American Institute of Certified Public Accountants

Last month we discussed outside directors or a “council of advisers” for a closely-held business. We touched on the research about directors, when in a company’s evolution it is beneficial to introduce outsiders, and directors’ liability. In this concluding installment, we cover the selection process and other steps involved in seating outsiders.

Identifying Needed Knowledge and Experience

The issues facing a company and the skill sets its business demands will suggest profiles of prospective members of the board or the council/panel. A distribution company driven by customer service probably might not benefit from those with heavy manufacturing backgrounds. A high-technology company can’t afford Luddite outsiders. (Almost no company can afford Luddites, inside or outside!)

But a company should identify skills it would like to have, especially if its industry is changing rapidly. What made the enterprise successful in the past might not cut it tomorrow. Its owner should not be afraid of having people around him whose expertise differs from his. Such persons will make his life easier—if he listens to them.

The key to attracting the right people is clear-eyed analysis of the current situation. The owner should consider where her company is now, where she’d like it to be a few years out, and what she’ll need to get it from here to there. She should consider competitive pressures, the impact of innovation and technology on her industry, and other aspects of risk assessment. That process should include an in-depth review of her company, the backgrounds of her key people, their attitudes towards growth and change, and the major processes which drive the operating cycle.

We have found that customer satisfaction surveys which allow for rigorous statistical analysis are invaluable in this process. The survey instrument need not be lengthy, but it must be designed so that it includes important variables. Besides attributes of satisfaction, those may be “dummy” variables for type of customer, geographical location, and persons with operating or sales responsibilities inside the company. These permit a more-specific examination and refinement of the data. Results can be used not only to improve operations and customer relationships, but also to motivate individuals to higher levels of performance.

Some companies mistakenly believe that talking to their customers is all they have to do to know if customers are satisfied or not. A few years ago, we were discussing a consulting engagement with a potential client in the midwest. I had noted in the company’s promotional materials that it was “committed to customer satisfaction.” I asked the owner how his company measured that satisfaction. “Simple,” he said, “we talk to our customers.”

Well, talking is necessary, of course, but it is not sufficient. Nor is it a substitute for rigorous information-gathering and analysis. The late economist and Nobel laureate, George Stigler, said it best: “The plural of anecdote is data.”

Thoughtfully conceived surveys have a high level of company satisfaction associated with them. The survey should be done by an independent third party. Customers will say things to outsiders that they won’t say to the company.

Now What?

Identifying and recruiting people with the desired skill sets is the next step. That should be done by the owner or lead family shareholder, in consultation with the outside consultant who conducted the customer satisfaction survey. Together they should consider the implications of the survey in the context of the owner’s analysis of where the company is now and where he wants it to be in the future.

Some owners worry that they cannot afford to attract top-quality outside advisors. We find that a stipend of $1,000 per meeting is usually sufficient to get the right people on board. If meetings are well-organized and follow a published agenda, and if outsiders have materials to study in advance, this is chump change compared to the benefits derived.

New advisors will need to learn about the company. A profile should be prepared. It will cover:

The company, its history and evolution from start-up to the present, including lines of business, key employees and their backgrounds, and major events.
Details about its industry environment and overall risk profile.
Reviewed or audited financial statements to help reassure those who would like to serve, but hesitate.
It should also spell out the role the group of outsiders is expected to play.

Having one academic on a board or council/panel adds a vital dimension. Be sure to focus on a professor who is actively conducting research. That individual will be abreast of current research findings. It also makes sense that those in the business of disseminating knowledge should be about the business of creating some. An added benefit is that most business scholars also moonlight as consultants.

Beware of those who carry heavy teaching loads and don’t have time to conduct research—their knowledge is usually dated. A year ago we saw a textbook being used in a course in entrepreneurship at a well-regarded university here in Virginia. Its publication date: 1988. When I asked the book’s owner what the course covered in the way of technology, he said, “It doesn’t.” I wonder why.

Being able to tap knowledge of the literature in an important discipline can be invaluable to an owner. A company faced problems with its union a few years ago. A well-published academic specializing in labor relations joined its board. By the end of his three-year term, the union problem was gone, thanks in large part to his knowledge of research in his field.

Of course, the academic needs to be able to communicate in language that non-academics can understand. Good ones can.

In our concluding installment in the next edition, we will discuss meeting frequency, committees within the board or council, and advantages and disadvantages of outsiders. We will also touch on issues of corporate governance.