312 - Does The Perfect Board Of Directors Exist?

0:00Last week I did a video on Does the Perfect Chairperson Exist? And I would first encourage you to go over to my Bruce Whipple YouTube channel and watch that video. So I wanted to do a podcast as a follow-on to that video, which was, Does the Perfect Board of Directors Exist? And much like the chairperson, there are not a whole lot of perfects in the world, so you don't need to worry too, too much about that. What you do need to worry about is, do you know who should be on your board? And what qualifications should they have? And if they're not perfect, are they good to the point that you can use them?

0:45And hopefully the answer to that is yes. So let's first talk about the board. First thing you need is a probably, I would start with industry experts if you don't have knowledge. And by start with industry experts, I'm not telling you to bring them on, but I would start by interviewing them. You're going to learn more about the industry. You can ask them questions like, if you had a magic wand, what would you fix? What do you think is the biggest problem in the industry today? On average, I see the profit margins as X. Do you agree with that? and what do you think about the amount of people that are older that would be interested in transitioning out through basically an early retirement or retirement plan and get their feelings on those things.

1:38So that's going to give you a feel for what's changed in the market, what the market is like from a profitability standpoint, what are the trends in the market, those kind of things. Then, don't bring those people on, But tell them that you wanted to talk to industry experts first. You're interviewing several of them. Next, you're going to bring on a chairperson, describe what those skill sets are, primarily that they've done deals and are reasonably well-known. It doesn't have to be that they're a household name, but when you explain what they've did in terms of acquisitions, people would go, oh, wow, okay.

2:16So then you pick your chairperson. The reason you do not want to bring on those industry experts is you want your chairperson to be on those interviews to pick the final board people. And I have had people that have lost the chairperson and the chair candidate as the replacement said, I want to talk to the board members. He went ahead and set those up. He was on the calls, which is important for you to do. And the chairperson candidate said, I don't think any of them are worth a damn. So if you want them, I'm gone. If you want me, they're gone. So that's the reason you want to warm those industry experts up, tell them that you're going to pick the chair, as I said, and that you'll get back to them and keep in touch with them on a regular basis.

3:10So you know, you think you know who your industry experts are. You then pick the chairperson, start with some of those industry expert joint meetings by Zoom probably with your chairperson, you and the industry expert, and then see what the chairman says. Does he agree that you picked some good ones? Does he think you missed the mark? You'll learn a lot about that chairperson in that. Then continue on, and you're going to get a finance non-executive director and a legal non-executive director. It doesn't really matter which order you pick those are. In the finance, NED is usually a retired person from the big four accounting firms and someone who has been involved in due diligence on deals.

4:05Not a tax guy, but actually did deals. So quality of earnings reports, those kind of things. Similarly, with the legal non-executive director, you want someone from a big firm that's done deals, and in both the accounting and in the legal NEDs, you want them to be in your industry, or at least aligned. So maybe they don't have the exact industry knowledge of your specific industry, but if, for instance, it's healthcare, and they've done plenty of healthcare deals, just not one in your subset, not that big a deal. If you can get them in your specific industry, that's even better. Now, most of the time, if you can find a retired person, great, but they don't have to be retired.

4:55And that is true for both the finance and the legal NEDs. But one of the questions you want to ask them is, can you join a board? Oftentimes, the firm will say, you can join any board you want, as long as it doesn't affect your work. No, you can't join any board, or you can join a board, but it has to be a charitable not-for-profit. So you are not a not-for-profit, I hope, at least long term. In the beginning, you probably are not-for-profit. it. So if the people say, yes, we can join a board that's for profit, great, continue on. And you can have someone who's already working in a firm. If the answer is no, and you have this person on the Zoom call or phone or whatever it turns out to be, many times there's retired partners that don't have those same restrictions about joining a board.

5:53And ask, do you know any retired partners that might be interested in this opportunity, and if so, how would I get in touch with them? I have gotten board members through that process, and so remember that. And then you're going to want what I call a quasi-CFO, and we'll talk about that first, then we'll talk about a CEO. I say quasi because in the beginning, there's not a whole lot to CFO. Oh, you haven't done an acquisition, but you do want someone who can help you with the analysis. So you want to interview someone, ask those questions. How comfortable are they with spreadsheets, calculating EBITDA, et cetera, et cetera.

6:39And you might mention to them that you're going to at some point need a CFO. Now, some of those people will say, hey, I've been a CFO before. I don't have any interest in working 16 hours a day anymore, but I'll help you pick that person. That's okay. Now, as far as the CEO, again, in the beginning, you don't have a whole lot to CEO. I'm sorry, CEO. You don't have a lot to CEO. You haven't done an acquisition. So if you have some people on the board, particularly the industry experts or maybe the chair, that have run businesses, you're probably okay to proceed without a CEO in the beginning. However, if you have nobody that is in that category, then yes, you want to begin to pick a CEO.

7:28Now, it's important both the CEO and the CFO typically are salaried positions. You are not going to be able to pay these people typically in the beginning. So explain that you're going to get equity, you will begin to add to their salary if they're going to take the executive positions, but that those will be probably in tranches. You're not going to get to a competitive salary right out of the blocks. You're going to have to do a few acquisitions. So I hope that helps in telling you what your board should look like. You will make some mistakes. I once worked for a company that the CEO said to me, your interview starts six months in when we find out what you can do and what you can't do.

8:16So one of the things you might want to consider is, first, you want board members that don't ask you about equity. And a lot of people find this amazing. Well, they're going to ask me. No, the right people, they're really not going to ask you. What you want to hear is, yeah, I'm interested if I can add value. Those are kind of magic words. But you might want to consider doing what's called vesting. So if you're going to give somebody 5 % equity, maybe you do that over five years. So after a year, they get 1%. The second year, another percent until they get their 5%. Some people will be fine with that.

8:55Some people won't. A lot of companies do that with options. And the intent of that is to keep you working for the company. Sometimes that works. Sometimes that doesn't work. I walked away from a lot of options early in my career for better opportunities. So think about that. You will make some good choices. You will make some bad choices. If you make some bad choices, even if you have to give up the equity to get the right person on the board, say, look, you know, this isn't working out. You do have equity. I'm going It'll leave you with that equity, and you can move on, and I'm going to replace you on the board.

9:37So don't keep people who are not the right people because that lack of effectiveness in them will usually permeate the rest of the board. You want a bunch of A players, to be sure. So I hope that helps. Again, you'll make some mistakes. Pay attention. The most important thing you can do is manage the communicate. First pick well, but then manage the communication and lead from the front. Board's governed, but you must lead that board. And in the beginning, the best way you're going to do that is have a good relationship with your chair, who's probably done this 100 times as opposed to you, and he's going to have your back and work together with you.

10:22You need to be a kind of united team on that front. So hope that's all helpful. If you're looking for conversation starters, how to start some of those discussions, go over to BruceWhipple.com and grab the free course there if you want to go there directly. Just BruceWhipple.com forward slash free course. But if you don't know the steps and it's critical to follow the steps, go grab the Acquisition Advantage Bootcamp over on BruceWhipple.com. And I have had emails about the VIP Mastermind. There are still a few spots left. So, go look at the VIP Mastermind if you're interested in that. Best program I run.

11:03Ignore the sold out. I don't like to take people's money until I talk to them and see if they would be a good fit. And if you've done that, if you know what the details are, then go ahead and send me an email, bruce at brucewhipple.com, and we'll talk about the VIP Mastermind. but only if you understand the financial and time commitment and you're able to commit to that. Okay, hope that helps. You now understand the chairperson, you understand the board, so go after that with a passion.