Although many closely held construction companies are successful, they could become even more successful if they would step outside the comfortable confines of the family circle and seek advice from outsiders. In many family-owned businesses, relatives hold primary decision-making positions. In fact, it's not uncommon for family members to hold all senior management positions on the board of directors. Unfortunately, such loyalty can often prevent higher profits.
When examining the nation's best contracting companies-including some closely held companies-it is clear that a very different mindset is at work. At these companies, the push is always focused on stockpiling ideas from non-family businessmen and women. These contractors have learned that the perspectives and opinions of others can point the way to higher profits.
Successful construction company owners seek outside guidance in a variety of ways. One of the most effective and time-tested ways is through an advisory board of directors. By establishing such a board, company owners acknowledge that managing a business in this rapidly changing environment requires the ability to recognize a need for change. These forward-thinking owners realize their workdays are monopolized by day-to-day operations and existing strategic considerations. Little time is left for creative thinking. Other family members in management positions are not always in a position to provide creative input because they often defer long-term decision-making responsibilities to the most senior family member. That's when having an advisory board of directors with a variety of knowledge and experience can add value to a contractor's business.
An advisory board of directors is a collection of professionals who may or may not be business associates but are not family members. Actually, the concept began as far back as the 19th century when President Andrew Jackson met regularly with an unofficial, intimate group of advisers that came to be known as his "Kitchen Cabinet." This concept of relying on advisers is just as valid today and offers benefits to private construction companies.
Like Jackson's kitchen gatherings, the meetings don't have to be formal. But there should be some basic ground rules. The group should meet on a regular basis-say, once every quarter-and should convene for two or three hours. Advisers shouldn't be required to remain on the board for an extended time but should commit for a fixed period. Advisers typically serve at least a year. Company owners should keep the board diverse to ensure a variety of thoughts and suggestions.
Advisory directors offer important advantages over strictly family-dominated boards. Outside advisers do not have to recognize family politics, ambitions or rivalries. They don't have to consider family history when offering critical advice, and they bring fresh ideas and new approaches to problem solving. Most of the time these advisers function more like consultants offering advice and support on a wide range of issues affecting the company.
It is helpful if board members have some knowledge of the construction industry to minimize the learning curve. However, candidates shouldn't be excluded just because they have never worked with a contractor. Remember, you are looking for new ideas. Complimentary industries such as real estate development and banking can provide insight not readily available inside the company. The best advisers tend to be individuals with years of experience who have run successful companies.
The board should not include the company's regular bonding agent, accountant and attorney. These individuals have a vested interest in the relationship that would hinder their objectivity. Instead, owners could look for assistance from professionals such as marketing directors, technology specialists and human resources consultants. Also, it might be beneficial to consider an economics professor from the neighboring college. Owners may consider retired executives from other industries who have dealt with labor issues, rising material costs or have managed a business through a recession. Finding the right mix of advisers may take some effort, but the benefits far outweigh the time it takes to assemble the group.
Although advisers are not always paid, it often makes sense to compensate them for their time and effort. It demonstrates the company's commitment to the position and is likely to bring out greater effort from all involved. Because private company advisers do not serve the same fiduciary role as individuals serving on the board of a public company, the compensation would obviously be less. But contractors should consider paying an amount that is viewed as more than nominal.
How exactly does a privately-owned company know when it's time to go outside and create an advisory board? The fact is, it's always time to have such a board. Whether a company is growing rapidly and gaining market share, or facing declining revenues and a looming recession, establishing an outside advisory board can add value and a perspective not found within the family group. Most forward-thinking private companies develop an advisory board before negative events begin; they understand that advisors can help them anticipate and prepare for changing economic conditions.
It's also important to remember that advisers should not operate in a vacuum. Once they agree to serve on the board, advisers should be able to meet with the chief executive officer, chief operating officer and chief financial officer on a periodic basis if needed. These key decision makers within the company can provide valuable information and insight that will assist the advisory board members in their roles.
It's important to remember that simply having an advisory board may bring a higher level of prestige, but prestige alone doesn't improve profits. Owners must truly listen to their advisers' suggestions and be willing to consider and evaluate any suggested changes. The owner is not giving up control but is instead adding a valuable resource to the company.
Mark Lund, CPA, CCIFP, is partner-in-charge of construction industry services at Weaver and Tidwell (www.weaverandtidwell.com), the Southwest's largest independent accounting firm. The company has offices in Houston, Dallas and Fort Worth. Lund can be reached in Houston at 713-297-6907.
