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Column

Gary Sutton
Director
Author, Corporate Canaries

When to Fold ’Em
There are times when the best thing a director can do is stay out of the way ... or take a hike.

Too many directors stay too long.

I’m into a second three-year term on a public board, and will not stand for re-election. While Ernst & Young and the SEC say I’m an outsider, I disagree. After six years, I feel like an insider, regardless of legal definitions, and it’s healthier if somebody with a fresh set of eyeballs and apprehensions steps up.

How’s the business doing? When I joined, this outfit was private, had missed a couple payrolls, and was losing money. Today it’s way beyond a billion-dollar market cap and sits atop hundreds of millions in cash with zero debt. Its share of market is growing. The market itself is growing. Earnings go up 25% every quarter and the cash beats that. Why leave?

Maybe somebody new will spot a potential problem that I can’t see, being so relaxed by quarter after quarter of double-digit growth, year after year. And there’s another reason. It gets boring.

There are times and situations when the best thing a director can do is stay out of the way -- not out of touch but observant, questioning yet passive. Any director who becomes so thrilled by great performance that he or she finds ways to spend even more time getting involved is a bad director, one who needs more success elsewhere. Verify results, sure. Meddle, not.

This business sailed through SOX without a hitch, files early, and has been ranked as a top company (under some criteria) by every major business publication. So it’s time I leave and let someone new ask their dumb questions, since once in a while those dumb questions uncover something fundamentally wrong.

I’m leaving another board at the same time, but that one’s private and the reasons are different. It’s a startup, almost reaching a positive cash flow, and has a unique technology that could be knocked off by a bigger competitor if we become successful enough that they notice. Interesting challenge.

But when I joined, all the other directors were engineers, most from MIT or Caltech. I’m highly confident that the gap between our IQs was statistically significant. Yet the board’s grasp of and comfort with marketing and finance was superficial, and I could contribute.

Later investors joined the board, bringing understanding of the numbers that matched mine. And a marketing person who knows the industry better than I recently joined the board, making me redundant. Time to go again.

So many people ask, “How do I get on a board?” That’s bothersome. The question itself reveals that the candidate doesn’t understand the thin veneer of board status is overwhelmed by the legal exposures. Insured against, yes, but each hour spent with lawyers is time without joy and lost forever. And the SOX drudgery and proofreading of 10Qs sharpens the dullest parts of your brain while the relevant cells lie fallow.

It’s a job, not an honor. And you’ve got to know when to fold ’em.

Gary Sutton has been a CEO and director of a number of private and public companies in his career as a specialist in startups and turnarounds. He writes the “Sutton’s Laws” column for Directors & Boards. His latest book is "Corporate Canaries: Avoid Business Disasters with a Coalminer’s Secrets" (Nelson Business, October 2005). He can be contacted at garysutton@san.rr.com, or visit his blog at http://blog.coughingcanaries.com.