As an independent sponsor with a lean team, leveraging your Board for best in class operational and industry expertise can be the difference between an average return and a home run.

Key Tips and topics:

• Advisory Board vs a formal Board
• AI tools for driving efficiency in Board deck preparation
• Creating actionable meetings that drive next steps
• Board compensation and springing Board rights

From Founder-led to PE Backed ... a Learning Curve

When it comes to Board construction, Heather D'Agosta, a PE Backed CEO of Goodfeet Midwest and her backer Tyson Smith of Tecum agreed that an excellent starting point on the journey is to ensure your board structure has a diversity of the industry, financial and operational expertise you will need to overcome inevitable challenges and accelerate growth.

For example, Heather’s board has a Harvard professor who specializes in management best practices. They recognized that taking the company brand from founder-led to PE-backed can be difficult, so that management expertise helps to ensure a smooth transition and fewer distractions allowing the team to focus on execution.

Equally as important, Heather also has CEOs from adjacent industries serving on the Board to help with strategy and execution.

Build a Board with operational, industry and financial expertise that you can leverage to overcome challenges.

As for the role of the Founder in the newco, they will likely sit in on Board meetings at times but not always as board members, to help offer an historical perspective.

Tyson shared that he is typically a board observer on his portcos. Lane Wiggers of Argosy explained that sometimes people who are sub-debt lenders don’t necessarily want board seats but do want observer rights so they can remain in tune with the company’s performance. He also shared that it’s a good practice to have boards consist of odd numbers for voting purposes, usually about five people including the independent sponsor, past founder and/or investors. Although if key decisions are coming down to split votes on your board you have bigger problems to manage.

The Value of An Advisory Board vs Formal Board

Advisory Boards are often actually more additive to strategy and the direction of the company than fiduciary boards, according to Lane, so don’t underestimate their value to your company’s growth.

Advisory Boards should be small, often comprised of three-to-five experienced industry experts that bring more than just financial acumen to the table. This is ideal for some who don’t want the liability of formal board seats, but are closer to retirement age yet still have a passion for the industry and want to stay engaged.

Tips for Making Meetings Actionable & Productive

Heather sends out board decks a couple of days in advance. The consensus across the panel was that financials shouldn’t bog meetings down. It’s much more useful to the management team to quickly get into the strategic thinking in meetings. Lane said that once a year he’ll have the meeting at his offices so the management team can meet the investment team – the analysts and partners the team has been working with. That helps with relationship building.

In terms of attendance, Heather likes to have her entire management team attend meetings and present on portions of the deck to give them experience working with the board. They also prepare questions in advance to ask the board.

Lane noted that management teams often complain about the time they spend preparing the board deck and offered AI tools like Gamma and Zeck to help with deck preparation, especially for independent sponsors who often don’t have a support team.

Financials shouldn’t bog meetings down. It’s much more useful to management team to quickly get into the strategic thinking

At this end of the market, meetings are generally informal – there aren’t usually motions or usage of Roberts Rules of Order. Minutes are important to take for legal reasons, but oftentimes less is more.  That said, it’s essential to get them on directors’ calendars early, so as soon as the deal closes get quarterly meetings scheduled.

Lane shared that he has a board run by a two-star Marine General who adds a last slide to every slide deck with blank lines. Every time there’s a follow-up that needs to be done, he adds it to the slide, and at the end of the meeting they review the slide and everyone has their marching orders.

There’s Nothing More Frustrating…

Heather stated that many CEOs don’t get a lot of strategic value from their board meetings, and that’s a problem.

As a management team, you don’t want to spend the majority of a meeting getting caught up in the financials. If you have a 24-page deck and the juicy stuff is at the end and everyone is too tired and there’s little time left to go over the good stuff, that’s frustrating for the management team. If you know your Board wants to dive into financials, it can make more sense to break the financials out in a pre-call or separate meeting.

Tyson noted that the best meetings are ones with a great executive summary slide that you can basically run the whole meeting from. Max also noted that this is why he likes to have sector luminaries on his board who can really delve into strategy, but recognized that, just like the best athletes don’t always make the best coaches, sometimes the best executives don’t make the best advisors and board members.

Max added that he asks board members to read the financials in advance to keep meetings forward-focused, and that he encourages investors to be collaborative. You should aim to build confidence in the management team by politely asking probing questions and being collaborative.

Board Expectations and Compensation

There’s a different level of risk being on a private versus public company board. Private company board members are generally compensated between $25,000 and $50,000 according to Lane, and are expected to attend all meetings and ad-hoc calls. He added that he calibrates off the CEO equity for board members. If the CEO is making less than a board member who attends four meetings a year, that can be dis-incentivizing. In other situations, there are also ample unpaid board members in this segment of the market.

Either way, Board seats are usually held through the lifecycle of the investment – there is little turnover on the board and it is up to the CEO to develop and foster those board relationships through individual calls and meetings.

Handcuffs … And The Fine Print

Independent sponsors looking for control over a deal will have to get used to being handcuffed at times by the board – whether they have control or not there are still sacred rights to work through that can impede decision-making and even control. As Tyson said, if the deal is going well, you never even open the board governance documents. But there are rights Boards can have depending on the legal language to affect decisions and even take over control.

Springing board rights is something independent sponsors need to be aware of, as it allows equity providers to add members to the board in order to gain more control.

Conversely, as a minority equity holder, you don’t want to hear that the independent sponsor is learning something in a board meeting at the same time you are. They expect more from their management fees!

Getting Real Impact From Your Board

Ultimately, the focus should be on getting real strategic impact from your Boards.

Aim to move past the financials and leverage the skills of the board to add insight and impactful ideas that the management team can use to grow the business. That means selecting a diverse group of board members who can offer a wide array of needed skills and experiences and creating a meeting plan that allows for real strategic, two-way conversation.

There is a lot of untapped potential in many board meetings that, if addressed, can really aid in the growth of the companies they are there to advise.

 

This article summarizes an engaging discussion on advisory & fiduciary board management and best practices from seasoned investors and operators with Tyson Smith of Tecum Capital, Heather D'Agosta CEO of Goodfeet Midwest, Max Dezara of Akoya Capital, and Lane Wiggers of Argosy Capital.

For more information on the Independent Sponsor Forum visit: https://sbia.org/independent-sponsor-forum/

Author: Stephanie McAlaine, Executive Director, Independent Sponsor Forum