Beverly Behan specializes in helping new boards get off to a strong start. In this article, she shares her experience in working with several boards of newly public companies that encountered difficulties and how they addressed those problems.
When a mid-cap utility spun off its largest business unit, half of the board and the current executive team went with it, providing an opportunity akin to starting up a new board even though half the board still consisted of legacy directors. The chairman, who had served for many years on the predecessor board, recognized a unique opportunity to “start fresh.” To prepare for the first board offsite, all directors and members of the senior management team were asked to participate in a series of interviews with a consultant to identify strengths and weaknesses of the predecessor board. New directors were asked to comment on practices of other boards that might be useful to consider.
Both legacy board members and long-time execs recognized that there were substantial opportunities to improve their meetings. Senior managers were frustrated by poorly designed and run meetings which left them watching directors run out with luggage to catch flights while they waited to be called in to make a presentation. Directors expressed similar concerns about over-packed agendas and endless meetings.
New directors, who had already attended a few board meetings, noted that pre-reading packages could be more focused and lacked information they might find helpful. At the offsite, the board and management developed a plan: Management agreed to beef up pre-reading materials and the directors gave a blood oath to read those packages from stem to stern. Presentations were cut from the 45 minute “death by PowerPoint” slide shows to three highlights slides and Q&A.
The result was an increase in workload on the pre-reading, but the board time was cut in half as hour-long presentations in the boardroom were cut back to 30 minutes for discussion. The over-packed agendas became manageable and the luggage runs stopped.
Improving board information
A high-growth company in the energy sector had followed a successful acquisition strategy and was poised on the brink of an IPO. Its board, which had served for more than two years overseeing the private company, scheduled an offsite to discuss changes that would be required as they moved toward becoming a public company. In addition to the legal and regulatory requirements, they reflected on how they had been working together through a series of interviews with directors and senior execs in advance of the offsite.
Make a list of the capabilities you’d want for your “dream team” at the board table before you start talking about individuals.”
Beverly Behan, Managing Director, Board Effectiveness Practice of the Hay Group
The results surprised the CEO. Nearly all directors expressed frustration with the board information packages, even though they had never said a word about this to either the CEO or any member of the management team. While the CEO, CFO and other executives felt they had been providing excellent materials to the board whenever they were reviewing an acquisition, the board members were “drowning in the numbers” and lacking information about the geology and strategic fit of the acquisitions. Moreover, the directors said there was information they regularly received about acquisitions that they didn’t feel was very helpful, but which took a great deal of management time to put together.
At the offsite, the CEO and the board discussed this information at length and reformulated the way that “deals” were to be brought to the board, including the use of an executive summary on the front end that highlighted key issues and initial emphasis on strategic fit and geology before the financials were presented.
Perhaps most important, the board members agreed that they were equally to blame for the quality of information they were receiving and agreed to regular “check ins” with the CEO.
Achieving strategy alignment
One of the first questions any board and CEO for a company going public should address is: What’s the corporate strategy, or, more specifically, how will the company spend the proceeds of the IPO? Often, this strategy is determined before the board is assembled and presented to directors as part of their orientation program. However, it is critical—as a Midwest company that recently went public learned—for the board to not only understand, but to be fully aligned with the strategy, including the goals and measures relative to implementation.
In this instance, half the board had served for several years prior to the IPO while others were recent recruits. The CEO discovered in the course of the first two board meetings that several of the new directors did not really understand the strategy even though it was presented in their orientation sessions. Moreover, a number of the directors, both new and long-serving, appeared to be questioning important elements of the strategy now that the IPO had been completed.
One of the more seasoned directors told the CEO: “The problem with strategy is that most CEOs think their job is to bring strategy to the board fully baked. But directors want to get their hands a little dirty on strategy issues for two reasons: First, that’s how they’ll really understand it. Second, there is no better place to leverage some of the talent and experience that you’ve taken pains to collect in terms of the people who sit at your board table.”
The first year after an IPO is busy, so it is important for management and the board to decide at the outset what the top priorities should be for the company and the board in the first six, 12 and 18 months following the IPO.”
Beverly Behan, Managing Director, Board Effectiveness Practice of the Hay Group
A board strategy offsite was scheduled for eight weeks after the IPO. Prior to that session, interviews were conducted with all directors and members of senior management to gauge their views on some of the critical elements that formed the underpinnings of the strategy, such as their views on the company’s strengths and weaknesses, competitive position, and economic opportunities in the industry. The results were illuminating. Board members clearly did not have a good handle on competitive threats facing the company, which had resulted in the niche strategy the company was pursuing. They also did not understand the cyclical nature of the business.
The CEO designed the offsite to provide information on the issues where “gaps” were found and to pose critical questions to the board on various strategic elements. These questions were narrowly framed to gather board insights and engage the directors on fundamental strategic questions. The session yielded valuable insights and perspectives from directors that really pushed the executive team in their thinking. Eight months later, when the board and management agreed to turn down an acquisition opportunity, investment bankers advancing the deal told the CEO after the board meeting where it was presented: “I have never seen such a strong alignment between a board and management team in terms of strategy. How did you accomplish that?”
Three tips for IPO boards
In addition to the lessons learned from the “war stories” referenced above, below are three practical considerations that should be addressed in either forming a new board or transitioning a private company board to govern a newly public company:
- Take a portfolio approach to board composition. Make sure that every board seat is occupied by a director who has a skill set that will bring valuable perspectives and insights to your business model and strategy. Make a list of the capabilities you’d want for your “dream team” at the board table before you start talking about individuals.
- Define expectations and priorities at the outset. The first year after an IPO is busy, so it is important for management and the board to decide at the outset what the top priorities should be for the company and the board in the first six, 12 and 18 months following the IPO.
- Carefully select board leadership. Whether you choose to have a non-executive chairman or a lead director, most U.S. boards find it helpful to name someone as the leader of the independent directors. It should be someone who is truly the informal leader of the group, who enjoys the respect of other directors, understands the business and can form a constructive and positive working relationship with the CEO. Take your time and make the right choice, since this individual’s leadership will be pivotal to the board’s overall effectiveness.
Forming a new board or transitioning to a private company board for an IPO presents unique opportunities to accelerate the board’s development. It is a once-in-a-lifetime event for most companies and is one that should not be wasted. Recognizing and capitalizing on these opportunities can not only avoid problems in the future, but it can also place a newly public company in the enviable position of having a high-performing board that makes a significant contribution to the company, stockholders and senior management.
Beverly Behan is Managing Director of the Hay Group’s Board Effectiveness Practice. She may be reached at Beverly_Behan@haygroup.com.