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Column

Gary Sutton

The Danger of Overqualified Directors

They looked impressive in the prospectus, but they didn’t know what was happening on our street.

By Gary Sutton

My superstar board wiped out the shareholders. But as chairman and CEO, blame me.

The startup value of our business was barely over $1 million. Within a year, new investors priced it up to $8 million. Year three hit $12 million, then $60 million, and by our fifth year a couple of blue-chip outfits asked to wire $20 million to us, unsolicited but accepted, for a mere 8% of our stock. Not bad.

Investment bankers swooped in, suggesting it was time for the IPO. No surprise there. (My barber always believes I need a haircut. The only differences between barbers and investment bankers is the amount, and that my barber doesn’t wear designer suspenders.)

We picked three top-bracket underwriters who agreed to split the deal. World class directors seemed appropriate, so the early investors dropped off the board, allowing us to recruit fancier resumes. This, of course, also let those early investors sell shares after the IPO, without that being called insider trading.

But one early investor, with little else to do, pleaded to stay on the board. I agreed. That was mistake number one.

Among the new directors were the CEO of Europe’s fastest-growing telecom, the chairman of a multibillion-dollar retail chain, a leading business intellect, the founder of a technology business that was acquired in its second year of life for nearly a billion dollars, and the chairman of a publicly held data business. Their IQs probably ranged 50 points above mine.

Perfect? Nope. This group was mistake number two. An overqualified board, yet a group that looked wonderful in a prospectus.

Just as we signed the last board member, our market died. It was catastrophic short-term, unpredictable, and suddenly business looked ugly. Fortunately, this happened before going public. One director resigned instantly. I sprang into frantic action. It looked serious enough to me that a complete redirection -- and the firing of all highly paid employees, including myself -- seemed appropriate. Kicking myself out felt like the right thing to do since, whether the reversal was predictable or not, I was paid to know those things.

But I screwed it up. I thought through a recovery plan but failed to sell it coherently to the directors. No time. But this new board didn’t know me well, didn’t like surprises, and had signed on for a smooth cruise, not a thrill ride. Operating on instinct had worked well in the earlier years, and those prior directors enjoyed watching it.

Still, we had no debt. We had cash to last for years, no matter what the markets did. In fact, we had money for decades with a significantly reduced operation, so there was plenty of time to redirect the business. The change could be fast and risky or slow and safer.

I hired a search firm to find the new type of CEO who I thought might fit the changes needed. Besides, I was approaching Social Security age, and this sprint had turned into a marathon.

Meanwhile, my board scattered like a covey of quail. The one holdover director, an unemployed fellow who had always lobbied for more involvement, jumped at the chance to oversee the search.

Mistakes were:

1. Activity suddenly became wild and unplanned. This is normal when a market tanks. However, I let communications to the board slip, at a time when they needed more feedback. I felt too busy. This is an understandable error. It is also a stupid error. Especially with a new group of directors who have no history for reassurance.

2. Allowing a weak director to stay on a board is always wrong. That’s the person who is most likely to cause trouble when things get wobbly. And things get wobbly regularly. You cannot easily get rid of a director when business is troubled, so do it when business is healthy.

3. Never recruit overqualified directors. When you’re running an apple cart, ask the local grocer and meter maid to advise you. They know what’s going on. Warren Buffett, Lee Iaccoca, or Jack Welch don’t have a clue about what’s happening on your street. If you attract them as advisers, they’ll also always be distracted by events elsewhere that matter more to them.

So what happened to our fledgling business? The weak director ran the CEO search. I left after the first hire, feeling the new CEO shouldn’t have a prior leader looking over his shoulder. He didn’t work out anyway. Three in a row came and went. Over the next couple of years all the new directors managed to resign, each for differently expressed reasons. The business convulsed and the cash vaporized. The sole holdover director stayed active, having nothing else to do, until the business died. The original investors never re-engaged, all feeling that surely this star-studded board would be doing the right things, which was wrong. But those resumes were impressive.

The largest individual shareholder, me, lost his entire investment. But I learned some stuff. Just when you’re the busiest is also the most important time to update the board, difficult as that feels. I learned that removing weak directors is critical, and best done during good times. And I learned that overqualified directors are a liability.

Gary Sutton has served as a CEO and director of a number of public and private companies in his career as a specialist in startups and turnarounds. He is the author of The Six-Month Fix: Adventures in Rescuing Failing Companies, published by John Wiley & Sons (http://www.sixmonthfix.com). The author can be contacted at garysutton@san.rr.com.