Eighteen years ago I was invited by the founder President of Chandos Construction to join a handful of shareholders in the then $23M local general contractor. Fast forward to today, we are now a broad based, employee-owned company with 150 proud owners and closing in on $400M in annual revenues. Needless to say, a lot has changed over the years and as we have grown our business we have been well guided by our board of directors.
Looking back on our experience, we can see how the evolution of our board was connected to the evolution of our company. If you have been thinking about the value of good governance for your ESOP company you may find the lessons we learned are helpful as you evaluate options for your board. Whether you looking at establishing a new board or taking your existing board to the next level, the recruitment of professional independent directors is critical to maximizing the value of your governing body.
In the early days of my time with Chandos, we had a typical board for a private, closely-held business. Essentially, we were a handful of engaged key employees who by virtue of ownership were also directors. A few times a year we would convene a “board meeting” to discuss important issues in our business. When I became President and succeeded the founder in that role, I frankly became confused in our system where employees with a “day job” in the company were also shareholders who consequently, sat on the board that I reported to. In addition to this, since we were not well versed in governance principles, our board meetings covered topics ranging from strategic planning to office management. We were well intentioned and working hard to lead our company but the challenges of shifting interests and agendas between that of individual owner to employee to director was quite the challenge.
From an operations perspective, our management board functioned similar to an executive team that worked reasonably well when the company was smaller. Over time however, we realized that our board structure could not support our ambition of building a scalable and sustainable organization. Our desire to improve and evolve led us to research best practices, sign up for director training and begin our journey of building a better board.
Our program took a few years to develop and with the help of our independent directors we today have a well functioning (although imperfect) best practices governance board. Although there are a multitude of considerations on how to approach governance for your firm, to get you started we have identified some of the keys that we think are foundational to getting the best value from a board of directors in an ESOP company.
The first is to develop a deep understanding of your purpose for your board and build it to serve your purpose, not a typical prescribed agenda. Is it to oversee an ownership or leadership transition? Risk Management? Strategy? There are many reasons that lead companies to form a governance board but usually there are one or two key reasons that become the catalyst. To build your board there are many best practices available that are in essence, tools for the job. In employing these practices it is important to be clear on what exactly the job is. Too often prototypical “best practices” are indiscriminately applied to new boards in an overwhelming dose which can lead to disenchantment and eventually, disengagement leaving both management and directors asking the question “can you please remind me why we did this?”
Another key to sustainable governance is to build a system based on process, not personalities. In our case, as with typical entrepreneurial firms, we partners had opinions. It was only when we introduced professional independent directors that we were able to establish a structure guided by terms of reference, work plans, committee mandates and agenda management. It took some time but once established, we achieved our goal of having sustainable governance based not on the individuals around the table, but more so the rigour of a system that creates a collective mind with diverse perspectives that can manage the unavoidable biases of management owners.
One benefit of this structured approach is that it can contribute to employee engagement by creating a “tone at the top” system of integrity and trust. With a board that is clear it represents all of the employee owners as well as the interests of the company itself, leadership is clearly accountable and trust is cultivated which in turn, contributes to employee engagement.
Executive team participation is another key. Some would argue that the board is exclusive counsel for the CEO. In our experience, however, we believe that for an ESOP company the full value from your external directors can be achieved if your senior leaders have an opportunity to interact with and respond to the thought process of trained directors. Unless your business is quite large, most senior leaders are operationally oriented and interaction with the board will help them understand the value of good governance, extract value from the board and as a consequence, enjoy the development of their executive and strategic thinking skills.
With both Chandos and a number of other Small and Medium Enterprises we have worked with, we have found that building and managing a properly conceived board of directors can be invaluable for an organization maneuvering through change and/or seeking corporate sustainability. Diverse and independent perspectives provided from a well functioning board can provide a degree of enterprise risk management and strategic value creation that is simply not available to organizations relying solely on their own internal perspectives.
Tom Redl is the CEO of Chandos Construction, an employee owned company. He holds an ICD.D designation from the Institute of Corporate Directors and is a faculty member of the University of Alberta as instructing in the ICD Director Education Program as well as the Governance Program for Small and Medium Enterprises. He has advised and supported a number of company owners in their transitions to employee share ownership programs.