This article was originally published in the June edition of NZBusiness Magazine.
David Irving, co-founder of The Icehouse, draws on his considerable governance experience to highlight how owner manager partnerships with external advisors can boost business performance.
Sometimes asking a single question can have a profound impact. So it was when Peter Lucas, former CEO of Heinz Watties, posed a question to owner manager Aaron Jay, during the final block of The Icehouse Owner Manager Programme.
“Are you a contracting company in viticulture or are you a labour supply company in viticulture?” Peter had asked.
What Peter was actually asking Aaron was “What are you really good at?” and the question clearly resonated. Aaron wrote to me some time later with the conclusion his business was, indeed, a ‘labour supply company’. This newfound definition helped him grow a labour force capability that he began contracting out. He had also renamed and reorganised the company and expanded its customer base from Marlborough to Canterbury. He was now getting in touch for advice on how he might grow into Australia.
Most owner managers, however, would never think to ask the question that Peter directed at Aaron. They’re bogged down in the day-to-day, doing what they’re good at: buying, making, serving and selling. The good ones, who are canny with it, make a buck, but they pay themselves last and take risks that most of us would find hard to bear. They also employ most of the country’s workforce and are the backbone of the economy.
And unlike most of us they are often alone in their job, devoid of corporate resources. Instead they have their staff, life partner, accountant, lawyer and maybe a colleague or two; but the advice each of these people gives is compromised by virtue of the relationship they have with the owner manager.
In light of this, I believe owner managers can reap considerable benefits by taking on outside assistance, particularly by getting the ‘right’ person in the role of company chair.
This view of governance for the owner manager has quite a different origin from the governance we associate with bigger and particularly listed companies. In their case the need for a board derives from the separation of owner and manager, hence the need for a board to oversee the owner’s investment. But in our small and medium enterprise (SME), the owner and manager is one person.
I’ve spent considerable time with owner managers since we started The Icehouse in 2001 and I know a huge number of questions play on their minds about the business and their role in it, such as: We are going gangbusters, but why can I just not keep up? I could do well in Australia but how will I succeed when there have been so many Kiwi failures? Am I good enough to run the company? How could I do better? How do I go about succession/exit?
Despite these thoughts playing on their minds, owner managers are often ignorant that they are actually questions to be asked, and even answered. They relate to points beyond their experience, and this is a significant problem, because such questions relate to matters of real consequence.
It reminds me of the story of two owner managers who came to see me after spending ten years inventing a new food machine capability. They had sold the rights to the technology to a multinational for, what they believed to be, use in Australasia – while the multinational was publicising its rights to use the technology worldwide. I read the sale of rights agreement and asked an experienced commercial lawyer to take a look. He confirmed my view: the pair had sold the worldwide rights for an Australasian price.
Who had negotiated the arrangement on their behalf? Their local provincial family lawyer. Guess who the multinational used? A highly experienced international commercial lawyer.
The inventors knew how to invent a technology, but they didn’t know how to negotiate with a multinational. Why would they? They had never done it before. They knew and trusted their local lawyer. But as I often say, general practitioners don’t do surgery.
Advice from the wise
To help them negotiate through situations like these – where owner managers don’t know what they don’t know – I believe a wise, external advisor can offer the best support. Indeed, it is my view that owner managers working with this type of external advisor hold the greatest opportunity to lift business performance.
Wisdom is about having ‘been there, done that’. But a wise advisor must also have a deep understanding of the industry the business is in, a high awareness of the capability of the business and owner manager, and, most importantly, be independent and not compromised by their relationship with the owner manager.
The beauty of a wise outsider is they will recognise circumstances the owner manager cannot see, let alone know how to deal with.
It’s not always easy for owner managers to put their trust in an outsider and they are often put off when the bank suggests a board should include independent outsiders. Or, worse still, should they progress to appoint a board, they then surround themselves with directors who toe the line, are compromised by their need for the fee or by their pride in the appointment. The result is a patsy board; worse than not having one at all.
It takes confidence to lay yourself open to a board appointment of an independent outsider. Quite gutsy when you think about it.
And that’s not to say owner managers aren’t seeking advice. In recent years professional firms and banks have undertaken surveys to better understand the advice being given to owner managers In New Zealand. The results indicate between 60 and 80 percent of owner managers seek advice, and from a wide range of people including staff, accountants, lawyers, mentors, coaches, bankers and even directors. Using businesses with turnover between $20 million and $40 million as a proxy, 79 percent of owner managers sought advice for budgets, 57 percent for business planning, 43 percent for longer term planning, 35 percent for people management and 12 percent for succession. These results are pleasing, but the questions remain: are owner managers really dealing with the game changing issues and do their advisors fall into the ‘wise’ category?
A look at trends among the boards of larger businesses can give us an insight into the value good governance can bring — findings that I believe are also pertinent to smaller firms.
A recent McKinsey global survey found boards of directors are adopting a more strategic approach than they were in 2011. Directors have better knowledge of their companies and greater collaboration with senior executives. High impact boards evaluate resource decisions, debate strategic alternatives and assess management understanding of value creation more often. They are also more likely to ensure there are organisational resources in place to deliver the strategy.
Phil Rosenzweig, director of the IMD Executive MBA Program me, emphasises the importance of strategy in his writings (The halo effect and other managerial delusions. McKinsey Quarterly. February, 2007). He identifies that in a competitive market everyone who survives has to be able to execute, so it is near impossible to gain advantage through execution alone. Strategy is what differentiates, therefore a means for assessing and developing strategy is vital.
Owner managers can often recoil at the term ‘governance’, but wise counsel does not have to follow traditional models. In my own experience, I tend to move from outside to inside the tent; from advisor to chair. When I join as chair I commit to the company for five years and set about thinking through strategy and understanding the capability required to deliver on it with a particular focus on the senior management team, the CEO (owner manager) and the board itself.
The chair is most obviously at their best when they are very familiar with the industry and business, and a good one will also bring networks – creating connections that save a business time and build confidence in new relationships. They can also be crucial in guiding an SME as it transitions through its various stages of growth, helping with everything from instituting business plans and proper people management processes to writing up papers on key business matters and ensuring there are informative financial reports.
So how do you know when the relationship between owner manager and chair is really working? There are several key indicators:
- It’s a partnership based on high performance expectations and trust.
- There’s an alignment of purpose, commitment and expectation between the chair and owner manager and throughout the firm itself.
- There’s a great sense of capability building either with the owner manager fully engaged or the firm independent of the owner manager.
- The business and matters to address are capably within the chair’s realm of experience.
- There’s a rich network of complementary knowledge gained from the chair’s years of experience that is typically unknown to the owner manager.
- It’s played out in a way that those involved cannot distinguish between the challenge of the work and the joy of play where minutes stand still and yet fly by.
What I like about these characteristics is they are relevant in a business of any stage and size. Early stage entrepreneurs and smaller SME owner managers often shun the idea of governance, but if they saw it as a source of wise, independent advice given with empathy, rather than a burden, they may be more receptive. Independent input is not the preserve of large companies.
My role as chairman of Prolife Foods, a privately owned company, illustrates much of what might be expected when these elements all come together. In the six years I’ve chaired the company our achievements have included shifting from being the very capable fresh food supplier of a single customer to being a truly capable fast moving consumer goods company. While moving the company’s market focus from New Zealand to Australasia, revenue has increased from $35 million to $150 million with plans to grow beyond $250 million, while profits have more than trebled.
The matter of SME performance is largely given lip service, but having had a window into the world of so many of them, I believe they really are our understated heroes. They deserve assistance in areas where they lack experience and, for their part, need to recognise that they do not always know what they do not know.
A curious mind will help them on their journey. And let that knowledge lead them to a wise person who will become their trusted partner.
David Irving is co-founder of The Icehouse, an advisor and educator to owner managers, and co-author of Changing Gears: How to take your Kiwi business from the kitchen table to the Board room. He would like to acknowledge the following people who helped with this article: Dr Brent Wheeler, Executive Chairman, The Boardroom Practice, Dr Darl Kolb, Professor of Connectivity, University of Auckland Business School, John Bongard retired CEO Fisher and Paykel, Dr Bernie Crosby, owner and founder Prolife Foods, Rex Howe, regular panellist The Icehouse Owner Manager Programme, Andy Hamilton, CEO, The Icehouse, “plus various senior managers of the BNZ and staff of the Institute of Directors”.