Today we are talking to Jim Zuehlke, who will be speaking about a board of directors: why they’re important, how to build one, how to compensate them, and how to upgrade the talent of your current board of directors. Jim has tons of experience as a builder of a boards of directors. Although many perceive a board of directors or board of advisors to be solely for extremely profitable companies, the truth is that any company can benefit. Today’s episode is a must-listen for anyone who wants to take their company to the next level.
In This Episode You’ll Learn:
- Jim’s background and how he got into his business, as well as how he got into building and developing boards of directors.
- What Jim asked candidates for boards of directors and what many of them have in common.
- The difference between a board of directors and a board of advisors and why the former is important.
- Where to start in forming a board. Jim lays out the steps to follow as well as some of the common mistakes companies make.
- Your obligation in compensating your board of directors.
- The factors that make a successful operating board and why it’s helpful to compare it to marriage, as well as balancing out the skillsets of the people involved.
- How to know that you’re not where you should be with your board of directors as well as tips on how to make changes.
- Jim’s recruitment process for someone who doesn’t have a board already.
- The typical set of subject pillars that Jim uses as he blends groups of people together, as well as Jim’s thoughts on diversity on boards and how that will change in the next decade or so
How to Build a Board of Directors Takeaways:
- Jim gave a very clear definition of a board of directors as well as how their role differs from those of a board of advisors and from a CEO’s peer advisory group.
- If you have a family business or a business with a crucial CEO, having a board of directors to be the voice of reason can eliminate some of the politics that goes along with having multiple invested interests.
- It’s important to know the qualities of a great board member and Jim gave us some excellent qualities to look for when searching for the expertise a company needs.
Links and Resources:
About Jim Zuehlke:
Jim’s company, Cardinal Board Services, is passionate about maximizing the effectiveness our clients boards. Whether it be a Board of Directors or the Board of Advisors, they help organizations with board formation, bylaw creation, recruitment & hiring of directors as well as facilitating the initial board meetings.
His clients range in size from $30M to over $1B companies from a variety of industries including manufacturing, construction, technology, CPG, wholesale apparel and medical. Our clients are mostly private companies seeking to grow their business, transition to a new generation or bring in outside management.
Ryan: Welcome back to the Life After Business podcast. Today’s guest name is Jim Zuehlke. Jim is on the show today to talk about how to build a board of directors, why a board of directors is important, the functions that the board of directors plas, actually how to strategically build them with the different roles and experiences, and then what happens if you need to upgrade your talent of your board if you already have a board of directors set up. Jim has a ton of experience to be able to speak to this because he started his company, Cardinal Mark, Inc. decades ago in an executive search firm and he was recruiting for billion dollar companies to help search for CFOs, CEOs, and top execs. He got into the board of director search because they understood Jim knew their culture and what they were trying to do and where they were going so well that it was a natural fit to start building the board of directors and searching for the board members for these companies. The reason that I wanted to have Jim on the podcast is because I think board of directors or board of advisors is this perceived resource that billion dollar companies have, but the reality is any size company can utilize a board of directors. If setup correctly, the business owner, the entrepreneur that is willing to put the effort in will get dividends back because of the level of expertise they’re surrounding themselves with, they’re holding themselves and their company accountable, and they’re looking out for the stakeholders and bridging the gap between where they want to be and where they are today with the people that have been there and done that. Jim lays out specifically how to build a board, the things that you need to do, the things to look out for, how to compensate them, and then how to actually set up the bylaws to make sure that everything goes correctly. But then also how to upgrade your members, should the fit not work. I think this is an absolute must listen for anybody because an executive CEO peer group is not a board of directors, and having the right employees is also one thing, but this is something that I think is applicable to anybody that wants to take their company to the next level and help guide them in the direction that they need to go. Without further ado, I really hope you enjoy the interview with Jim. Good morning, Jim! How are you doing?
Jim: Great. Good to talk to you, Ryan.
Ryan: I’m really excited to have you on the show today. Your expertise is something that I think is really missed out in the mid-market entrepreneurs and the businesses that are in our community. We came across each other through a local event that People host called Club E where you just recently did a panel. But for our listeners, before we kick it off, can you just kind of give a little bit of a background of how you got into the business that you are today?
Jim: Sure, Ryan. I would love to talk about that. I’m going to go back away to give you some better background. Whenever I sit down with a CEO that I’m going to either do work for or that we’re going to potentially recruit to a board of directors, I ask one question. A truism I find with every successful business person I say, “Did something happen to you between the age of 5 and age 20 that shaped who you are today and the success that you’ve had in your career?” I ask them, “What is that?” The answers that I get are just amazing, the stories that they tell me.
In doing that, I also said I have to answer that question. So let me answer that to you. I grew up, born and raised in Rochester, Minnesota. I was an avid hockey player growing up. I went to the catholic school and they didn’t have a hockey team. So I switched high schools and I went to Rochester Mayo, my alma mater. I was a shy, young guy coming in, didn’t know anybody and I tried out for hockey. What I see happened was I was doing the tryouts and the most famous hockey player in Rochester was one of my coaches at one point in time, his name is Art Strobel.
Art came up and talked to the varsity hockey coach and he pointed me out and he made a comment to him, I couldn’t hear him, but he made a comment to him. Later on, after I made the team, I asked him, “So on the first day of practice when Art Strobel came in, what did he say to you?” He says, “Pay attention to Jim, he’s a good hockey player. He works hard. He’s going to go places.” He made the decision to put me on the team partly by that reference from Art.
To this day, what the passion that I have for helping companies and helping individuals was born back when I was 15 years old and saw that how somebody—if you’re determined to go on your way to help somebody, you can pay it forward and that’s kind of the way I build my life on.
I grew up influenced heavily by my father, big Ed. He owned his own business and he was very much part of the community when he died at 93. There’s not many people left at 93, he filled the church. I could see the impact that dad had. He really had a big influence on me.
My first job out of college, I worked for a company called Burroughs Corporation. It’s now called Unisys. Burroughs sold accounting computers to first-time computer users. I went and had a territory in Saint Paul and I cold called businesses to say, “Tell me about your business. Tell me about what you do and maybe I can help you with this thing called a computer,” which they didn’t know about so much in 1976. I really learned how businesses run and how does a company make money.
I did that for a number of years, it was in a technology executive. And then 25 plus years ago, I decided to go and switch careers. I want to run my own thing like my father had done. I started in the executive search business.
One guy really set me straight when it comes to boards. He was a close friend of mine here in the Twin Cities by the name Greg Palen, maybe one of the more famous board members. He was formerly the chairman of Polaris. He was on the Valspar board. He’s been on a dozen other boards. He’s really well-known. I’ve helped him. I was sat in his board of directors, I helped him with his board and he said, “There’s a real market here for the mid-size company to have a board or upgrade their board and nobody pays attention to it.” That’s the reason why I focused on it and I’ve had an amazing career with that last ten years focusing just on boards and helping him out.
Ryan: I love it. Specifically the last point about the opportunity in the mid-market which is what we’re going to address today. It’s a really cool story. Did your company start an executive search and then you migrated in the boards? What’s the kind of correlation there?
Jim: We have two companies. We have Cardinal Mark which is an executive search firm. We do it a little bit different because we get really tight with the senior executives of the company and we help them really in the most difficult searches that they need. It could be anywhere in the world. The company could be located anywhere in the world. We have lots of different clients.
When you get close with the senior executives—if it’s a company, it could be a public or private company, they go, “I could use some help with my board and Jim, I trust you because you understand number one, our culture, and number two, our business. It’d be nice to have somebody that is out there representing our company.”
We backed into it and then we did some board searches and realized this is completely different than an executive search that we might do for a chief operating officer or chief financial officer or something like that. We said, “We should make a business out of this.” And that’s how ten years ago, we started Cardinal Board Services to go out there and help companies build better boards.
Ryan: I love it. So the difference between the executives that you’re searching for and the board of directors, how did the board of directors that you’re looking for—was there a common theme in the one question that you ask them?
Jim: I would say 50% of the answers usually revolve around an influential person, lot of times a teacher or somebody they knew that said, “I see something more in you. You can do better. Quit coasting. Push yourself a little bit.” The person woke up to that idea and they all of a sudden start trying harder in school or trying harder in their career and it just took a big jump up and they go, “Wow. Maybe I should really try to reach for the stars.” That’s usually the one common thing that you’d see that somebody influenced them along the way.
Ryan: I’m assuming that you want to give back as a board member because you’re kind of switching roles. We can get into that a little bit more as we talk about the types of candidates and why they know from their perspective. Maybe before we do that, for the listeners, we can go back and ask some of the questions, why boards and maybe give your definition of exactly, in your mind, what is a board of directors versus a board of advisors because I think some clarity around that is very, very important.
Jim: Very, very good question. I ask myself the question, why are boards important? Well, there’s some places where it’s by law. I use the phrase, “If you’ve got other people’s minds, OPM, other people’s money, you’re going to have a board.” If you’re an ESA or you’re a public company or if you’re a non-profit, in some other situation with private equity, if there’s other people’s money invested in your company, you’re going to need a board either legally or ethically to watch over management, to make sure it’s being done right.
Sometimes it’s a necessity, it’s legal, it’s part of the law system, the law of the country to do that. The second part is really governance. The word governance, I was looking up the definition of what I’m going to talk to you. I typed into Google and got the definition. Google has this thing now where you can see how much is the word used. Since 1980, the word governance appears nine times more often in our daily culture today than it did in 1990. People are thinking about governance, how to oversee things. You look at governance, it’s a lot like exercise. It’s good for you but it’s work.
Ryan: It might not feel good, right?
Jim: But it’s good. It takes work. There’s no question about it. The other reason why you might have governance is you have to satisfy shareholders. The best example is a multi-generational family owned business. A lot of our clients are that way and they’re on the third or fourth generation. You can imagine by the time you get to the third or fourth generation, there’s a lot of shareholders. Grandpa had five kids and those five kids had five. The family tree is pretty large.
Often times, governance is important because you have this big group of private shareholders that have different needs or different desires to do things. That’s an important part as well.
Ryan: Before we continue, what was the actual definition of governance and as you continue to use it throughout the show, what are you kind of referring to in that mindset?
Jim: Oversight of management. Really straightforward, oversight of management. The last reason why people have boards is expertise. Some small companies may need some doors opened up in their industry because they have a small company and they need to understand how to get into some customer base. They may hire the expertise for that. Somebody might bring in expertise.
One of the first board searches I did was an o-line manufacturing company that you wouldn’t think would be important but they said, “We need to get somebody that understands Lean and Six Sigma because that’s going to be our differentiating value to our customers going forward.” We’re on an active path inside our company. We could use a board member to help us make sure that we are investing in the right things and then oversee it. There’s some expertise that person was able to bring to the board for a period of time.
The last reason why companies look at boards and why they’re important is it’s really one of the key elements to the optimization of the company. When you’re running the company, you look for ways to optimize it. It could be a CRM system or it could be Lean or Six Sigma. Things like that, you look for optimizing always. But for the business itself, a board can help you optimize to keep you away from doing things that don’t make sense and encourage you in ways that you’re going to be able to grow faster or get into new markets.
Ryan: I think those are very, very well said points to it. Think about how you came from these large corporations, public companies, and now we’re talking about bringing into the mid-market and this opportunity that you referred to because I think everybody needs what you just said. Now I think it’ll bring us into some of the main points that we want to make.
But what size companies are these applicable to and what’s the biggest difference between a board of directors and a board of advisors? How do you formulize that? Because I think there’s a big distinguishment of having a really good family friend or neighbor that gives you advice versus what you’re talking about. I think there’s major distinctions that need to be made.
Jim: The difference between board of directors and board of advisors I would say is when you have a true board of directors, they vote on issues that the company is facing that needs to be put to a vote and they can turn down that. It could be wrong compensation, it could be wrong acquisition. They often say that in a public company, the board of directors has two main functions, to hire and fire CEOs and to approve strategy. There’s many other things they do around audit and around governance and all the other things but those are the two primary functions of a public board of directors. You may have a private company and you’re not going to fire a CEO.
Ryan: Let’s hire someone that’s going to fire us.
Jim: There might be other reasons why you would have board of directors. Part of it is because like what I talked about, you have a multi-generational family. You want that board to put their stamp of approval and what the strategy is for all these shareholders.
I know one local CEO of a fourth generation family business, he says he spends 25% of his time just dealing with his family’s shareholders. There’s a lot of work that goes in. You need a board to make sure that those family members feel that the strategy is right. For a board of advisors, it’s a really simple task.
If somebody owns more than 50% of the company, you’re kind of really doing a board advice because they get to do whatever they want, they own majority of the company. But in reality, a board of advisors can act very much like a board of directors but the owners and the CEO goes off and goes on what they want anyway but they’re using them as a sounding board which I’ll go back to and I’ll use an example.
I used to have different opinions about this. Definitely, if you’re a billion-dollar company, you probably need to have a board of directors or board of advisors, you might say. It gets real fuzzy and grey between the two. But I’m thinking, “What about if you’re 50?”
I know a local company here in town, I know the CEO pretty well. He was brought in. He’s not the founder, they had two founders. The business was stalled out, he was brought in to be a catalyst to drive the business forward. Put together a board of advisors just to help—so it’s not just his idea but his board’s idea. It’s a $5 million company. He grew it to $15,000,000 and then sold it.
One of the reasons why he looked at the board of advisors being so good is once you quarter basis, he had over a hundred years of experience sitting around his table talking about the strategy and the issues his company is facing. And because they were on the board, they knew the business from a financial standpoint, from strategy, what the market sector is, they knew it well and they could provide some continuity from quarter to quarter and help him guide the waters of what he’s trying to do in building the company.
Is it too small? The one factor is if they’re just one executive and they really don’t have much management underneath them, a board of advisors or a board of directors is probably not as effective as needed because they need to have a management team to be able to execute on all this as well. If you’re a small business, you might even be hitting $20 million in sales but all you have is some salespeople, it’s a branch of people working for you. You don’t need this board because you’re going to do what you want everyday anyway, and it’s not going to be of value.
Ryan: I think you hit on a bunch of really good points. First of all, I just think about when we run our business, why would you not want that kind of advice sitting next to you and actually helping you push yourself and the company in the right direction. I think the biggest difference too is your employees always have some sort of stake in the game. They’re not going to get the purest advice outside of the bubble of where you’re in, getting the different angles.
We can talk a little bit in a second about the different set of expertise but before we do that, can you explain, Jim, I think a lot of people, from my experience, think that their Vistage group, EO group or whatever peer group might replace a board of directors, can you explain how those two maybe fit together or are different?
Jim: A CEO Coach, Vistage, YPO, CEO, there’s lots of them out there. What those are really for the CEO. The CEO goes into this round table group and says, “Here’s the struggles I’m having.” It could be at home, it could be at the job, it could be at some employees. He’s got no one else to talk to. This is a set of peers that are not competitive that can really help you be a better performer as a CEO. That’s what they’re for.
The board of directors, the board of advisors is to help the company optimize, as I said before, it’s optimization for the company. The CEO’s gotta have their own training but think of this as a lot of professional athletes have personal coaches but they also have a coach to their team. It’s just different.
Ryan: I think that was a perfect way of explaining that. In the peer groups, you’re getting basic, high-level contacts but you’re not really in the trenches counseling working on the business, it’s just random hot topics that are going out. I think you did a very good job. I totally agree with you. Then, dive into how do you form a board. Where do you start?
Jim: There’s really a couple of steps to building a board, there’s kind of four or five steps. The first thing you do is you’ve got to realize that this is something you want to do, you’ve got to come up with some by-laws. By-laws, you can get and you can research and do them but you need a set of rules to operate this board by.
You don’t want to be super stringent but you don’t want to be too lax as well. The by-laws become really important. It’s your math going forward. This is if I have a board, these are all the things I can do to go back and improve my board as well.
Ryan: Can you give an example of some by-laws? I think I just think about the entrepreneurs that I know that are so busy running their company and to sit down and do this is foresight which is important. Are they putting rules for themselves, for the board of directors, for their company? What exactly are by-laws?
Jim: There’s one that’s really a gotcha and they’re almost everyone I’ve ever read. By-laws is going to be how many times a year we’re going to meet, are we going to have committees, what is their compensation plan going to be, what’s our term limits going to be, what’s our expectations? Do you have to abide by every little detail? No. But at least you’ve written it down and thought about it.
Probably the number one mistake boards make in their by-laws is they have no way to get rid of a director. What’s the big deal? Let me tell you a story. I have a son who lives in Colorado and he called me up one day and he says, “Dad, I’m thinking about moving in with Annie, my girlfriend.” I said, “Wow, Adam, you’re 30 years old. You don’t need my approval.” “I don’t need your approval but I like to understand what your thoughts are.” I said, “Well Adam, let me tell you something I’ve learned. It’s really easy moving in, it’s really hard moving out.” Three years later, he’s moving out and it was messy.
A lot of bylaws don’t think about when things aren’t going well. How do you get exit a director gracefully? You’ve become close with them, you don’t want to tell them that it’s not working anymore or the business has changed and you need somebody different. You need to think about that as well. First thing is by-laws.
Second thing is you need to determine your board make-up, meaning, how many people do we want, what kinds of people do we want to have on our board. I sat down with one chairman of the board of a bank here locally and we’re talking about diversity and things like that and he says, “Wow, that’s really a good point, Jim. We’ve got seven people on our board and we’re all guys over the age of 55. More than 50% of our customers are women, more than 50% of our employees are women. We don’t have a single woman on our board.” That’s crazy.
You need to think about that and know what exactly can fill the gap. It’s more of where the company is going. One of the things that we always look at is if you’re a billion-dollar company, “Let’s get people with $2 billion worth of experience because they’ve been there, done that and so they will have known where the pop holes are along the way.” Or say you’re a $100 billion company on your way to $500 billion. “Let’s get somebody who’s gone from hundred to five hundred.” Determining that board makeup is important.
Ryan: If I can interrupt for a second, because I think what’s interesting about this and the whole concept of having a board of directors for your company in the mid-market is most often I see people try to hire these people. If you’re a $20 million business and you want to get to $200 million, you go hire the person from Cisco and then you realize that they don’t know how to actually work inside your company. You’re getting the expertise but you don’t have to have a million dollars worth of payroll with people that aren’t actually executing correctly.
Jim: The other mistake they make when we’re looking at the board make-up, they say, “Well, I’ll get the board, I’ll get my banker. I like him. He’s a good guy. The lawyer, she’s really helpful, she’s helped us a lot.” The problem with that is there’s no independence there. Because if I’m already getting paid to be your banker or your lawyer or whatever it is, or your brother-in-law, guess what? I’m not going to be independent, I’m not going to be objective because I have to continue that relationship with you outside of the board room.
Ryan: Isn’t there crazy conflicts with that? Putting your banker on there who wants to make sure that you have deposits, loans, specific things, you’re never going to get you advice anyway, the fiduciary or the prudent responsibility of the board of directors—there’s just too much conflict there isn’t there?
Jim: There absolutely is. The third point is director recruitment and onboarding. They both are important. Recruitment, we had somebody who we built a board from scratch and the main owner of the business said, “Oh, I know some really good people. I’m really well-connected.” We said, “No Mike, you can’t go there because those people already have a relationship with you. We need to find people that are of the highest value that could come and bring independence and objectiveness to it.”
That’s really what we bring a lot of. Every time it’s happened, every time we’ve got a board search, the person we get is 2x of what they thought they could attract. It takes some skill to go and be able to talk to other people, to show them the opportunity and what the value is.
The big mistake that comes is when they don’t onboard the person correctly. There’s a whole process of onboarding of the board of directors member that’s not dissimilar to employee but it’s not the same as employee. You don’t want them coming to the first meeting and feeling like they don’t know what to say to you. “Wow, this person is not much value.” Because the first three meetings they didn’t say anything. You probably didn’t onboard them correctly.
Ryan: What’s an example of how you would actually go about onboarding someone?
Jim: I have them come as an observer for the first meeting or two. You can’t say a word, you just got to sit down and listen. I have them go to the production facility, wherever they are, it could be a warehouse, it could be a manufacturing company, it could be distribution. I have them actually go there and spend a day and see how they make money. I would have them go and I would give them the last two or three board books to have them study to see about the topics and the financials so they know what they’re talking about when they get there. Those are some of the things that you might do on top of just shaking their hands and saying welcome aboard.
Ryan: Even if you’re the other board members, I couldn’t imagine if I’m the other member and all of a sudden a new individual is sitting in there and just giving advice with zero background. You either have someone where you get that kind of tension or like you said, you don’t know why because they’ve no context to give advice on. No matter what, there’s not a good fit there then.
Jim: The point then is board meeting execution, as important to setting everything up, is you need to have a plan for every board meeting, you need to put together the board book, you need to get them in the hands of the board members at least a week in advance so at least they can study it, so they’re prepared when they get to the meeting. Then in the meeting you need to execute it, have that meeting, and you need to move it along.
It needs to have a rhythm to it because otherwise, you can take a left turn in how we’re valuing inventory and spend an hour on that and you don’t get to the important topics. You need to have a real plan and execute that over and over again in the board meeting.
The last piece is repeat. Just because you go through this whole process once, you’re good. Just keep always going through this process to keep it fresh and going.
Ryan: Before we continue, I think the one question I think everybody always thinks about is how much do these people cost and what is your obligation to them?
Jim: There is a cost. There’s always a cost even if you don’t pay them something. There’s the cost of time, the cost of materials and things like that. You want to understand what those costs are. You do need to pay your board members to be able to get—it varies with every company, it varies vastly.
I’ll use the example, there’s two multi-billion dollar public companies here in Minnesota and one pays their board members 2x of what the other one does. The one that pays their board members less has 2x the valuation in the market. Why is that? It just is. But you do have to pay them and you do have to value.
Then there’s time. You may have an off-site board meeting. Once a year, a lot of times what they do is they go to an off-site, it may be in a remote manufacturing facility and see their facility in Mexico, see their facility in Kansas, whatever it might be just to mix it up or we may have a board summit, we may have a three-day board summit where we get together and talk about the strategy with the executives. There’s lots of time and there’s some dollars involved, not as much as you’d think.
I would say that the commitment that you make to those board members is that you’re going to talk about how to be successful, what makes a good or great board. You’re part of a zero commitment to be prepared. It’s all about being prepared. When we’re together, because we’re busy people, let’s make the most of our time.
Ryan: I think that’s a great segway into what does make a successful operating board. I think one of the things that I think people struggle with is what is it that we have to be prepared for, what kind of information are we giving the board members prior, and how do you pick the topics, do you run your board on a traction or some sort of EOS kind of deal? How are you picking the hot topics to discuss or are the board members actually flushing us? Maybe shed some light on that.
Jim: What makes a good/great board? First off, it’s a two-side relationship between the CEO and his management and the board. Word be said, I think it’s a good adage, think of it as a ten-year marriage. Go in that commitment that this relationship is a ten-year marriage. I’ve been married for 34 years and the similarities are striking between this quote, I sent this to my wife the other day and it’s really true, it’s “marriage is two imperfect people who refuse to give up on each other.”
That’s so true about the board as well because it doesn’t go good every time. You can’t give up on each other. The second thing to have a good board is it’s all about the stakeholders. It’s not about just the shareholders.
There’s a handful, there’s five main people that are stakeholders, maybe a sixth at a time. One is the shareholders, very importantly, you have to think about the shareholders. When I say a stakeholder, it’s who doesn’t want to see the company fail, who wants to see the company to succeed. The shareholders want to see it succeed. Your employees want to see it succeed. Your customers want to see it succeed. Your suppliers want to see it succeed. Your community wants to see it succeed.
The sixth one is government because there’s some businesses that we’re in that are so severely or heavily government regulated. Having somebody on your board that understands how the government thinks can be a real benefit like health care and things like that. But if you keep your focus on the stakeholders, not any one of them, but the full gamut, you’re going to have a pretty good operating board.
Ryan: I think you laid that out beautifully. How do you then figure out the expertise that you need in order to make sure that all of those people have a voice or some sort of representation. You’ve got a combination of how do you count for the voices and all those six categories and then how do you also balance that with the skill sets that you want to help bring you in the company forward?
Jim: It’s not easy. That’s for sure. Just by the question, you could tell that it’s not easy.
Ryan: Right. I feel like you’re going to have a hard time even formulating the topic because there’s so many things that you have to accomplish with these select people that you’re bringing on board.
Jim: I guess my point is it’s awareness. You have that awareness. Some companies do it from a standpoint of making health committees. We have an audit committee for example. An audit committee helps us with our government regulations of filing taxes and things. There’s a compensation committee. You’re thinking about the compensation of not just the CEO but the whole company compensation which addresses the employees. You might have a cyber security issue which has to do with your customers for example. You think about – if [00:33:56] didn’t have a cyber security, they do now, it does matter. Often times, you solve those by committees.
Ryan: When you’re saying committee, because I’ve been on a board of a non-profit, I think I know what you’re talking about. Let’s say you’ve got eight people on your board of directors but three of them might be really skilled with compensations. Those three would be responsible for the compensation topic or subject. Correct?
Jim: Exactly. They go off to a study, it might be CEO compensation, it might be executive, it might be bonuses, and things like that. They’re going to make recommendations. These are strategic issues that they’re dealing with. You don’t want to spend a lot of time in the official board meeting recorder, you want to have a report on to make sure that people are paying attention to you.
Ryan: That’s a huge point because instead of getting eight people’s opinion when some people don’t have the backgrounds and actually trying to solve the problem in the meeting so it’s not just about—in the meeting, you should be giving recommendations and giving the updates and all of that stuff should be going behind the scenes. Correct?
Jim: Yes, absolutely.
Ryan: How do you determine whether it’s the committees or subjects that you’re trying to address?
Jim: That’s a really good question. You look at your business today and your strategy says here’s the business where we want to be going towards the future and you say, “We’re going to need some help getting there. We can see where it’s going.” Or you might say, “Here’s the hole we have today.” Some of them become very self-evident in what it is that we need to find.
Remember, you always want to find collaborative people. There’s a phrase around boards, “nose in, fingers out”. They’re not running the company but they’re really involved with the company. You want to be able to make sure that they get along together as well.
Ryan: I just think about some of the stuff that we—I think a lot of people try and use it, call it the five million to a couple hundred million, they’re trying to do this in their peer groups and I think that’s where the frustration of the peer groups come because you want to solve all of these problems.
We redid our compensation structure because we’re in the copier IT services and the margins disappeared in the hardware and we needed to redo our whole camp plan and we’re just alone trying to do this and trying to figure out what worked and there’s so much failure that you have to go through because you have no one to bounce it across. Being able to find and have people that you can talk to that don’t have a vested interest or that have a vested interest but not an actual motive to bring you one way or another, it’s just invaluable.
Jim: Yup, exactly. If you look at, Ryan, the keys to maximize board effectiveness, you have a board, I want to make it really efficient, it really starts with a strong chairman. I’m not a fan of having the CEO be the chairman because I want an independent be the chairman that can really hold people accountable which is the second one, accountability. Honest and timely communications, you hear about this a lot. You don’t want to be surprised when you get the board book over here or when you walk into the meeting, “We lost our biggest customer. It’s been going on for three months.” No surprises, honest communication.
Really, a good board is strategy first, reporting is second. Really you’re thinking, strategy is the most important topic of the day. Reporting on the numbers and things, you can spend a lot of time going through the minutia detail but that should really be secondary. You should have done that beforehand and just hit the high points.
Then, there should be a mutual commitment but with the ability to disagree. A little contention in the boardroom is not a problem because you’re challenging the conventional wisdom which is good because if you just take conventional wisdom, you may go off the cliff because you didn’t see something coming. You’ve got to be [00:44:44] all the time. A really good board doesn’t always get along in every subject but they respect each other, they can come together easily.
Ryan: I think it’s fantastic. Are you familiar, Jim, with the book Principles by Ray Dalio that just came out?
Jim: Yeah. I’m interested in getting it.
Ryan: It’s seriously amazing. He calls his big thing, his radical truth, fullness, and radical transparency but in the context, and I’m going to so butcher the word because I can never pronounce it, it’s called an Idea Meritocracy. Everybody that brings ideas can argue because everybody’s got credibility but somehow, a decision is still made based on the believability or the credibility of the people that are voicing their opinions.
What makes that work is it’s pretty much what you just described. It’s everybody’s there, different backgrounds, different experiences and are processing this strategy together. But what is the process to actually make that decision? Is it the actual business owner or is it the chairman or the CEO? How does that final decision get made after all of the input is given?
Jim: There’s a reason why there’s odd number of people on boards. It comes down to a vote.
Ryan: Got it. When you say that you got the ten-year marriage, obviously you’re bringing on these board members to be able to be there for ten years with all things going well. How do you upgrade your board and how do you get rid of them and how do you determine that you’re not at the right level that you should be?
Jim: The one thing is in the by-law, you have something it might be a term limit, like you had a three-year term to be renewed and you can be on board a maximum number of ten years for example or 12 years or something like that.
That’s a pretty easy way but you also have some other safety valves. For example, if you retire from your current position or you leave your current position, because there’s some reason why we came and got you in the position that you’re at today. You tend your resignation, we may not accept it but you should tend your resignation so that way, it’s an easy way for you to make a separation happen.
How do you determine what is it that you need to make a change or add a board member? It’s really going back there and say, exercise we do it, companies call it the Board Gap Analysis. We look at the board members, their experiences, what experiences are important for the company, average age, you want to have the average age of the board members be in the low 50s, not the high 60s for example. You want to be able to look at that and say, “Where are some gaps? Where’s the future coming?”
I have one client, a large private company here in the Twin Cities. You may see their industries changing drastically, they realize that there’s going to be labor charge in the future and there’s other challenges coming and they don’t have somebody on their board that’s really one of those progressive thinkers that’s facing that stuff today. They have to bring somebody in that will help them guide the waters of change that’s going to become in their industry.
A lot of times, it’s really looking to the future. Look at what we got and look into our future and see where’s the gap in between and try to fill in that gap.
Ryan: How often do you do that?
Jim: You should probably be doing it every two or three years. The thing with 360 reviews in new board members is a smart thing to do as well because you might think you’re doing well but your board members don’t. You never say anything, you don’t add anything of value. The chairman needs to hear that. He needs to see what other board members think of him. It’s not a popularity contest but it’s about making sure that we’re holding each other accountable.
Ryan: Okay. Let’s say I’m the CEO or owner of a business, that’s $27 million, $30 million, whatever that might be. I want to create a board of directors. Obviously we’ve talked about a lot of the different ways you can start, some of the by-laws and all that. How do you determine—the gap analysis that you would be doing for someone that doesn’t have a board is obviously very big. How do you determine what positions, where they’re coming from? Explain your recruitment process because I think filling in those gaps and how you do that is very interesting.
Jim: First of all, you use the example, the $27 million company. You look at what business are you in. We need some expertise around the business that you are in. Then we look at it and say, “What challenges do you have that if you have some more senior management oversight, you could probably help that with?” The third thing is, “What are your future challenges or what future directions you want to go so we could pick up some of that expertise?”
We’re trying to take care of today’s world and tomorrow’s world and build that bridge of tomorrow effectively. Once again, you’re hiring senior executives that have been there and done that so you should be able to go off and find that.
What I find interesting is that many people want to serve on boards. Finding the board member, if you’re diligent about it, it’s going to happen. It’s going to be a great experience. Because you’re not asking that person to leave their current job, you’re asking to take on another responsibility that’s mutually beneficial to their business because you’re going to learn some things and you can give to that other business some of your expertise.
Ryan: That’s one of my questions. I think there’s probably a lot of these frequency notions of these board members have to be someone that sold a business or an executive that retired that are just looking for something to do. That’s obviously not what you just alluded to. Are these people that are currently at, like current executive, business owners, how do you go about finding these people?
Jim: First off, we have an incredibly large network and we’ve talked to so many owners and executives. But you do some really old-fashion research and networking to be able to find the person. Often times, this person knows that person. I’m not going to be a good fit with this person over.
I’m in a middle of a board search right now, I just kicked off. There’s somebody that I was really impressed with that I think I’m going to have a good fit. Which then comes to, “Hey, would you consider being on this board?” “I’m passive this time, I don’t have the bandwidth, but here’s somebody I think is pretty good.” Didn’t know that person so I reached out and connected with him. We’ll see if he’s the right kind of fit and has an interest. It’s fit and an interest because you’re making a ten-year commitment.
Ryan: I’m just kind of curious, how do you sell the company that you’re trying to create the board for? Is it compensation, is it the vision of the business, is it the personality and culture? How do you actually make that sales percentage candidates?
Jim: Companies with strong brands are pretty easy to sell. You guys have got some incredible appliance here. You just mention their name and they go, “Oh, I think that company is so wonderful. I’d love to be able to get involved with it.” That’s the easy part. But the other end of the spectrum is, “Oh, I never heard of them. What are they all about?” You’ve got a billion dollar plus companies but sometimes they’re just under the radar.
People are predisposed to want to serve on boards, that’s a positive thing that you’ve got going for you. But you really have to explain to them what the business is like, what the challenges they’re having, and what kind of expertise they’re looking for to bring in. Anybody who asks you for some help with something you’re good at, you’re probably going to be predisposed to want to do that.
Compensation comes in, definitely, compensation comes in. It’s about fourth or fifth on most people’s list. Time commitment comes in because it could be a really remote place that’s hard to get to and it takes some time. Every board needs a three-day event and they can’t take three days out of their quarter. Those come into play. But the second thing I would say that’s most important is the executive says, “What can I get back from this? What will I learn?”
A lot of times, what they think is different than what they get but they always get something bad. But you have to remind them of that these are the value you get back for your business you’ll be able to see.
Ryan: Is there like an interview process that you guys go through or is it just like hiring a normal executive?
Jim: It’s a lot like hiring a normal executive I would say, but it’s a different kind of an interview because it’s not just functional. You’re not just saying, “Oh, so you manage 5,000 people? Oh, that’s good,” we check that box. You want to look at it, because remember, the board is a very strategic piece of the business so we need to find people that have really good strategy background combined with good execution with some relevant experience and have a personality that fits really well with that board is and what the company is.
We do this a lot like an executive search but the way we approach it is going to be completely different because once again, we’re not asking to leave the company and join. Compensation and location mean a lot more if you’re asking somebody to move across country to take on a position. But if you’re looking for the boards, that’s less important. It’s more about the cultural and experiential fit.
Ryan: Do you find it a hard gem to find people that don’t have egos because you’ve got to have just a whole altruistic perspective on the world, because to throw a bunch of people’s egos, there’s going to be miserable obviously, for a lot of different reasons. How do you filter through that main variable?
Jim: We spend time with them. One of the things that I learned over the years of executive search is the more touches I have with somebody, the more I get to know who they are. I talk with them late in the day, I talk with them early in the day, I talk to them face to face, scheduling things and see how flexible they are.
One of the things that’s on our radar, because often times—we’re doing Minnesota or Mid-west companies are pretty family driven. GE people, sometimes you’ve got to be pretty aware because GEs have high testosterone. They come with that already.
Now, that doesn’t mean that’s what the person is. But a lot of people, if they got far in GE, they move that kind of way. Obviously, your radar is off and you go, “I just want to make sure that that’s not going to happen.” That’s an easy one to filter out. Different companies have different cultures that you know about and so you want to filter that out to make sure it’s not going to come through.
Ryan: You’ve got the personality fit, and then the expertise fit, trying to bridge the gap between today and tomorrow’s world. Is there a typical set of pillars or subjects that you try and find as you blend all of this together? Whether it’s finance, marketing, security, governance? What are some of the main subject pillars that you’re trying to find in a blend of all these people?
Jim: That’s a really good question and one of the last subjects that I want to talk about with you today is I get contacted all the time by people who want to be on boards. What I try to tell them is, “I can’t put you on the board. I can’t find one.” But at the same time, there’s a list of things that a great board member will have. I suggest that they make sure that they all fit.
The first thing is everybody that gets on the board needs to be a financial star. They need to understand how to read a P&L, a balance sheet, and a cash flow statement, all of those things. It doesn’t matter what the business is, they all have financials.
The second thing is what’s your functional expertise? Functionally, I’m in manufacturing, or I’m in sales and marketing, I’m a financier, or I’m a CEO but there’s a functional inside of a company, the expertise that they bring. There is an industry expertise so they might be in the software industry or they may be on the consumer package goods industry. That’s important.
The next thing is leadership skills. We need leaders to be on board because they understand the challenges of running the business. There’s a, what I call an “it factor/” An it factor is something beyond all that. It could be their personality. The it factor might be where they’re located.
We’ve done board searches where we need to find somebody but not here or but not in Michigan or we want somebody that’s located in the southwest because we have a big growth there in the southwest. Some of those its could be tangible. One of the searches I’m doing right now, it’s the woman, the leading candidate’s 35 years old. She’s bringing age diversity. She’s got the age diversity. In the opposite direction, that’s a good thing because she’d be on there for her technology expertise. That it factor comes into play.
Readiness is an important place as well. Are you ready to serve on a board? A lot of people say they are but when it comes down to it, they won’t commit the time. The podcast about boards the other day, the person had a really good point, he said, “Are you somebody that people will listen to?”
Jim: He’s going to preach? “Or are you somebody that brings such great value that others want to hear you speak?” That is a really important thing to people.
Ryan: Does it mean something when you speak versus just rambling all these ideas without actually listening to everybody else?
Jim: That’s right.
Ryan: You brought in that age diversity. I’ve heard a couple of cool things that I’ve read in some of the main publications like Forbes, Inc., Entrepreneur, and such. How are people blending the baby boomers and the millennials and the next generation? Is there any cool takeaways that you’ve seen of how people have embraced that?
Jim: I have not seen it. Something’s going to happen here in the next number of years. There’s going to be what we talked about, diversity on boards. There’s going to be a tsunami of women going on boards in the next ten years. I have three daughters so I’m all for this.
The reason is because if you look at the average board, it’s pretty much guys in their 60s that are on boards that are CEOs. There’s definitely big, public companies, they’ve brought some diversity into as well. But you’re seeing more and more companies look at the board, like this 35-year old gal we’re talking about, and say, “Well, they can bring some things quick to the table that we don’t have.”
I know they specifically seek out gen x or the millennials but if they’re presenting where they’re a little bit more—I think especially as we get this generation of board members retiring, the next generation will be much more open to it.
But remember, one of the things about being an effective board member is these leadership skills. How do you get leadership skills? You get leadership skills by leading people. Often times, you don’t get that chance until you’re late 30s, early 40s, late 40s, to be a diverse leader. Sometimes it tends people, we want people to go to experience.
Ryan: That’s just the nature of years built up on experience.
Jim: Exactly. That’s what it tends out to be.
Ryan: As we’re wrapping up here Jim, is there something that you want to highlight that we’ve talked about or something that you want to leave our listeners with?
Jim: The one thing is that I was at a meeting about three months ago. I’ve been on this search for division of a public company here in Minnesota. I was presenting to the CFO of the public company the findings. I’ve been on a week-long tour of the country reviewing board candidates. I went through the book, the board book I put together. I’m going through it, and I’m half-way through it and the CFO says, “Jim, stop.” He says, “You really like what you do, don’t you?” I said, “I just love it. This is awesome.”
It was so fulfilling for me because I am passionate about it and it’s a passionate subject that I like. It’s not for everybody. But I’m so glad that it showed through to him that I cared that much about it. I think that’s one of the things that the clients that we work with and the board members that we recruit deal that way. In this world, this little world that we created, it’s something to be very passionate about because you can help companies become more successful.
Ryan: That is so important because I’ve used recruiters in the past. They have to understand you. You really, really have to understand me, where I want to go, what I want to do, because how else are you going to be able to surround people with me, around me, that are going to be able to do that if you aren’t passionate about it and don’t understand the whole situation.
Ryan: Jim, what’s the best way for our listeners to get in touch with you?
Jim: The easiest way is just go to our website which is www.cardinalboardservices.com. We’ve got resources that you can download and we’ve got our contact information on there as well for both myself and my partner. That’s probably the easiest. Got our phone numbers, email addresses, everything.
Ryan: Jim, thank you so much for coming on the show today.
Jim: Take care, Ryan. I really appreciate the time.
I hope you enjoyed the interview with Jim. Here are some of my main takeaways. The top three that I had were the first being the real clear definition and the clarity that Jim brought to what an actual board of directors is and the roles that they play, how that’s different from a board of advisors which are just people that are giving you advice but not actually voting or holding you accountable without the by-laws and the governance, and then understanding the difference of a board of directors compared to a CEO peer advisory group.
Because I think that everybody needs some variations but the board of directors is really the one thing that you need to surround yourself with the top talent and its expertise that can hold you and your company accountable, to take you to the level that you need to go because being alone is so daunting and being able to have a committee that understands some specific topics that you’re trying to address is absolutely amazing.
The second main takeaway I had was that if you have a family business or if you’ve got a business with a very crucial CEO that is running the business and most of the day-to-day, having a board of directors that can help govern and help strategize with the multiple parties to be the sound and voice of reason and then can actually push you forward without all the political bs that comes with having multiple parties that have a vested interest in a specific subject.
The last takeaway and the third takeaway that I had was the qualities of a great board member. The seven different things that Jim listed are fantastic. Making sure that you’re not just bringing your family member, your banker, or anybody that knows you and has this preconceived notions or perspective of you and the company, finding the expertise that you actually need to bring you to the next level is huge and making sure that you’re not just sacrificing that because it’s too much work.
I really hope you enjoyed the interview with Jim. Lots of great takeaways. Always remember if you want any of the links, they’re in the shownotes.