Tips for finding an outside director for your private company board

Tips for finding an outside director for your private company boardSo, you have made two important decisions: first, to utilize a board of directors and second, to have an outside director who is not associated with the day-to-day operations of your company. Now, how do you find a capable candidate?

The first step is to develop a job description outlining expectations and anticipated time commitments, as well as a skill set inventory for the right candidates. What is important to you at this stage of your company—industry expertise, business acumen, functional background, growth experience, access to strategic contacts, etc.?

Next, identify candidates that fit your criteria. The best places to prospect for candidates are to talk to your professional advisors (accountant, lawyer, banker, insurance broker, etc.), contact applicable industry associations, review annual reports for local public companies, engage an executive recruiter, contact the National Association of Corporate Directors, and talk to other business owners you know.

After you have identified prospects, make sure you personally contact them to explore the opportunity and start the interview process. They will want to hear your vision, passion, and desires, which will help them determine whether the opportunity is a good fit for them.

One warning—try to stay away from friends and relatives. You are looking for someone to hold you accountable, provide strategic, objective strategies, and challenge you and other members of management. Often this is difficult, if not impossible, for friends and family to do effectively.

Adding an outside director can provide a significant benefit to your organization. These are a few helpful hints to navigate the process but I would be interested to hear your success stories in identifying the right candidates for your organization.

 

Stephen W. Christian, CPAStephen W. Christian is managing director of Kreischer Miller. Contact him at schristian@kmco.com or 215.441.4600. 

 

 

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The most-read Center for Private Company Excellence blog post of 2013

Top Center for Private Company Excellence blog post of 2013Of all the blog posts we published in 2013, this one from April 22 took the prize for the most-read post of the year. Since it clearly struck a chord with our readers, we decided to republish it for anyone who may have missed it the first time around.

 

 

Why issuing stock to employees isn’t always such a good idea

Business owners will often offer their employees—key or otherwise—shares of stock in the company. This is typically done in lieu of additional cash compensation, to motivate behavior changes, to reward employees for their part in creating value, or for retention purposes. Employees often desire stock ownership to feel part of the organization and to be rewarded both short- and long-term for their efforts.

Although issuing stock to employees can sometimes accomplish everyone’s goals, the process is full of pitfalls and unintended consequences. From an owner’s perspective, some of the negative aspects include:

  • A potentially much more expensive way to reward employees.
  • A possible requirement to make pro-rata distributions to minority stockholders.
  • Minority stockholders can interfere in the ultimate sale of the company by claiming the deal is not fair.
  • Desired behavior changes often never materialize.
  • The way you lead your life within the company is more closely scrutinized, as a minority owner may be desirous of the same benefits you enjoy. This may ultimately result in a strained relationship.

From an employee’s perspective, owning stock does not always result in benefits they desire. The employee is a minority stockholder and often has little or no say in running the business. Plus, the perceived value of the employee’s interest may not increase over time and the employee may have been better off with cash today, rather than a chance at a bigger payout later. Finally, in some circumstances, there could be elevated legal liability for the employee.

An employee often views stock ownership as a path toward more current compensation, a reward for long-term value they helped create, and a chance for a spot in the inner circle where decisions are made. However, these goals can all be accomplished without the expense and potential pitfalls of issuing stock to employees.

How might this be done? Here are some options for each type of employee objective:

  • Additional compensation. Implement a bonus-based/variable compensation plan through which an employee can earn more money by achieving certain tangible results.
  • Participation in the creation of long-term value. Develop a form of phantom stock or stock appreciation right plan to reward the employee for the value created under their watch.
  • Being part of the inner circle. Create a management committee that meets regularly to discuss various strategic and tactical issues and include the employee on the committee.

The moral of this story: Don’t issue stock to employees unless there is a compelling reason to do so that cannot be accomplished with an alternative strategy. 

 

Stephen W. Christian, CPAStephen W. Christian is the managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at schristian@kmco.com.   

 

 

Have you awarded stock to your employees? What has been your experience? Share in the comments.

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How to approach mentoring and coaching in a small business

How to approach mentoring and coaching in a small businessMentoring and coaching are two of the most common contemporary business buzz words. When you Google these terms, hundreds of search results come up; each professing the value and benefits of mentoring and coaching efforts in terms of producing results for organizations. Some proponents recommend highly formalized programs while others suggest informal approaches. Regardless of the methodology you embrace, the fundamental premise of mentoring and coaching efforts is based on the notion that employee development and performance will be enhanced by concerted efforts in these areas.

For the purposes of this blog post, we will use the following definition of each of these terms:

Mentoring is a relationship-based process predicated on trust, whereby one party endeavors to act as an advisor/guide to another person. Mentoring typically is long-term and development-focused.

Coaching is a task-oriented process, whereby one party provides targeted direction to another party related to specific skill-based performance areas.  Coaching is typically short-term and performance-focused.

While there is a place for both mentoring and coaching efforts in small businesses, there are two very important factors to keep in mind when contemplating implementing such efforts in your organization.

1. Who should play the role of a mentor and/or a coach?

A mentor is normally not the individual’s direct manager. It is most effective to have the mentor role be held by someone other than the employee’s direct manager. In a small business, it may be a wise alternative to consider a mentor from outside your organization. A coach is typically the person’s immediate manager. This is an effective choice because the direct manager has first-hand knowledge regarding the employee’s performance-related improvement opportunities.

2. What are you trying to accomplish?

If you are trying to develop future leaders for your organization, then mentoring is the ideal route. However, if you are attempting to develop specific competencies, and/or help employees improve subpar performance, then coaching is the recommended approach.

Mentoring and coaching are useful tools for small businesses that when planned and implemented properly can have a constructive impact on your organization.

 

Mary Ellen Harris, Kreischer MillerMary Ellen Harris is the director of Human Resources for Kreischer Miller. Contact her at mharris@kmco.com.   

 

 

 

What has been your experience with mentoring and coaching programs in your business? Share in the comments.

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Review your corporate documents to minimize disruption to your business

Review your corporate documents to minimize disruption to your businessToo often, shareholder agreements, employment agreements, bylaws, and other corporate documents sit in a drawer where they are not periodically reviewed and adjusted for changes in circumstances. In some cases, such agreements do not even exist or they were ill-conceived or documented and do not provide for adequate protection for the company or its owners.

Effectively drafted shareholder agreements protect both the shareholder and ultimately the company as it provides for a smooth transition in the wake of a triggering event. In the event of the untimely death or disability of a shareholder, do you want their spouse or children to be your partner? Do you care to whom your partner sells stock? When and for how much can shares be redeemed? You’d better make sure you have language in your agreements that will accomplish your desires. Times change; make sure your agreements are relevant to today’s landscape.

Privately-held businesses often fail to acknowledge the differences between a shareholder’s role as an owner and as an employee. There is a big difference—shareholders have an investment in an asset and, as such, get to reap the benefits of that investment. There are no guarantees of employment, compensation, or job activities. A shareholder’s involvement as an employee, however, should be governed by an employment agreement. The agreement should include such things as compensation terms, length of employment, and responsibilities. Do your shareholders have a right to be employed for or receive benefits life? Make sure your employment agreements properly reflect your desired terms.

While you are reviewing the shareholder and employment agreements, take some time to also familiarize yourself with the company’s bylaws. So often they are outdated or contain terms with which owners are unfamiliar. For instance, the bylaws might provide for quarterly Board meetings for a minimum of three directors. Unfortunately, you may never have known this and have been operating with less than three directors and no formal board meetings to ratify corporate resolutions.

We have seen too many businesses fail or become severely distracted because of weak or absent corporate documents. Please take some time to review your company’s agreements.

 

Stephen W. Christian, CPAStephen W. Christian is the managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at schristian@kmco.com.   

 

 

Do you have a process to review and update your corporate documents on a regular basis? Share in the comments.

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Lifelong learning—a trait of winning leaders

Lifelong learning a trait of winning leadersAlmost all leaders have a competitive instinct that manifests itself in different ways.  One way is a need and a desire to “win.” The best way to put yourself in a position to succeed is to be better prepared, educated, and trained than your competitors. Lifelong learning is a significant trait in all successful people.

Lifelong learning encompasses all facets of life—technical knowledge, interpersonal skills, team member development, organization building, computer and other technology skills, process understanding, competitive pressures, and economic and fiscal matters—to name a few.

How do you do this? Having the desire is the biggest part of the battle; once you are committed to your need to grow intellectually, every daily interaction is an opportunity to learn. Here are some easy ones:

  • Read books, newspapers, and magazines.
  • Use the internet to research leadership skills, business trends, and the worlds of your customers and suppliers.
  • Participate in industry or community trade groups and read the related publications.
  • Become attuned to the latest technology and people (generational) issues.
  • Study companies you admire and learn what got them to where they are today.
  • Join a business owners group similar to Vistage.
  • Spend time with your professional team—accountants, lawyers, insurance broker—talking business.
  • Interact with your team members more often.

It is a leader’s responsibility to not only improve themselves, but also to make their team better. Help your team members to be the best they can be. Share your ideas. Moderate a review of a leadership or business book you found meaningful. You could also orchestrate a periodic (weekly or monthly) session discussing topics of interest with your team—efficiency, quality, customer service, etc.

Inquire, watch, listen, and learn. Challenge yourself to become a better decision maker and leader each and every day. Successful people embrace the concept of continuous improvement.

 

Stephen W. Christian, CPAStephen W. Christian is the managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at schristian@kmco.com.   

 

 

Does your private company have an advisory board? What value has the board provided to your business? Share in the comments.

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Can your private company benefit from creating an advisory board?

Can your organization benefit from creating an advisory boardEvery business needs a sounding board and set of experienced mentors. Gaining outside perspective on issues can help a business owner make grounded, forward-thinking decisions.

Many companies have a fully functioning board of directors as dictated by its bylaws. An alternative to an official board of directors is an advisory board, which can hold owners accountable for goals and provide insight on a variety of matters. The most successful companies are run by individuals who acknowledge what they don’t know and seek the counsel of others. An advisory board can fill a knowledge gap in a business.

Business owners often are caught up in their own worlds, dealing with the issues of the day. Unfortunately, all too often the bigger, more strategic issues are relegated to the bottom of the list either because of time or expertise. If used properly, an advisory board can provide quality, independent counsel on strategic initiatives and provide a forum for accountability in accomplishing tasks.

In addition, an advisory board can supplement internal skill sets, assist in resolving owner conflicts and provide credibility to the business in the eyes of outside stakeholders like banks and bonding companies.

A board can help set the mission and strategic direction of a company, but its work goes beyond that. A board can assist owners in setting financial strategies and plan succession, which may involve everything from identifying talent to transitioning a company, targeting investors, and executing a sale. Also, a board can offer ideas for managing risk.

Finding the right members for an advisory board is often the hardest part. Typically, the best board members have entrepreneurial experience and strategic-thinking capabilities, which are qualities often found in business owners. These people have lived the decisions that the owner is confronting. A board member may even have worked in the same industry. Both perspectives are valuable.

Choose members who fill a need. Be sure they have an interest in the process and care about the success of your business. A board should include a combination of members from inside and outside the organization. Networking is the best way to identify capable candidates for an advisory board. Let people know that you are looking for board members, but be specific as to the qualities desired in a candidate. In particular, talk to your accountant, attorney, banker, and other professional associates for suggestions. These people know your business the best.

Be committed to the process. Schedule regular meetings, and be sensitive to the time demands of the advisory board members. Also, prepare for meetings and create a meaningful agenda. Distribute timely information to board members in advance so they can read and study it. Have the courage to replace non-performing board members. And most importantly, keep an open mind at all times. Those who gain the most knowledge from a board realize that the insight members bring to the table is for their benefit.

 

Stephen W. Christian, CPAStephen W. Christian is the managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at schristian@kmco.com.   

 

 

Does your private company have an advisory board? What value has the board provided to your business? Share in the comments.

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Why issuing stock to employees isn’t always such a good idea

Why issuing stock to employees isn't always such a good ideaBusiness owners will often offer their employees—key or otherwise—shares of stock in the company. This is typically done in lieu of additional cash compensation, to motivate behavior changes, to reward employees for their part in creating value, or for retention purposes. Employees often desire stock ownership to feel part of the organization and to be rewarded both short- and long-term for their efforts.

Although issuing stock to employees can sometimes accomplish everyone’s goals, the process is full of pitfalls and unintended consequences. From an owner’s perspective, some of the negative aspects include:

  • A potentially much more expensive way to reward employees.
  • A possible requirement to make pro-rata distributions to minority stockholders.
  • Minority stockholders can interfere in the ultimate sale of the company by claiming the deal is not fair.
  • Desired behavior changes often never materialize.
  • The way you lead your life within the company is more closely scrutinized, as a minority owner may be desirous of the same benefits you enjoy. This may ultimately result in a strained relationship.

From an employee’s perspective, owning stock does not always result in benefits they desire. The employee is a minority stockholder and often has little or no say in running the business. Plus, the perceived value of the employee’s interest may not increase over time and the employee may have been better off with cash today, rather than a chance at a bigger payout later. Finally, in some circumstances, there could be elevated legal liability for the employee.

An employee often views stock ownership as a path toward more current compensation, a reward for long-term value they helped create, and a chance for a spot in the inner circle where decisions are made. However, these goals can all be accomplished without the expense and potential pitfalls of issuing stock to employees.

How might this be done? Here are some options for each type of employee objective:

  • Additional compensation. Implement a bonus-based/variable compensation plan through which an employee can earn more money by achieving certain tangible results.
  • Participation in the creation of long-term value. Develop a form of phantom stock or stock appreciation right plan to reward the employee for the value created under their watch.
  • Being part of the inner circle. Create a management committee that meets regularly to discuss various strategic and tactical issues and include the employee on the committee.

The moral of this story:  Don’t issue stock to employees unless there is a compelling reason to do so that cannot be accomplished with an alternative strategy. 

 

Stephen W. Christian, CPAStephen W. Christian is the managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at schristian@kmco.com.   

 

 

Have you awarded stock to your employees? What has been your experience? Share in the comments.

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Making difficult decisions – it’s our job

Making difficult decisions it is our jobRead the books—the value of a leader is significant.  What aren’t we supposed to do? 

One of the traits of highly successful leaders is the ability to make tough decisions.  Many people can identify what should be done, but not everyone is courageous enough to act.  A day becomes a week, a week becomes a month, a month becomes a year, and before we know it, a decision we knew was necessary never takes place.

So why don’t we act?  There are many potential reasons, including:

  • Uncertainty about what we are trying to accomplish
  • Fear of failure
  • Failure to embrace the opportunity
  • Worry about what others think

Leaders face numerous difficult decisions, but a few common and meaningful ones are:

  • Making strategic hires (not just hiring task-driven employees) such as Human Resources, IT, Risk Management, and CFO.  All too often, these types of strategic hires are viewed as overhead, when they are really our path to future success and growth.
  • Investing in equipment, including technology
  • Exiting or entering a geographic region
  • Walking away from a customer or product line

Decisions like these guide our future.  As leaders, we have people watching us and counting on us to do the right thing for the organization.  We may be the owners or the top executives, but our team members’ livelihoods depend on us effectively dealing with tough decisions.

How can we more easily navigate the decision-making process surrounding complex and difficult matters?  Here are a few steps that have been outlined by highly successful leaders:

  1. Define the discrete decision at hand—focus on the issue, not all the noise surrounding the matter
  2. Outline the opportunities arising from the action
  3. Define the costs—both monetary and process changes
  4. Determine a plan of action
  5. Commit to a timeframe to accomplish the task
  6. Seek the counsel of those whose judgment you trust to validate the plan—these individuals may be in or outside the organization
  7. Remind yourself that the goal is to advance the cause of the organization
  8. Act!

Successful companies are led by people that identify critical issues, are decisive, and take responsibility. 

Everyone has their own style in confronting difficult decisions.  What strategies have you employed that have worked for you?  Share in the comments. 

 

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Are you working on—or in—your business?

Steering the ship or charting the course?

Managing or leading?

Pursuing results or developing processes?

Caught up in activities and “busyness” or focusing on accomplishments and productivity?

Working in the business or working on the business?

 

Effective leaders focus on the latter half of those questions, not the former.  Not surprising, but my experiences with clients and serving on various boards over the past 30 years have indicated a direct correlation between the leadership effectiveness of owners and executives and long-term, sustained success.  Leaders that focus on the following are often the most successful:

  • Defining a vision and sticking with it.
  • Planning and preparing around the vision.
  • Building and retaining the right team to execute strategies.
  • Making decisions solely in support of the organization.

Why do owners and other executives spend more time managing than leading? My clients tell me the following: 

  • I don’t need to–life is good.
  • I don’t know where to start or how to do it.
  • I don’t have time–too much other work.
  • I don’t have the right people to execute my plan even if I had one.
  • I don’t have any support mechanisms or accountability. 

Think again:

  • The marketplace changes daily.  You may be okay today, but how about in 10 or 20 years?
  • Unsure of what to do? Get active. Read, spend time with industry groups, solicit advice from key employees, involve your board of directors or advisors, etc.
  • You do have the time–your employees should be executing your strategy.  Employees provide manpower and you provide mind power.
  • Build the right team–it is your job.  Take a blank piece of paper, determine an optimal org chart, and then go fill it with current employees or new ones.
  • Need help? Put a board of advisors together.  You could include your accountant, attorney, and any other person you feel has something to bring to the table.

 

What other advice do you have for those struggling to spend more time working on the business rather than in the business?  Share in the comments.

 

Check out our free tool to help you chart your company’s course: the MindShop GPS Diagnostic.  This simple and powerful tool helps pinpoint your key opportunities for increased growth and profit over the next 12 months and develop strategies to address each of them. 

Click here to access the MindShop GPS Diagnostic.

 

Single owner companies: Where’s your instruction book?

Single owner companies are very unique because they have no buy-sell agreement.  If something were to happen to a private company owner and he or she did not leave explicit instructions, it presents a serious and unusual problem.  In these cases, the ownership and management baton often moves to the spouse who may or may not have the knowledge and capacity to make decisions relative to the company.  This scenario can have disastrous consequences for the business and for the surviving spouse of the owner. 

There are a handful of things your company can do to prevent this situation. First, you can form a board and provide them with instructions on what to do in the event of the owner’s death.  If you’re not interested in that level of formality, at a minimum you should make sure that there are clear instructions for the surviving spouse about the advisors they should use and the best course of action for the company.  It also helps a great deal if the spouse knows the advisors ahead of time so that they have some level of trust and familiarity.

As the Boy Scouts say, always be prepared.

Is your company prepared?  Share in the comments.

 

Become a member for access to a wealth of information on private company boards and other tools and resources to organize your business.  Learn more about the benefits of membership and register here.

 

 

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