, is this the most effective governance model that corporate America should adopt? From my personal experiences of playing on, and being around, championship football teams, I don’t think so.
In addition to playing eight years of professional football, most notably with the Cardinals, Lions and Packers in the NFL, I have personally served on more than 20 public-company, private-company and nonprofit boards, and helped banking regulators resolve more than 50 failed bank situations beginning in 2008. I have seen governance successes and governance failures up close and personal. I find myself appreciating more and more the governance lessons I learned from self-governing championship sports teams.
Championship teams have absolute clarity about how each governance dimension links with each execution discipline to achieve each specific strategic outcome. And each member of the organization, including general managers, coaches, players and team support staff, understands exactly how his or her specific role contributes to achieving those strategic outcomes that create competitive advantage. Most importantly, governance for championship teams is as much bottom-up governance as it is top-down governance.
Is there equivalent strategic clarity in the corporate world? Rarely, I think. Governance is mostly top-down oversight from a board of directors. But, I don’t think that is the most effective governance model to adopt for competitive advantage.
One of the great experiences I had in professional football was to play with my younger brother, Bart, on the Philadelphia Stars (USFL) championship team for two years at the end of my professional career — before injuries caused me to conclude that being a lawyer and turnaround banker was a really good career trade. The championship team lessons from the Philadelphia Stars are relevant here. Much credit for the Stars’ championship performance and culture has to be given to the owner, the late Myles Tanenbaum, and the president and general manager, Carl Peterson. They put a championship organization together by hiring great self-governing coaches and the right mix of high-performing players who also were self-governing.
The players held themselves accountable more to each other than to the coaches. Self-governing players are always more critical of themselves than coaches need to be. In fact, during film study, players on championship teams spend more time studying their own on-field performance (both in games and in practice) than they do studying their opponents. The championship thesis is that if players can perfect their football craft, they put themselves in the best position possible to win against any competitive matchups on the field of play. (Parallel lesson for the corporate world?) The great coach Vince Lombardi of the Green Bay Packers said, “Perfection is unattainable; but, if we chase perfection, we can catch excellence.”
It is true there needs to be a threshold level of execution talent on the field to win. But, bad organizations become good and good organizations become great primarily based on governance culture, particularly what I call “tribal traditions.” Let me illustrate with an example from my days as an offensive tackle in the NFL.
Championship quarterbacks (QBs) have a tradition of regularly treating their offensive linemen (OL) to a nice dinner at an expensive steakhouse before games. (Note: OL are carnivores and not tofu eaters). OL are the unsung heroes on a football team, but this tradition reinforces and strengthens the tribal bond that exists between a QB and his “Praetorian Guard.” Do you think that bond makes a difference during a game, when a millisecond of extra pass-protection time can be the difference between a completed pass for a touchdown or an interception, or even worse — the QB being carted off the field on a stretcher? You bet it does! Self-governing organizations are built from, and govern from, the bottom up, as much, if not more, than from the top down. And, just for the record, the OL are the poets and philosophers of a football team.
Let’s explore execution disciplines a little more. When I was drafted by the Cardinals in 1976, I broke in on what was considered the best OL in the NFL at that time. Consider a strategic execution goal for the OL of no sacks of the QB in a game. One of the self-governing traditions of the Cardinal OL was not just “no sacks,” it was an execution goal that the man you were assigned to block never even hit the QB in a game. But, this execution discipline was really perfected during practices. It was part of the OL tribal tradition that you never “hit” (fall to) the ground during practice. This was practice with a specific execution mission in mind — always be in an “on-your-feet” mobile position to make something good happen on the field. Vince Lombardi said, “Practice does not make perfect, perfect practice makes perfect.” (Parallel lesson for the corporate world?)
Championship teams train consistently with a perfect-practice mindset. This is one of the secrets (really, not so secret) to the competitive success of the New England Patriots. They have a strong bottom-up, self-governing culture that enables them to get more out of practices than other NFL teams, who have a more top-down, command and control culture. In fact, the Patriots are notoriously silent when it comes to their winning ways. You rarely find the coaches or players saying much of anything about their competitive success. Their performance on the field speaks for itself. And when they do speak, it is mostly to credit each other for their success. Eventually, the players themselves will get sick and tired of losing and do something about it. This is the heart and soul of championship teams — a winning culture comes from the bottom up, from self-governing players who love each other.
To this point, Coach Lombardi said, “Teamwork is what the Green Bay Packers were all about. They didn’t do it for individual glory. They did it because they loved one another.” Love, what a quaint, old-fashioned ideal! Rarely spoken of in the corporate world. But in the NFL, we had a saying, “If you want to fix losing, fix the locker room.”
In championship football, governance culture has proved to be a stronger competitive force than all of the other governance dimensions combined. That is the enduring lesson that the first championship team in America, the original Patriots, taught us well. I wonder sometimes how well we apply these governance lessons in corporate America. Championship-team principles endure throughout time in almost any competitive setting. And, that is a lesson worth remembering today.
Brad Oates is chairman of Stone Advisors. He is an American College of Corporate Directors-certified professional director on the CIT Group Board (NYSE: CIT) and a strategic advisor to a wide variety of companies, particularly special-situations companies. He also is a guest lecturer on business ethics and corporate governance through his association with the Marriott School of Management at Brigham Young University and a member of the advisory board of the Institute for Excellence in Corporate Governance at The University of Texas at Dallas. Brad can be reached at firstname.lastname@example.org.
January and February, 2017
Lunch at UT Dallas, JSOM IECG Offices. Membership meetings to network and share résumés.
January 28, 2017
Young Leadership Council (YLC) of Volunteer Now will hold a half-day, nonprofit program geared toward young executives to educate them on governance in the nonprofit sector. 9 a.m. – noon, UT Dallas, JSOM 11.301A and 11.305.
Brochure • Registration
February 8, 2017
Strategic information for board members and executive directors of nonprofits, UT Dallas JSOM 1.606, Executive Dining Room.
February 21, 2017
What does free trade look like in the new administration? Todd Bluedorn, chairman and CEO of Lennox International, confirmed; and Ron Kirk, former Dallas mayor and former U.S. trade representative, invited. UT Dallas JSOM 1.606, Executive Dining Room.
March 21, 2017
Board Dynamics Breakfast; UT Dallas JSOM 1.606, Executive Dining Room.