Saturday, June 15, 2013

Be Careful of Family and Friends as Board Members

My last post was on the importance of outside, knowledgeable board members and how some entrepreneurs unwisely try to control their boards.  I am expanding on that article with my experience with family and friends in management and on the board.

Gary Mahn and I cofounded Learned-Mahn in the early 1970’s.  When Gary and I joined together we were best friends. Bea Black had come to work for me right out of college. Later my wife Nancy Learned (now Briggs) joined us.

We were well educated, hard working, and totally dedicated to the success of the company.  But even with these attributes, I believe our personal relationships got in the way of our success.

When family and/or close friends run a company, management is often by consensus.  The problem with this is that options, which may be good for the organization but bad for an individual, are rarely discussed, much less implemented. Further, it is difficult for the leader to hold his or her friends and family members accountable. 

Our first board consisted of Gary (best friend), Bea (who I had mentored since she graduated from college), Nancy (my wife), my father (who had invested in the company) and me. For a while Bea’s father (who had also invested in the company) also served on the board. 

We thought at the time we were doing the right thing; but as I read this, it was ludicrous. I would never again invest in a company with this degree of family and friends in management and on the board. Boards need to inspire and to hold management accountable. But when management is the board, and half of it is family, there’s no real accountability. 

And if the company tries to change that structure, the results are predictable—everyone reverts to protecting their own interests rather than doing what is right for the company. Gary, Bea, Nancy and I all believed we should be on the board. After all, we were the founders and managers, we had capital invested and felt we should be on the board by virtue of our stock positions.

My father was a good businessman, but he knew little about the markets or the technology we were deploying.  We felt there were others who could bring more to the boardroom. When I tried to talk my father into resigning, he threatened a proxy fight.  This obviously impacted our relationship, but Dad and I were able to resolve our differences

Ultimately Gary, Bea and I left the company, Dad resigned from the board, and Nancy was made the president. The company made the transition from an inside board to an outside board. Ray Smelek, who was a senior vice president at Hewlett Packard, Chuck Jepson who left HP to run a technology company in California, and Gary Atkins who left HP to start Extended Systems joined the board. Their impact was huge. They demanded performance, constantly pushing Nancy and her team to move more quickly, to grow more rapidly.

I know the counsel of the board was often frustrating to management.  Its demands on management and the company were difficult.  But in hindsight, I believe the success the company ultimately achieved was due primarily to having a skilled president clearly in charge without any family or friends as employees, and to having an experienced, outside, demanding board. The company was sold to National Data Corporation of Atlanta in 1994 in a successful exit for the shareholders.  In 1999 National Data Corporation closed the Boise office.

Dr. Kevin Learned is the Director of the Venture College at Boise State and an experienced angel investor.  208-426-3875,

1 comment:

  1. From personal experience I would advocate for outside board members with domain expertise, particularly at the early stages of the company. I have too often seen board seats served up to the biggest angel investor who brings only money to the table. A board member with a rolodex and domain knowledge can help immensely.