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, kevinlearned@boisestate.edu

Don't Be Afraid of Outside Board Members

Its board of directors governs a corporation.  The owners or shareholders elect the board; the board delegates management of the company to management.  In my view the board has two principle tasks:  (1) to hire, evaluate, and when necessary dismiss the CEO and (2) to see that there is an effective strategy in place and being executed. 

In early stage companies, the founders generally form the board.  They are the shareholders, the board members and the officers. But when they begin to raise capital, the new shareholders will want to have something to say about who will serve on the board.  This frequently makes the founders nervous as they want to stay in control of their company’s and their own destiny.

Often we angels see boards made up of two founders and one outsider elected by the investors, or the CEO and his or her spouse, and one outsider.  I believe when the CEO does this, he or she is missing an opportunity to bring put in place a board that will not only bring expertise to the company, but will also hold management accountable and thereby accelerate the company’s progress.

When we had Learned-Mahn back in the 1980’s, we had an all inside board consisting of the four founding officers and my father.  It didn’t really work very well.  I was the CEO and the other officers worked for me.  But they were the directors, and I worked for them.  My father brought really interesting family dynamics into the boardroom where they didn’t belong.  And what good was a board meeting when all of the officers worked together all day long?  We didn’t get any outside perspective. 

After agonizing discussion, we decided to bring in outside board members to replace the three management directors that reported to me.  We didn’t replace my father, but family dynamics are the subject of another article at another time.  We were able to recruit experienced business people to the board who could bring their experience to our company.  They included Ray Smelek, who brought HP to Boise, John Dahl, who had just retired as the President of the Simplot Company, Gary Atkins, CEO and Founder of Extended Systems and Charles Jepson who was an early HP employee, and an experienced small company CEO.  

We got expert advice and counsel, and for the first time, I became accountable to people who weren’t my employees.  In hindsight, I think that was one of the best business decisions we ever made.  The outside board made us face our weaknesses and guided us to successful strategies. In fact, Smelek’s counsel convinced us to see ourselves as a financial software company rather than a company for banks.  But for him we might never had seen this blind spot because we were to close to the day-to-day operations.

Today I serve on the board of Medical Management, Inc. The company manages both physician-owned and hospital-owned medical clinics throughout the Pacific Northwest. Until a year ago the board members were all company employees who owned company stock.  A year ago the CEO, Jim Trounson took the difficult step of asking the internal board members to resign.  He replaced them with Dr. Ted Epperley, CEO of the Family Practice Residency program in Boise and Dr. Pat Hermanson, a retired hospital administrator and currently a professor of healthcare management at Idaho State, along with myself. 

We have served a year and were just re-elected by the shareholders, so apparently the shareholders are happy with the change.  The boardroom is a much different place that it was before we were elected.  We bring our diverse perspectives to the company and we hold company management accountable for performance.  The results after the first year have been terrific.

When small company management tries to hold onto control of the boardroom, I believe it is making a big mistake.  The team is giving up the information and counsel they could be receiving, and they are shying away from accountability.  Most entrepreneurs are so focused on execution, they lose sight of the big picture. An outside board will force you to confront your weaknesses and help you see opportunity where you may only see problems.

Dr. Kevin Learned is the Director of the Venture College at Boise State and an experienced angel investor.  208-426-3875, kevinlearned@boisestate.edu, http://kevinlearned.blogspot.com/