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Even the most savvy entrepreneurs have their limitations.
They start out in familiar territory, doing what they do best, until the initial wave of success carries the company and its leadership team to uncharted waters. The great unknown can be a daunting challenge. Should they go public? Should they expand to new lines of business? Should they acquire a competitor? The array of potentially life-and-death decisions can seem endless.
“Many things are new even to management with great backgrounds,” says Don Kendall, Founder of Kenmont Capital, a Houston-based investment firm. “No management team knows everything.”
To fill that gap, some privately held direct selling companies lean heavily on boards of directors, including Dallas-based Stream, where Kendall is a board member. Unlike their publicly held counterparts, private companies voluntarily choose to have a board of outsiders help with everything from hiring C-level executives to the overall strategy of the company. These boards aren’t federally regulated; as a result, they can appear enigmatic to the business community at large. To gain more insight into this powerful tool for assisting private companies with corporate governance, Direct Selling News reached out to company executives, board members and other experts. Their input revealed the high value of having a strong, diverse sounding board of outsiders that regularly engages and challenges company management.
Boards in Action
Stream has had a board of directors since inception 10 years ago. CEO and President Mark “Bouncer” Schiro and CFO Renee Hornbaker are the two company representatives on the board. They sit alongside Kendall; Steve Glasgow, a partner at Austin-based RAM Investment; and Rob Snyder, Managing Director of Dallas-based SnyderCapital Corp. and the original founder of Stream. The company posted net sales of $918 million in 2014, up nearly 6 percent from the previous year, ranking it the 9th largest direct selling company in North America, according to Direct Selling News research.
Stream’s board played an important role in directing a new component of its growth strategy: venturing into the hyper-competitive wireless industry, selling phones and wireless plans. Unlike retail electricity sales, which are restricted to deregulated markets, wireless services can be sold practically anywhere, opening up new opportunities for the company and its independent contractors. But this also was a calculated risk with a million different possibilities. Should the company outsource aspects of the new business with which its team is less familiar or develop the expertise in-house? How many people should Stream hire? Is now the best time to do this? The board provided key counsel throughout the process.
“Any new business you go into takes a capital cost and a people cost, and obviously what you want to do is make sure it makes sense and vet it at the board level,” says Kendall, who was already an investor in Stream as an individual and through his own company when he joined the board five years ago. He brought years of experience from running a billion-dollar power generating company in addition to his investment experience. “Where could it go wrong? Anticipate things that could be more difficult.”
Stream’s board also was involved when the company hired Hornbaker in 2011. Corporate governance is a point of passion for Hornbaker, who currently serves as President of the Dallas chapter of the National Association of Corporate Directors.
“In many ways, we try to act like more of a public company board,” she says. “If the company should ever desire to go public at some point in the future we would already have the process in place and it would be a more seamless transition.”
All in the Family?
Many private companies in the direct selling industry are run by a small group of people, even family members. That’s where companies can run into trouble.
“You begin to be guilty of intellectual incest,” said Stan Fredrick, who has owned several direct-selling companies and is a past chairman of the U.S. Direct Selling Association. “You’re only thinking and rethinking the same thoughts. You need people who have a better perspective.”
Fredrick has extensive experience in the boardroom. In addition to having outside board members work with some of his privately held direct selling companies, he also currently serves as Chairman of the Board at publicly traded Mannatech Inc., a nutrition product company in which he is a significant shareholder. Outside direct selling, Fredrick also was a founding board member of the Professional Bank in Dallas, a boutique bank, and Co-Founder of the Texas-based commercial holding company Irving National Bank Shares.
Experts in finance, legal issues, information technology and compliance, not to mention ethics and public image, are needed for success in the marketplace today. Outside boards of directors can provide an additional level of corporate governance by looking at financial results, approving the budget and evaluating performance of the company on behalf of investors. For less-established companies, they also can provide new contacts and references that the management team couldn’t otherwise access. For more established businesses, a board of directors may assist management in positioning a company for an initial public stock offering, as an attractive merger partner or simply to help guide the team through a period of explosive growth.
“I think the private companies, they don’t have anybody looking over their shoulder. …If they have some outside board members who can give them straight advice, they’ll be better off,” Fredrick says.
Building a Board
No one tracks data on the boards of privately held direct selling companies, but a look at the boards of directors for publicly traded direct selling companies provides some insight into the diverse approaches available when creating a board. Equilar Inc., an executive compensation and corporate governance data firm, analyzed the most recent proxy statements for 19 direct selling companies. Among the companies included in the research, board size ranged from two directors at Youngevity International and Natural Health Trends to 15 directors at Herbalife. Total board compensation also spanned a wide range, from zero at ForeverGreen Worldwide to $7.7 million at Herbalife, with many board members receiving compensation through a mix of cash fees, stock and option awards, and other pay.
Just like their publicly traded brethren, private companies need objective viewpoints, people who will really challenge management based on their business acumen, not whether it helps or hurts their investment. They make decisions that they believe are best for the company as a whole.
“You want a variance of opinion,” says Equilar Director of Content Dan Marcec. “You don’t want people all from the same background, all from the same line of thinking. I think that objective viewpoint is very important to help management look at their decisions from an external point of view.”
These board members can help private companies make the leap for an IPO or acquisition or even a possible takeover, Marcec says.
Though independent board members should be compensated for their work and have their travel expenses covered, establishing and maintaining a good board doesn’t have to be overly expensive. Quality business experts can cost as little as $1,000 a meeting, Fredrick says. Wineshop at Home, a private direct-sale company owned by Fredrick and his family, has one outside board member. That board member is an expert in compliance, a top issue facing direct selling companies today. But a formal board of directors isn’t the only option. Outside advisers also can be brought in with specific expertise and no ties to the company. In addition to its board of directors, Wineshop at Home uses an advisory board to provide guidance on legal and finance matters.
Thirty-One Gifts, a Columbus, Ohio-based women’s apparel and accessory company, utilizes a seven-member board of outside advisors. The privately held direct selling company was founded in 2003 and has grown increasingly complex in recent years, today boasting more than 100,000 sales consultants. In 2012, the company reached a fork in the road as it weighed a possible international expansion. That’s when management decided to add an advisory board that included expertise from a wide range of disciplines.
“We felt like it was the right time in our life cycle that we wanted to have seasoned executives to help us,” CFO Jon Snyder said. The advisory board has provided guidance for the company’s expansion into Canada and helped Thirty-One Gifts make its first acquisition. Unlike a traditional board, these advisors don’t have voting rights and can’t make decisions for the company. They are compensated for their time and have their travel costs reimbursed.
“We leverage our advisors quite a bit for strategic planning and business planning,” Snyder says. “They are really a sounding board for the CEO.”
Boards of directors play an invaluable role as outside observers working on behalf of investors or the company itself. Veterans of the direct selling industry have shown the benefits of enlisting the help of objective, independent voices for your company’s most important decisions. Outsiders aren’t there to make friends. They bring fresh perspective that stimulates new thought, challenges the status quo and takes on bad corporate governance. The return on investment could come from higher profits, avoiding devastating mistakes or growing the company in ways you never dreamed possible.
“Today, when there are so many challenges to our form of business model you want to make sure that your structure and the actual implementation of issues passes an outsider’s evaluation,” Fredrick says.