One of the most important recent trends is the accelerated interest and involvement of private equity investors in wholesale distribution. Stuart Mechlin's blog on mdm.com focuses on thinking differently by using a Private Equity Investor Framework. He recommends distributors think more like investors to add value to their businesses.
Corporate governance using advisory boards or boards of directors is a critical aspect of any private equity investor approach with their investments. These investors know that a board comprised of at least half outsiders brings measurable, qualitative impact to any investment they may participate in. The combination of owner, senior executive team and outside board members has been proven time and time again to be an advantage that creates additional value in the investment and subsequent higher returns.
I have been fortunate to be a participant in, leader of and executive reporting to some exceptional boards and leadership committees. Well-run boards have an impact!
There are many reasons why across verticals, geography, size and ownership type, many distributors are either reluctant to set up advisory boards or they hold onto mediocre ones:
- Fear of giving up control.
- Not comfortable with heightened accountability.
- The additional expense.
- More work: It’s another management job – assessing and selecting candidates; preparing and debriefing meetings; and other responsibilities.
- Owners are very skilled in so many things they do, but running boards is not usually one of them. They want to stick to what they do best.
- Redundancies. I have a network from my industry association, my marketing group, regional executive forum and my family. Aren't I getting everything I need from these groups?
The above are all valid objections.
But there is one reason to have a well-run board: Consistently better decision-making that yields additional value creation and more options for growth.
A significant number of our best-run distributors and of course those involved with private equity investments have seen these benefits in action. Investors in public companies also have great examples of the impact of well-run boards. And you have seen many good, successful firms not realize their full potential – in both growth and profitability – because they omit this very productive tool.
Well-run boards are like Rocky Balboa’s sparring partner Apollo Creed. Like Apollo, a seasoned professional in his own right, boards give you a workout – probing, jabbing, trying out new moves, validating current moves, showing things you may have missed – so the “champ” (that’s you) can win in the ring. (Winning defined: Create additional value and outcompete.)
Here’s how boards can help distributors make better decisions:
An outside point-of-view: Outside perspectives are critical. Owners should be told what they need to hear not what they want to hear. Include term limits to keep perspectives fresh.
Limited baggage: For your outsider members, their careers are not dependent on what they say on the board. For your inside members, the board forum is a higher and different calling than their internal day jobs. For family members, with some ownership and/or working in the firm, the board provides an unemotional sounding board.
You can't hide: The best board members care about the company they are associated with. They are professionals, and they are getting paid. On the other hand, they have other day jobs. This is true independence: They can walk out any time.
Additional expertise: These are invaluable resources for any firm that can complement the skills you already have, including strategic planning, finance, accounting, IT, industry knowledge, suppliers, acquisition expertise and more. They all bring rich gifts. Boards also bring a network of other experts that they know and have used that you may be able to rely on in the future.
Improved external stature: Whether it's your bank, your end-user customer, suppliers or your buying and marketing group, outside groups will see you in a different light when they know you rely on a board.
Improved internal stature: Nothing ups the game of your staff from senior executives to the warehouse floor than your employees knowing that you have a board and periodically having selected folks present to the board about their activities. A board also encourages the many voices, one message approach.
“Nose in, hands off” philosophy. The best boards are not there to run the business, they are there to generate and confirm good decision-making or to question poor choices. They provide oversight and counsel without disenfranchising the management team.
Confidential networking: In today's competitive environment, strategy has to be kept confidential. But that can limit getting the critical information you need to make good decisions. Board members are extremely useful in filling the gaps.
Accountability: Socrates said first and best: “The unexamined life is not worth living.” A well-run board is the mirror of truth that the best of us all strive for but don’t always achieve by ourselves.
OK, you say, I get the benefits. Again you will argue that you get all that from the extensive best practice networking you have in associations, marketing groups, regional executive committees, supplier relationships and so on. I have great accountants and lawyers to help me. I have experienced family members.
But here’s the difference: You are more isolated than you think. If you are a distributor owner-operator or senior executive you are paying attention to your business every minute of the day. And rightly so. Unfortunately it's a recipe for isolation and insulation that can be remedied to a large extent by relying on a board.
What’s more, networks in any form are not compensated. Professionals who are paid a fee are good, but it’s not the same. There is something about being compensated for independent advice and input – representing respect for the time and resources of that individual – that makes board advice, both in quality and quantity, better than anything else you can get.
Private equity investors know this. That’s why they almost never operate without a board.
There are a lot of resources out there on how to form an advisory board for your business. Here is one article from MDM on how two distributors approached the task: Creating a Board of Directors.
Understand the benefits and potential impact, as well as what an effective board looks like – whether contemplating forming a new board or upgrading an existing one – and good execution will follow.
Stuart Mechlin is a partner with Real Results Marketing. After 18 years in the wholesale distribution industry, including the role of senior vice president of Affiliated Distributors’ Industrial Supply Division, Mechlin is actively engaged in working with distributors, suppliers and technology companies on growth, marketing and profitability strategy/tactics. He is a member of several wholesale distribution company boards of directors. He has worked in such varied management roles as sales, finance, international J-Vs, purchasing and distribution for several public and privately held best-practice companies. Mechlin is also a member of MDM's Editorial Advisory Board. Contact him at [email protected] or connect at www.linkedin.com/in/stuartmechlin.