August 1, 2008

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Article

Filling the Director's Chair

Effective Board Members Need Skills and Talent at the Table

Gretta Spendlove

August 1, 2008

“Groups make better decisions than individuals and diverse groups make the best decisions of all,” says Ron Poelman, Salt Lake City corporate attorney and director of USANA Health Sciences. Such is the theory behind corporate boards of directors—that the best business decisions are made by a group of people whose skills and backgrounds are carefully balanced, instead of an individual rushing headlong down a chosen course—and dragging a company along. “The trouble with individual decision-making in business is that each individual has his or her own frame of reference and biases,” Poelman explains. “Hiring a new CEO, entering a new market—those are the kinds of major decisions for which balanced, group judgment is necessary.” Especially important in today’s stringent compliance atmosphere, companies from start-ups to the Fortune 100, struggle with how to best choose, use and keep their team of corporate directors. Talent Search “We try to match the talent on our board of directors with what we’re doing as a company,” says Harris Simmons, chairman and CEO of publicly traded Zions Bancorporation. “We operate in 10 western states so we’ve increased the geographic representation on our board to match those areas. On our 10-member board, we have representatives from Utah, Idaho, Texas, California, and even from some states outside our market area to give varying perspectives.” Each board member is chosen for particular skills, says Simmons. For example, director Patricia Frobes has a strong background in law and real estate, he explains. Frobes was vice chairman of O’Melveny & Myers, a large West Coast law firm, and then general counsel of The Irvine Company, one of the largest real estate developers in the U.S. “She has a good, general legal background and understands the California real estate markets particularly well, where we’re very active,” Simmons says. Stephen Quinn, another Zions Bancorporation board member, is a retired managing director at Goldman Sachs and is knowledgeable about capital markets. “Since the nature of our business is to do frequent financings in the markets, he’s been very useful,” Simmons says. Don Cash, former CEO of Questar, has been a Zions board member for many years and has “the institutional memory.” And Steve Wheelwright, current president of BYU-Hawaii and former senior associate dean of the Harvard Business School “has an incredible general business background. He just knows a lot about a lot.” Triple Threat In selecting a member of any board, certain aptitudes are always high on the wish list. Val Christenson, general counsel of Energy Solutions, board member of Dynatronics and former board member of Franklin Covey, describes three skill sets that are particularly useful to corporate directors. “Industry expertise and connections are one skill set. That’s the person who can give advice because he or she knows the key individuals in the industry and how the industry works. That person can recruit key managers and bring in business,” he says. “Another skill set is having a strong financial background. That’s the person who can look at the company’s balance sheet and help with cash management, forecasting and budgeting. A third category is a director who is really an expert in compensation and recruiting, and in maintaining internal talent.” Because Sarbanes Oxley requires public companies to have compensation committees, knowledgeable chairmen for those committees remain in particular demand. “Sometimes the issue is paying executives too much, but just as often, the issue is paying them too little,” Christenson says. “It can be vital to have a board member who says, ‘You guys are thinking way too conservatively. To get the right kind of person, you’ve got to give more in severance packages and policies, benefits, cash and equity incentive programs.’” One final type of valuable director, as Christenson describes it, is the mentor—“somebody whose judgment is so solid and respected that the CEO can call and just bounce ideas off him.” Christenson suggests that companies keep a matrix of the skills they’d like to have in their directors, and the skills that each existing director provides. When an opening for a director occurs, it is easy to see where the gaps are and to fill them effectively. For publicly held companies especially, it pays to bring the goods. In light of the Worldcom and Enron melt-downs and the intricate Sarbanes Oxley laws, the risk of taking on a corporate directorship has increased, driving up compensation. The compensation package for Zions Bancorporation’s directors runs between $125,000 and $140,000 per year in cash retainers, meeting fees and stock options, depending on whether a director chairs committees. Smaller public companies pay tens of thousands of dollars per year to their directors. New on the Scene For the mid-market and start-up businesses, filling the director’s chair can come with the funding. “We come in when companies have more than $10 million in yearly revenue,” says Jordan Clements, partner with Utah private equity firm Peterson Partners. “We back the founder of a business in trying to establish a platform for continued growth. In many cases, we help the founder develop the first board of directors he or she has ever worked with.” Most Peterson Partners-backed companies have a five-person board, which consists of two founder designees, two Peterson designees and one outside specialist. “Five is a good number for the board because, with a small, high-growth business, we don’t want the CEO to be encumbered with a large board that will take a lot of his or her time,” he says. Typically, the Peterson designees are general partners of the firm, such as Clements himself, or limited partners of the firm. The fifth board member may be anyone with valuable expertise to the startup’s industry. For instance, when Peterson Partners invested in scrapbooking wholesaler Making Memories, Bob Nakasone, former CEO of Toys “R” Us, joined the board, bringing valuable expertise in providing products to the retail sector. “I look at a corporate board as a council of advisors,” says USANA’s Poelman, “And I encourage companies to establish a professional board as quickly as possible.” Even the issue of compensation can be a surmountable problem, Poelman insists. “Although small companies have to pay board members’ out-of-pocket travel expenses, it’s not necessary for them to pay large cash retainers to directors. Directors are usually willing to take an equity position, such as stock options,” he says. However, Poelman acknowledges that, “If you’re running a crafts or clothing store, or a yogurt shop, you’re talking about lesser amounts, but in the game of high growth or high technology, businesses need to be willing to give directors a significant payoff. That may be stock options sufficient to pay out half a million to a million dollars when the company is sold.” The best directors for smaller companies, Poelman believes, “are rich, successful, retired people. They are people who don’t want to play golf and they do want to stay involved. They have enough money, and they also have the time and interest to serve as directors.” Nicole Toomey-Davis recruited talented directors when she founded her successful software start-up, Do-Box, in 1999. “For a start-up company, the hard thing about choosing corporate directors is that you need people with a lot more experience than you [who are] capable in their area, and you don’t know them,” says Toomey-Davis, who ultimately sold her company to Motorola. Luckily, Toomey-Davis’ father had been a CEO and her husband was also an experienced businessman. The two became the core of her board of directors. “We skied the avalanche,” Toomey-Davis remembers. “The market peaked in January 2000, and we sold Do-Box in March 2002, just before the market bottomed out in October. Throughout it all, the Do-Box directors had enough experience so that they were very calm. That helped us hold together in the face of daunting circumstances.” Toomey-Davis now heads the Utah Centers of Excellence, a state program that provides funding for companies developing Utah college- and university-licensed innovations. Program volunteers, who are senior executives from technology companies, review the grant applications. “No board, no experience, no independent investors—those are signs of a company which may not succeed,” Toomey-Davis points out. “If a company wants money, it must come up with a successful team.” Start-up owners should choose their investors based on the talent that will come with the financing, Toomey-Davis advises. “It’s easy to think, ‘I need the money,’ but with the money, you get the people,” she says. Toomey-Davis also says small company owners should search for angel investors and venture capital based on the fit between the investors and the company. “Even with a venture firm, try to work with the partner at that firm with the contacts, skills or experience that will most help you.” Director’s Cut In the non-profit sector, board seats typically don’t include the attractive compensation packages of the for-profit seats, but still bring other types of benefits. The United Way has some 50 members on its board, and the Utah Symphony/Opera has 40, not counting lifetime and auxiliary board members. “Our work requires a lot of support from the community,” explains Deborah Bayle, executive director of the United Way, “and a large board gives credibility and a broad reach into the community.” Pat Richards, Wells Fargo vice president and chairman of the Utah Symphony/Opera Board, agrees with Bayle in that the advantage of a large board is that it can provide a wide range of essential skills, as well as increased fundraising abilities. The challenge is in keeping a large board effective, she says. “I concentrate on really engaging the members at the meetings,” Richards says. “I try to make sure we’re always trying to talk about something that’s important—educating as to a trend, dealing with an issue. I try to encourage open discussion, rather than simply making presentations and taking a vote.” Getting board members involved in committees is another way of keeping a large board effective. Bayle also stresses the importance of good organization and making sure directors’ time is always well spent. Board members need their passion and commitment to compensate for large directors’ fees, she says. Know the Script Representatives from for-profit and non-profit corporations alike stress that keeping directors onboard requires transparency, trust and making good use of time. “There’s nothing that frustrates boards like dog and pony shows,” says Christenson. “Two hours of power points at a board meeting is lethal. Board members want to actively engage.” Written materials for the board meeting should be circulated well in advance, Christenson believes, so that the board can concentrate on a productive working session that takes advantage of their skills. Because the more a board brings to the table, the more expertise, support and mentorship a company will gain. Speak Out What is the most important trait for a corporate director to bring to a board? Darwin John Corporate Director, Contentwatch “A different viewpoint. The more different, the better. Sometimes we look for directors that are like we are, thus think like we do. My sense is that is a common mistake.” Susan Johnson Corporate Director, Zions Bank “Listening to the input you’re getting in board meetings and preparing ahead of time is critical. It’s also having the perseverance to challenge the conventional thinking in business, to not just go along with what management says and take the standard answers. As a director, our job is to bring outside objectivity.”
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