When It’s Time to Bring in Fresh Blood
His family was in over its head, Greg Lennox realized soon after he replaced his uncle as president and chief executive of the third-generation family business, P.L. Porter Co., in Woodland Hills.
Guiding the $100-million maker of seat controls for aircraft and autos was going to take more than the collected skills of the small family board of directors that included Lennox, his retired uncle and the rest of the company owners: his mother, brother and two cousins--an interior designer, ground water hydrologist, equine veterinarian and graphic designer, respectively.
“They were interested, but they felt ill-equipped to make important policy decisions,” said Lennox, 45, who joined the company a decade ago after a career in the automotive industry.
Annual board meetings had grown to daylong affairs as Lennox and his uncle, an engineer, tried to educate the family stockholders about what was going on. Lennox prepared lengthy reports on competitors, new technology, plans for an auto-related plant in Indiana and financing. In the end, the family, who enjoyed cordial relationships, always deferred to Lennox and his uncle.
“Sometimes tough love is a valuable concept, and it’s a lot easier for outside directors to play that role and hold me accountable and keep me sharp,” Lennox said.
He was eager for outside mentors with the contacts and experience to drive strategic planning at the increasingly complex business. His uncle wanted help in his oversight role as a nonexecutive chairman of the board.
The two men set out to build a gold-standard board with the help of their advisor, Ken Anderson, a partner at Arthur Andersen in Los Angeles. The result was unusual among family-owned companies, and effective.
First, the rest of the family agreed to step down. That’s atypical, experts said, but it cleared the way for Lennox and his uncle to add the experienced outsiders they needed. Second, they tapped Arthur Andersen’s network of potential board candidates, as well as their own. They ended up interviewing seven, then choosing three who had the desired skills in manufacturing, finance and the automotive business.
“Our approach was to say, ‘What are our blind spots?’ ” Lennox said.
He didn’t fall into the trap of tapping business buddies, paid advisors (attorneys, accountants, etc.) or vendors and suppliers, none of whom could bring the objectivity a business owner needs from a director. And Lennox put a majority of outsiders on the new board. The result: Sales have soared, operations have expanded nationwide and the company has begun an international push.
So why don’t more family businesses take the plunge?
Fear stops most, said family business guru Leon A. Danco of the Family Business Center in Cleveland. With 30 years of experience advising family businesses and several books on the subject under his belt, Danco considers an outside board critical to a family business’ survival.
“I’ve seen people destroy [their company] because they are not willing to have someone say, ‘You are out of your mind,’ ” Danco said. “It’s the ‘emperor’s clothes’ syndrome.”
A board stacked with insiders who meet once a year to rubber-stamp plans may meet the legal requirement for a private company, but it’s not likely to challenge the pet projects and musty assumptions that can pile up in any business, particularly a closely held one. Without the oversight of experienced, objective outside directors, it’s easy for a family firm to sidestep the sometimes contentious issues of succession planning, family business policies and strategic planning, among others.
“An independent board is the single most valuable thing a family business can do for itself,” said John L. Ward, professor of enterprise at Loyola University Chicago Family Business Center. A company doesn’t even need a majority of outsiders to benefit, said Ward, who also wrote a book on the subject.
Yet only 5% to 15% of family businesses have what could be considered an outside board, he said.
Not every family business needs outside directors. A start-up venture or a very small business, one with less than $5 million in annual sales, for instance, can get by with a less formal board of advisors, experts said. But at some point, a family business should consider an outside board as part of its growing-up process, according to attorney Michael Schulman, who will speak on the subject at UCLA’s family-business conference in March. “Business owners who want to have their business pass on to multiple generations need to understand that at some point there needs to be a separation between the ownership by the family and the control,” said Schulman, an estate planning specialist at McDermott Will & Emery in Newport Beach.
Paradoxically, the family owners at P.L. Porter Co. are better informed about the business now than when they sat through the family board meetings, said Lennox. Their monthly reports are more complete, thanks to the chief financial officer hired on the recommendation of the outside directors.
As annual sales head past $100 million, Porter’s work force has grown to 950, and the automotive business now accounts for 60% of revenue at the company founded by Lennox’s grandfather, a former Douglas Aircraft engineer. In addition to the plant in Indiana,the company has opened technical centers in Detroit and Germany, and is considering adding a fourth outside director to help with expansion.
“You’re proud, you’re excited, you’re overwhelmed,” Lennox said of the company’s growth curve. “That’s really where the outside directors come in.”
Does your family business have an innovative solution to a management challenge? Tell us about it. Write to Family Business, Los Angeles Times, Business News, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to cyndia.zwahlen@latimes.com.
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Books on Boards
Here are two books that offer clear-cut advice on how to set up and run a board of outside directors and what to expect from it.
* “Outside Directors in the Family-Owned Business: Why, When, Who and How,” by Leon A. Danco and Donald J. Jonovic (1981). Practical and witty advice. Call University Press Inc. at the Center for Family Business at (440) 442-0800.
* “Creating Effective Boards for Private Enterprises,” by John L. Ward (1991). Step-by-step guidelines, real-life examples. Call Business Owner Resources at (800) 551-0633.
