Gary Sutton passed away much too soon — on July 12, 2015, one day shy of his 73rd birthday. His formal obituary called him “truly one of a kind,” and we at Directors & Boards concur. His family obit reads: “Gary Edwin Sutton was a troublemaker and a man full of integrity, class clown and a brilliant businessman, ruthless when crossed and a generous advisor to everyone who leaned on him, a risk-taking adventurer and a mushy family man, a C student and a lifelong learner, a healthy fitness buff and a wine lover, a small town farm boy and a big city sophisticate.” The Gary we knew served as a chief executive and board member of a number of public and private companies in a career as a specialist in business startups and turnarounds. He first came to our attention as the author of the 2002 book, Six-Month Fix: Adventures in Rescuing Failing Companies, a lively recounting of his turnaround handiwork. We asked him to give us some thoughts on boards of directors, and he composed “Rules for Rock-Solid Governance,” which we made the cover story for the Second Quarter 2004 edition. Sensing a major talent who had fresh and provocative insights on board effectiveness and an unabashed willingness to share them, we then asked him to become a regular columnist. He wrote a column in every issue of Directors & Boards from 2004 to 2010. The following is an excerpt from his first article, presenting what we have since come to know as “Sutton's Laws.” (Click here to read the PDF version.)
— James Kristie
Let's first agree that boards have three jobs:
1. A board hires and compensates the CEO fairly.
2. The board fires and replaces CEOs fairly.
3. The board approves any financial restructurings that affect the balance sheet — be they mergers, annual budgets, dividends, or acquisitions.
That's it. If you go beyond, to a point at which the board is managing the business, then there is no CEO. And if you've traveled, seeing many statues in many parks, you know that there's not one yet erected to a committee. One thing makes it easy to confuse a board with a committee: They are identical.
The trick is this: A board cannot intelligently handle these three tasks, when they arise, unless each director understands the business. To do this, board members must contact a few customers, auditors, employees, and vendors every year. Yet this intrusion must be casual, graceful, and low-key to avoid undercutting the leadership. These customer and vendor calls should be made with an employee. The employee contacts should be one-on-one.
Meet quarterly. This lets the board review financials without getting buried by monthly detail. Those who argue against quarterly reporting, claiming that it hurts long-term thinking, seem to have never studied long-term success. Profits over time are made up of a consecutive series of short-term gains. It's a habit … momentum. Can you name a business that lumbered along for years and suddenly skyrocketed into success? Fat chance. If so, was it planned or an accident? Right.
At least 75% of the directors must attend each board meeting — physically. You see stuff in the hallways and parking lots that doesn't show over a phone line. The information packet should arrive one week in advance and contain 20 to 40 pages of data, with minimal verbiage. The meeting is for the talking. An ideal meeting is formally presented, with a third of the time left open for discussion. Too much open time leads to chaos; not enough means it was a presentation, not a meeting. Managers should present their department results during part of the meeting.
The minutes should show split votes sometimes. If every vote is unanimous, there's no governance or discussion going on.
The current trend toward dinners the night before a board meeting is bad. That lets management preempt the proposals. A dinner after the meeting is better. That lets directors dig into points that came up during the day.
Set incentives so the CEO gets rich only when the shareholders get rich. Sleep nights. Let the CEO get rich no matter how the business does and best you get a lawyer now.
Directors' compensation should match the chairman or CEO's, roughly, on an estimated hourly basis. Directors are peers, each with one vote, and pay should reflect that.
Board members should not be friends outside or directors together on other businesses, and ought to have begun their careers in different disciplines.
Five or seven board members work best. Six leads to tie votes. More is worse, since it diffuses responsibility. Look at Leonardo Da Vinci's “Last Supper,” with 12 distracted disciples, conducting separate conversations. If you think bigger is better, consider Congress. Remember those park statues.
Anybody who has been on the board for more than five years has become an insider. Period. Restrict terms to five years. Rational perspective is lost with time. History is less relevant in a fast-changing world.
I've not always followed Sutton's Laws. These are goals. When I was a CEO during the '80s and '90s, my board duties were simple. All I did was to keep those directors who thought me stupid from talking much with those who hadn't decided yet. Those days are gone. Good thing.