August 21, 2007
Case categories include: Leadership Operations
By Robert Sher
Most entrepreneurs had a boss in their earlier life. One of the big benefits of owning your own company is supposed to be freedom and independence from a boss. And it is, if you can avoid seeing the customers, the bank and the marketplace as your boss.
Ceil McCloy, CEO and her husband Dave Dobson, Co-Founder, fled the corporate life and started their own business, Integrated Science Solutions, Inc. (ISSI). But by 2004, they had brought in two outside board members, and ended up with only a 50% vote on the board. Is this a case of capitalistic recidivism, where these owners just can’t take the freedom?
ISSI is one interesting business. Ever wonder how the government figures things out? Like what clothes future soldiers should wear to protect them, but not weigh them down? Like what kind of wire is best for equipment in the nose cone of the space shuttle? Like how to build a repository for nuclear waste that will be toxic for ten thousand years? Integrated Science Solutions is a company that bids on government contracts to answer science and engineering questions like these. When they win the contract, they assemble a team of top scientists who go to work.
Ceil was a corporate vice-president who quit her prior post while Dave had already left his prior job and was a technical consultant. After Ceil left her job, they decided that they could do it on their own just as well, if not better. Ceil’s prior focus had been as an operations manager with targeted business development experience, and Dave’s focus had been primarily technical as a senior scientific contributor. As their first outside board member they selected Nick Trentacoste. Ceil had worked with Nick at her prior employment for many years, and he had been Director of Marketing and Business Development for 25 years. He understood the industry, had connections and relationships in all the right places, and had just started a consulting practice on his own. She brought him on as a board member as well as a consultant.
Formal board meetings are held twice a year, on schedule. Just like a CEO of a large company, Ceil prepares for them ahead of time and presents the financials and progress on strategic decisions. Nick has voted both for and against Ceil. He has crafted compromises when Ceil and Dave held nearly opposite strategic opinions. ISSI flies Nick and his wife from Washington, D.C. to California twice a year and plans fun itineraries for Nick’s wife. As a consultant, Nick makes introductions in pursuit of contracts, reviews bids (they are very complex), and provides strategic direction.
The cost: About $5,000 in annual expenses, plus about $15,000 a year paid in hourly consulting fees for Nick’s business development activities. The benefits: Millions in contracts that would not have been landed otherwise, and an honest, experienced voice on the board.
In mid-2004, they carefully brought on Don, a second board member. A retired military officer, his knowledge and credentials are different than Nick’s, and are of strategic assistance in broadening the base of agencies that work with ISSI.
Today, the board looks well very well credentialed – a critical issue in ISSI’s world. Top scientists want to hire on with top firms, led by people that command their respect, and they look at the director roster. Likewise, agencies awarding contracts for large and critical projects look for credibility in the directors of firms they work with.
Businesses of all sizes look to the outside for help, hiring consultants for all manner of needs. For better or for worse, corporations are legally required to have an oversight group – the Board of Directors. Too many businesses pay lip service to the notion of the Board’s role, just barely fulfilling legal requirements. But bolstering the Board’s role in oversight of your business can be very beneficial, as it has for ISSI.
Having outside board members forces the CEO and the top team to set aside time to work on strategic, board level issues and formally present them. The effort and time to develop the presentation forces disciplined thinking and planning, which is a hugely beneficial process. Immediately following is the review of the proposal by a board that can evaluate it objectively and dispassionately, and base a decision on a broader experience base than the CEO or other owners alone can have.
The existence of outside board members adds credibility. Lenders take comfort in the experience and oversight they provide. Employees, especially professional ones, can see that the CEO is held accountable. As a result, the professional atmosphere in which management resides is enhanced. Recruitment of senior people becomes easier. Likewise, in industries where credentials are important, the status and respect of board members transfers directly to the company.
Most board members take individual initiative too, and actively participate in building the business. Board members that are more highly paid are generally expected to bring in clients, make introductions, and assist in financing matters and more. ISSI’s technique of mixing low paying board membership with hourly consulting fees is another way to achieve the same result.
Ownership Must be Ready
For some owners, it’s more about control than success. If that’s you, avoid outside directors. Having outside directors that you overrule or ignore is a waste for both parties. Alternatively, if you want your business to be all it can be, and you are ready to travel a variety of roads leading to that success, you are ready for outside directors.
The CEO and all owners of the firm must realize that having outside directors is a time commitment. Time to prepare for meetings, time to keep them informed about developments in the firm, and time to socialize with them when they are here. Like a real company, directors have power, and respect must be shown for the role they play. Similarly, outside directors cost money too – less if they are local, less if they are eager to serve, but still, it takes money changing hands to create a sense of mutual obligation.
The right board members
Choose outside directors carefully. Not only do all internal directors have to feel good with the choice, but each director must have a clear plan of the contribution you expect. In ISSI’s case, the connections both directors had and the experience in business development were the primary reason they were brought aboard. Another common expectation is access to outside investors.
Fully understand why the prospective director wants to join the firm. For most experienced outside directors, money is not the main reason. More often it’s a chance to help build a business. The pride of seeing “their” company succeed is real and powerful, and for some, provides some bragging rights at the country club.
Most importantly, a matching value set and a mature stable person are critical. Board level disagreements over conduct and values are generally explosive. Diligently flush out everyone’s values before bringing anyone on the board.
Long term control of your business is a big issue. The owners typically vote in directors once per year, and thus do retain ultimate control. Still, having a bad director on board for a year can be a real problem, so choose carefully. ISSI today has 50% of the vote from outside directors, but Ceil and Dave said they aren’t ready to go past that 50%. Together, they could still block the board from making a decision that they felt was ill-advised.
Although ISS has never had such a problem, a board member with secondary role like a consultant has the possibility of conflict of interest – for example a board member pushing for a direction that increases the consulting work. But well-chosen board members with integrity, and a CEO that is watching the shop, mitigate this risk well.
It all boils down to how a entrepreneur gets high level outside help.
1) You can hire that help (for big bucks, if you can find it); 2) you can give up ownership interests; 3) you can offer them a seat on the board; or 4) hire a consultant/mentor. Of course, combinations are common. Too many entrepreneurs easily give up pieces of their company. They later realize that it can be really hard and costly to recover that ownership. When looking for outside help, be sure to carefully consider the pros and cons of these four options.
Having an effective board with well placed outside directors has taken away some of Ceil’s freedom to act independently. But she’s gained freedoms that are far more valuable: The freedom from worrying if she personally has all the connections she needs to bring in business; the freedom from trying to make decisions in a vacuum; the freedom from worrying that she could ruin her business by making a big, bad decision on impulse; and the freedom of not having any more partners than when she started the business.
• Outside board members can make a business much healthier.
• Ownership has to be emotionally ready to share decision-making for the betterment of the firm.
• Choose the outside board members carefully, with specific goals in mind.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Company and Case Facts:
Company: Integrated Science Solutions, Inc.
Person: Ceil McCloy, CEO
Alliance Member since: 2004
Business Founded: 1999
Annual Sales Volume: $5.4 million
Growth Rate: 25%
Head Count: 48
Service: Science and engineering services
Typical Customer: Government agencies
Written: January, 2005