Category: Governance

Podcast: Can Business Serve a Higher Purpose than Profits?

Can business have a higher purpose than profits and revenues? Should business have a higher purpose than profits and revenues?

Michael Jacobs spoke with AFP Conversations host Ira Apfel about corporate governance, business with a higher purpose, and how treasury and finance fits into this equation.

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Why Business Owners Need Boards

The old adage ”it’s lonely at the top” applies nowhere better than to running a private company, where CEOs make daily decisions about disciplines in which they have no background.

Having worked with over 200 private-company owners over the past 25 years, it is my observation that the most underutilized resource for private companies is a “real” board of directors.

If you want to maximize the potential of a company and fully enjoy the experience of running a business, owners need to surround themselves with a seasoned, diverse compliment of business minds that meet on a regular basis.

Most business owners have complete autonomy. In fact, the primary reason many started their own company is that they don’t want anyone looking over their shoulder. However, not only is running a business too complex for any single individual, it is no fun to make decisions in a vacuum over an extended time period.

Business owners succeed because they are really good at something. It might be science, medicine, manufacturing or sales. But that something is rarely business. The Achilles heel of most business owners is that they don’t know what they don’t know.

It is not an admission of failure to acknowledge that you need help making key business decisions. In the 1980s the board of Coca-Cola, one of America’s most successful companies, was comprised mostly of marketing experts, with some lawyers and doctors who were buddies of the CEO thrown in.

Coke’s stock had been dormant for years. Roberto Goizueta emerged from an unlikely background–head of the R&D department–to take the helm at Coke. The chemist questioned everything about the business despite its great success, and he reconstituted Coke’s board with experts who knew what he didn’t know.

Over the next decade Coke stock grew ten-fold, dwarfing the S&P 500, largely the result of implementing new financial strategies his prior board had never considered. Today Emory University’s business school is named after Mr. Goizueta, because he knew what he didn’t know and built a board to supplement his skill set.

What Should Your Board Look Like?

The key to constructing a successful board is to assemble a diverse set of business skills that are complimentary, not redundant. You need at least one person who has significant knowledge of corporate governance. Unless there are people in the room who know what a board is supposed to do and how boards function most effectively, you will have the blind leading the blind.

You also need someone with specific industry knowledge, who knows what is going on in your competitive landscape.

You need an expert in finance. Most private-company CFOs are really controllers. You should have a board member that knows all aspects of the capital markets and has worked on transactions. Even if you have no immediate need to raise equity, borrow money, make an acquisition or sell your business, some day you will.

The backgrounds of the other board members depend on your business and your personal skill set. Recruit directors whose competencies are in areas in which you are the weakest.
Except in rare instances, employees should not serve on the board. They can attend board meetings to make presentations and contribute to dialogue, but there should be times when the directors are free to discuss management issues without management (except the owner) present.

Likewise, every company should have a competent lawyer and accountant, but they should not be on the board. Public companies are prohibited from selecting their accountant and lawyer to serve on the board for a reason. They have a different role as paid advisors.

Your board should meet at least four times a year. Any less, and it is impossible for directors to get to know the company and its management team, limiting their ability to offer insightful advice.

While it may be counter-intuitive, the best boards have an even number of members. You never want a board decision determined by a single vote. If a solid majority of the board is not convinced a path is the right one, you shouldn’t go down it.

​Your directors should receive some compensation. The amount and form depends on the size of your business, its financial resources and its stage of development. If you have the right directors, their sage advice is probably worth many multiples of whatever you pay them.
Consult your board between board meetings. Directors are a resource 365 days a year.
Surveys show that private companies with true boards outperform those without. What is not commonly known, though, is that business owners who have a true board of directors enjoy their jobs more—it is not so lonely at the top.

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Private Company Governance: Is it an Oxymoron?

With all the noise about ENRON, WorldCom, Tyco and the myriad other corporate governance disasters that motivated Senators Sarbanes and Oxley to rewrite many of the laws affecting corporate accountability, private company owners have been asking what, if anything, this means for them. The answer is nothing, and a lot. From a legal and regulatory perspective, Sarbanes-Oxley has little impact on the governance of privately owned businesses. But the recent media attention does bring to light what always has been true: that effective corporate governance can significantly impact the performance of any commercial enterprise.

Craig Aronoff, who founded and runs the Family Enterprise Center at Kennesaw State University, claims: “The potential positive benefit of effective corporate governance is the most overlooked opportunity in private companies.” Aronoff has conducted extensive studies of the longevity of private companies, i.e., what it takes to survive long-term, and he concludes that one of the three unmistakable factors correlated to long-term success for family businesses is effective corporate governance.

From my not-so-scientific sample, which entails working with about 50 closely held businesses a year, it appears that private-company corporate governance is an oxymoron. Aronoff believes that only about 10 percent to 15 percent of private companies have effective governance mechanisms in place. That may be generous. It is rare indeed to find a privately-held company that has a functioning board of directors that provides the accountability mechanisms envisioned by legal scholars. Most private boards are simply legal versions of the management committee empowered to make decisions requiring board approval. Or, if they include any “independent directors,” the most common suspects are the spouse of the owner or the company’s lawyer or CPA.

One of the privileges of owning a closely held business is that you do not have to be accountable to anyone. Unfortunately, this privilege comes with a price: some accountability is a good business practice. As Aronoff observes, “Despite what some may think, all the wisdom and insight in the world is not generally contained in a single individual.” He notes that effective boards are crucial in setting strategy, planning growth and monitoring performance. Besides, as any private company owner knows, it truly can be lonely at the top. There always will be decisions for which a CEO can’t seek counsel from his or her underlings, and it is nice to have someone who is familiar with the company to provide objective advice.

My personal experience bears out the admonitions of Aronoff. In the cases where I have served on private company boards as an independent director, the companies made significant strategic decisions that otherwise would not have been made if only owners, managers or family members served as directors. In one case, the board consisted of three members: the two 50 percent owners who founded and ran the company and myself. (I wouldn’t advise taking such a position.) One of the owners wanted to sell the company, but his partner wanted more for his share than it was worth at the time, so I was asked to help them position the company so it could eventually be sold at a more attractive price.

At the first meeting it became apparent what was behind the divergent views of the two owners. The owner who was opposed to selling also objected to the strategic initiatives that the company needed to undertake in order to improve its performance to justify the higher price he said he needed. My role quickly became one of convincing the reluctant partner that in order to achieve his target price, he would have to make some changes in the way the business was run. The other owner, who had been anxious to exit out of frustration with his partner who was stuck in his ways, soon gained a second wind as we started to implement the reforms needed to fuel growth and reduce overhead. Three years later the company was sold to Mohawk Industries at a price that was pleasing to both owners.

In another case, involving a much larger company, I served as one of five independent directors on a board with 12 members. This employee-owned $350 million global engineering firm recognized the value of outside counsel, but wasn’t willing to turn over control of the board to non-employees, which is understandable. The other independent directors included a four-star Air Force general, the highest ranking woman of a Fortune 500 company and the former head of a major strategy consulting firm. Each quarter issues arose that resulted in outcomes clearly different than what would have been experienced if the board were simply an extension of the management committee.

On issues ranging from forcing a reluctant CEO to establish a succession plan to persuading the company to find a new bank that would better support its growth than the home town institution, the outside directors were instrumental in building consensus around initiatives that otherwise would not have made it past first base. And the decision to eventually exit a consolidating industry before it was too late would undoubtedly not have been made without the influence of unbiased outside directors.

It takes a secure CEO to establish an accountability mechanism. When I was responsible for corporate governance policy for the first Bush Administration, I met a lot of CEOs of large public companies who resented board oversight. And they did not even own a meaningful share of their company’s stock, as is the case with most private company bosses. Self-imposed accountability is contrary to human nature. But at the same time, an effective sounding board, whether in the form of a formal board of directors or an ad hoc board of advisors, is invaluable.

If you are progressive enough to assemble a functioning board, here are a few tips:

  • Discuss family matters around the dinner table or at the country club. The board room is for business.
  • Meet often enough for board members to keep up with what is going on with the company. Every two or three months is advisable.
  • Put some people on the board who have no axe to grind. An advisor who receives income from the company such as a CPA or attorney is not defined as “independent” by the National Association of
  • Corporate Directors, the New York Stock Exchange, or any other body knowledgeable about corporate governance. There is a reason for this.
  • Seek individuals with different experiences than your own. I am not one of those who believes that a board has to have representatives from every race, sex and sexual orientation to be effective. But directors will add more value if they know something you don’t. If your forte is production, include individuals who are knowledgeable in marketing or finance, for example. They don’t have to know your specific industry to add value. Over time they can learn the business. Bernie Marcus demanded that his directors visit a Home Depot store on a regular basis as part of their board duties.
  • Don’t hesitate to seek the directors’counsel between board meetings.

Some CEOs, like Sherwin Glass’s son Greg, who now runs Farmers Furniture, have found organizations like Young Presidents Organization (YPO) or The Executive Committee (TEC) invaluable resources. These organizations can be extremely beneficial because they provide many of the benefits of a board. But if you want all the benefits of a board, there is no substitute for having one.

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What They Don’t Teach You at Harvard Business School

During the summer months, I work out of my home on the coast in Wilmington, N. C. Sitting here watching the dolphins swim by, it is easier to be philosophical than when I am perched in my high-rise Atlanta office. So rather than pen another educational article about how things are supposed to work, this month I am going to write one that summarizes some of the observations I have made in my 25 years in corporate finance about the way things actually work.

In the world of finance, like everything else, all is not the way it is presented in the textbooks. My first exposure to the deal world came during my summer between years at Harvard Business School when I interned on Wall Street for the top M&A advisor in the country, Marty Siegel. I could write an entire article about how Marty traded in insider information to further his career and net worth, but I never observed this firsthand, and James Stewart already documented Marty’s escapades in a bestseller book called Den of Thieves. To make a long story very short, Marty ended up in prison, and my eyes were opened for the first time to practices you don’t learn about in business school.

Wall Street didn’t mesh too well with my values, so when I graduated, I came to Atlanta to take the only corporate finance job in the Southeast at the time. Fortunately, I found ethics to be more prevalent here.

My investment banking career was interrupted following the election in 1988 when I was appointed director of corporate finance policy at the U.S. Treasury Department by our current president’s father. My mandate was to develop financial policies that would improve the competitiveness of American businesses, which according to most journalists at the time were quickly being surpassed by the Japanese.

The prime suspects for our country’s competitive demise bantered about in Congress and the media were those dastardly leveraged buyouts and hostile takeovers that were upsetting the apple cart in corporate America. The day after I arrived in Washington, I was handed a copy of a letter sent to the Secretary of the Treasury by the chairman of the House Ways and Means Committee asking for Treasury’s input on 24 options to stifle LBOs.

In researching what factors inspired the surge in buyouts and takeovers in the late 1980s, I came to the surprising conclusion that they were more a byproduct than a cause of poor corporate performance. After talking to countless leaders in the world of business, academia and government, I concluded that corporate raiders were actually performing the role that corporate boards should have been performing, namely holding CEOs accountable. The targets of hostile takeovers were not the well-run companies with fully valued shares, but the laggards who had failed to produce competitive shareholder returns.

Needless to say, in an administration that was staunchly pro-business, this was not a popular position, and certainly was not what Congress wanted to hear. My advice to the administration was to reform the dysfunctional corporate governance system characterized by clubby board rooms teeming with conflicts of interest. I argued that well-governed companies would not become takeover bait.

That was 15 years ago, well before Sarbanes and Oxley drafted their overkill legislation. What I learned from this experience is that corporate America was more interested in job security than good public policy. The Business Roundtable, that bastion of Fortune 500 CEOs who often speak for Corporate America, quickly got busy trying to deep six my ideas. If not for a couple of intellectually honest men, my boss at Treasury, David Mullins (who later became vice chairman of the Fed) and his boss, Bob Glauber, who is currently Chairman of NASDAQ, none of my ideas would have seen the light of day.

One of the more intriguing conflicts of interest that I surfaced (which has still never been written about) was that the most powerful group of shareholders at the time—private pension fund managers who controlled trillions of dollars in equities and who had the fiduciary responsibility for looking out for the performance of their investments— ultimately reported to the very CEOs who were intent on quashing the shareholder rights movement. I was told several off-the-record stories by pension fund managers of major corporations that they were instructed by their bosses how to vote their proxies in takeover battles involving buddies of the boss. One of the few major company CEOs who truly believed in good governance and supported me was Coca-Cola’s Roberto Goizueta.

Since my return from Washington, I have spent over a decade working with business owners interested in transitioning their companies through a sale or otherwise. While the lessons learned have not been quite so heady, there are a few observations that many people assume but few write about.

One is that most business owners cheat on their taxes. I have seen it all, so nothing really surprises me anymore. Basically, business owners typically do what their CPAs tell them they can get away with. Some CPAs feel it is fine to run your son’s bar mitzvah and the renovation to your house through the company. Others are more conservative.

Another observation is that when there is a lot of money on the table, it tends to bring out the worst in people. When business owners sell their companies, it is not unusual for some employees who never took the entrepreneurial risk that is rewarded with stock ownership to demand what they believe to be their share of the spoils. And relationships among shareholders and/or family members who have been close for years can splinter overnight.

Advisors to business owners whose sage wisdom has been invaluable over the years tend to lose their objectivity when it comes time to discuss transitioning the business with their clients. The most trusted financial advisor according to 80 percent of business owners is their CPA. But what I have observed time after time is that many CPAs have neither encouraged nor discussed ownership transition with their clients hoping that day will never come and the company will remain an annuity to their accounting firm indefinitely. I have actually witnessed a few CPAs try to kill a deal in order to keep their largest client from selling their company.

Bankers are prone to behave likewise. Years ago I started the M&A department for the largest bank based in Georgia at the time. The wealth management and private client professionals were usually very supportive of introducing my team to the bank’s clients in hopes that we would turn that illiquid investment in private company stock into liquid assets that could be managed for a fee. The commercial lenders, on the other hand, typically kept us as far away from their customers as possible because they didn’t want to lose the loan or deposits on which their bonus depended.

My sector of the financial industry is among the worst when it comes to objective advice. There are two national M&A/valuation firms that prey on business owners whose companies are below the radar screen of more reputable investment banking firms. These firms (one is a spin-off of the other) barrage business owners with invitations to attend their seminars where they sell the owners Amway-style on the vision of riches they will achieve if they sell their companies.
These firms sometimes use paid actors to parade as happy clients; they charge enormous fees to value companies; they typically overestimate the market value to induce the owner to sell; and they succeed in closing a deal less than 10 percent of the time. The time and expense they put clients through, often chasing a mirage, leaves cynical business owners in their wake who question the integrity of honorable investment bankers. What surprises me the most is not that firms like these have succeeded financially, but that a major bank and a major CPA firm have acquired these two companies.

​I suppose none of the behaviors I have witnessed on Wall Street, in Washington or on Main Street should have surprised me, though none of this was ever mentioned in business school. After 25 years in finance, it appears to me that there are two types of people in the business world, whether business owners, CPAs, bankers or otherwise: those who do the right thing because it is the right thing to do, and those who do whatever they think will serve their immediate personal interests. And which camp you fall into does not depend on where you went to business school; it is usually taught by your parents.

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