Role of Independent Directors
As business owners, most of you are familiar with the typical top to bottom governance structure for a business:
I would guess that most of you follow this structure in your business, just like the publicly-traded companies. But the difference between your dealership and a publicly-traded company is that most dealerships have exactly the same people in all three categories. This is a significant difference – if the same people fill all roles, you lose the potential benefits of the checks and balances involved in this business structure and a typical consequence is that the dealership’s board of directors is left with no real function. Instead, the owners make all key decisions and the management team implements them through their day-to-day jobs.
This model is gradually shifting as the pace of succession planning within dealerships continues to accelerate. Many of you have seen this play out with the hiring of a non-family member(s) in key management. But an overlooked change that can add a lot of value to the organization without dramatic day-to-day change or financial consequences is the use of one or more independent people to serve on your board of directors.
What is the Role of an Independent Director?
The first role of an Independent Director comes straight from the title – independent. Board members are always supposed to look out for the best interests of the dealership (vs. the owners or the employees). However, when board members are also owners and/or employees, it is incredibly difficult to expect them to check these other interests at the door. As a result, the easiest way to help the board focus on its duty to look after the dealership is to bring in an Independent Director that is NOT family, NOT an employee and NOT a key customer/supplier.
The second role of an Independent Director is to help the entire board focus and execute on the traditional board of director functions. These include the following:
- provide strategic direction and vision for the dealership with a focus on longer-term strategies
- oversee the CEO/President, including performance evaluation and growth and development
- monitor organizational succession planning
Independent Directors should also be selected to help bring missing expertise or other needs to your dealership. This will be different for each dealer (and can change over time for a dealer) but skillsets like the following should also be considered to maximize the value of an Independent Director:
- industry knowledge
- relevant experience, e.g., accounting/finance; mergers and acquisition; organizational development
- expertise in complementary industries or industries with similar business models
When is the Right Time to Consider an Independent Director?
As long as you think an Independent Director can add value, there is no “right time.” But these types of decisions are typically made as part of succession-planning events like the following:
- mergers that create large shareholder groups from multiple families
- transitions involving multiple generations
- creation of ESOPs that require the use of Independent Directors
These types of situations are often trigger points for change in dealerships due to the closely held nature of the ownership groups involved. In these situations, Independent Directors often serve an important role as a buffer between generations to help take the “family” out of “family business decisions” and perhaps reduce stress on management that is not part of the family. Independent Directors help fulfill a similar role as a tiebreaker, reality check, or “us vs. them” buffer that can be important in helping multiple family groups come together successfully as part of a merger.
There are no set rules when it comes to adding Independent Directors to your dealership, but here are a few common topics that often come up when giving it consideration:
- Start Small. Adding even a single Independent Director can help change the culture of the organization. With most dealers, 1-2 Independent Director(s) will be most common, although some ESOPs require a majority of directors to be independent.
- Compensation. Independent Directors are compensated. Compensation is generally based on a per meeting fee or daily rate, but as dealerships get larger, I think that you’ll see more dealerships also look to forms of equity grants to help incentivize directors to improve the dealership’s value through a bigger upside directly tied to that increase.
- Change is Expected. Independent Directors serve because they are elected by the owners. As a result, they can be removed at any time and it is perfectly acceptable to replace board members if you don’t think they are adding enough value or if you think the dealership’s needs have changed and require a different skillset.
- Dealership Size. Independent Directors won’t break the bank, so there is no magic dealership size required. Although larger dealers have been the first to adopt this model, smaller dealers may get as much or more value out of Independent Directors that help them keep the focus on business decisions vs. family conflict.
Adding an Independent Director into your dealership’s organizational structure is something that should be thoughtfully planned, but it is one of the lowest-cost and least disruptive changes that can be made from an organizational standpoint. As a result, it is a step that most dealers should consider as they look toward maximizing long-term value in their organization.
Lance Formwalt is the leader of the Equipment Dealer Group at Seigfreid Bingham, P.C. The firm serves as legal counsel to Western Equipment Dealers Association and many individual equipment dealers and Lance also serves as an Independent Director for some equipment dealers. Lance may be contacted at email@example.com or 816-265-4106. Also see www.sb-kc.com. This article is intended to provide general recommendations and is not intended to be legal advice. You should always consult your attorney for advice unique to you and your business.