A case study of board focus at Methode Electronics Inc.
Methode Electronics Inc. is the story of a board that helped move the company from supplier to innovator by making technology expertise a priority. It is also the story of what it takes to create a strategic board in today’s environment.
It starts with the right people — a core of experienced executives who have a history of making good decisions, have the interpersonal skills that thrive in a team environment, and make the most of the group dynamics.
When William J. McGlinley, CEO/founder of Methode, died suddenly in 2001, board members asked Warren Batts to join them to help with governance. It was a smart move. Over a period of two decades, Batts led a number of large companies, including Tupperware Corp., Premark International, Dart & Kraft, Dart Industries, Mead Corp., and Triangle Corp. He served on the boards of Allstate, Sears Roebuck, Sprint, Cooper Industries, Harte Hanks Communications, Temple Inland, and International Minerals and Chemicals. And he teaches corporate governance at the University of Chicago Booth School of Business.
An experienced board member, Batts advises: Beware of the unexpected when you join a board. He joined the Methode board following conversations with the shareholding family who said they’d never sell the company. At his first board meeting, a family member announced the sale of the company, creating a host of issues for the board, including shareholder lawsuits. One group of shareholders charged that the board had sold too cheaply; another group argued the board demanded too high a price.
Technology expertise on the board was weak in early 2000 when Batts first joined the board. An equipment supplier to the automobile industry, Methode manufactured and sold fully mature products that were becoming commoditized. Continuing along that path would have spelled trouble. Fast forward a decade and a half, Methode Electronics is an innovator in developing and making electronic devices that make cars safer and run better.
At Methode, it is rocket science. “Methode is in the business of doing things that have never been done before, bringing new products to market,” says Batts. “Think about the product liability if that product doesn’t work. The average car on the road today is 11 years old — that’s the average! When you translate that into electronic components that will be installed in automobiles, it becomes a product that has to last 15 years. That’s really a demanding challenge to meet when you have something new. It makes it extremely valuable to have knowledgeable executives in the boardroom.”
Through a concerted effort executed over time, Methode has attracted directors with significant expertise in areas relevant to the company.
The board made technology expertise a priority. Given that the bulk of Methode’s manufacturing operations and 4,000 employees are overseas, selling to global automotive companies, expertise in international law and international sourcing and logistics expertise were desired competencies. So is a bias for innovation.
Methode, like other boards, begins with the basics in fulfilling its fiduciary responsibility in providing oversight. The financial expert category is filled by not just one but three former chief financial officers. “Two of the former CFOs have direct experience in the electronics end of the automotive industry,” observes Batts. Add to the mix a former general counsel for a major international oil company, incredibly helpful for a global company with more operations outside than inside the U.S. The board had two Ph.D. university professors doing research in the area where this company operates now and will in the future. (One Ph.D. has since left the board to start his own company.) Another director began his career in the Far East, specifically Japan and China, where Methode has operations. Another director was a CEO/CFO in the automotive industry. Not only is automotive the largest segment of the company’s current business but that particular director has automotive industry dealmaking experience.
Let’s start with the technology superstar that Methode recruited to its board — Darren Dawson. The dean of the College of Engineering at Kansas State University, Dawson has done research and won awards for his work in nonlinear control techniques for robotic manipulator systems and vision-based systems, an area where Methode is developing products.
Isabelle Goossen was recruited for her strategic insight, analysis and ability to interpret data along with a penchant for asking simple but penetrating questions about research: “If this is successful, what does it mean for Methode in the future?” She is a CFO in her day job (of the Chicago Symphony Orchestra) and adds gender diversity to the board.
Stephen Gates was general counsel for global giants ConocoPhillips and FMC, which helped refine his skills as an international lawyer.
As a serial entrepreneur, Christopher Hornung’s experience has been helpful to Methode as well as expertise regarding international sourcing and distribution.
Lawrence Skatoff was CFO at Borg Warner and Premark and VP of finance at Monsanto. In addition, Skatoff lived in Southeast Asia, where Methode has manufacturing facilities. He also knew the automotive supplier world through his experience at Borg Warner.
Walter Aspatore, a longtime chairman of a business-consulting firm, succeeded Batts as board chairman in 2012. Since Methode will grow in part from acquisitions, Aspatore’s dealmaking expertise is invaluable, enhanced by his experience as a consultant in manufacturing and technology as well as his work in private equity.
Expertise is one aspect of board strength, but how the board brings its experience to bear on the company’s strategy is another. With technology changing so rapidly, the Methode board created a technology committee to bring greater focus to developments and opportunities. Formally, the committee is comprised of four directors, but all board members are invited to attend. Most of them do to be “in the know.”
The technology committee is a relative newcomer to the corporate governance scene and its role is gradually evolving.
A typical technology committee agenda includes regular reviews of the company’s technology investments as well as the consideration of the company’s competitive position from a technology perspective. With a technology committee made up of well-informed outsiders, the directors can take a dispassionate and balanced view in its discussion with management of where the company stands in the industry playing field. Analysis of where the company has a competitive advantage and where the industry is going are also key topics for the committee.
For Methode, having an expert like Dawson leading the technology committee is a significant advantage. Acquisition of technology to augment or enhance the company’s existing technology portfolio is a regular discussion item. So too is developing the strategies and priorities for protecting the company’s intellectual property. Patented technologies are a valuable corporate asset to a company like Methode. In keeping with the board’s role in providing oversight, the technology committee can probe deeply into the company’s technology investments, impose financial discipline, and help management to prioritize and rank projects to better support the organization’s overall strategic direction.
At renowned technology investment firm Silver Lake, partner Egon Durban has famously observed: “By definition today, almost every company is a technology company. If companies don’t implement technology to run and generate business, they will die.”
Batts concurs: “Our directors have helped us make investments in emerging technologies, which has enabled us to grow the business.” He adds that Methode directors are knowledgeable about the company and help the company adapt “to ever-accelerating change in an increasingly uncertain operating environment that is being reshaped by new competitors, emerging technologies, globalization, regulation, demographic trends, and economic and geopolitical volatility.”
“Nose in, fingers out” is an oft-used term to describe how a board should engage in strategy but avoid crossing the line into management. The Methode board has found a good balance, playing a critical role in the company’s success while not usurping management’s role. The directors understand the company’s business from expertise in a variety of vectors that impact Methode. “This board knows the business as well as a board can and has really helped management stay on track,” says Batts.
Methode Electronics CEO Don Duda agrees. “The involvement of Methode’s board of directors in the company’s strategic decision making has many advantages for both shareholders and the management team,” he says. “Notably, our directors often put strategy into perspective for our management team by contributing their expertise and guidance which have been developed over the course of long and varied careers.”
Karen Kane is a Chicago-based governance consultant who works with CEOs and boards on improving company performance (www.karenkaneconsulting.com).