The Executive Brief

ESOP Board Search Q&A

Mike Frommelt ESOP, Private Companies, Board of Directors

A KeyStone Search Executive Recruiter sat down with our CEO Mike Frommelt to discuss a recent Board search for an ESOP client. Here's their conversation...

Hi Mike, and thanks for sitting down with me today. You and I were partners on a recent board search for an ESOP client of ours. What can you tell us about the client?

The client is a mature ESOP, with a strong ESOP culture, very employee focused, people-oriented culture. They have lots of long-term employees and leaders and they have done very well as a company. Up till now, they’ve had an all-internal ESOP board and wanted to bring on an outside member to start morphing the board to more of a mix between internal and external.

Regarding the search process itself, how is a board search different from a full-time leadership search, from a client’s perspective? Are there any special considerations to keep in mind for an ESOP board search?

On a board search, clients are generally looking for senior leadership that will provide objective advice and counsel – meaning they want to bring in someone with different experiences. The individual is typically a retired C-level leader, but can sometimes be an active leader as well.

From here there are three things we look very closely at: 1) The individual’s functional experience i.e. are they particularly strong in finance, sales, operations etc., 2) Industry experience and, 3) an appreciation and/or understanding of the ESOP culture. If they have actually worked in an ESOP, all the better. This third piece is probably most important because ESOPs are definitely different from other types of companies and although there are some great C-Level people out there, if all they know is the publicly traded or closely held private environments, it’s likely going to be a difficult switch to an ESOP.

In the case of this board search, the client was interested in finding their first external member. For potential ESOP clients reading this, why is an external member worth considering?

The value of an external member to an ESOP board is the variety of experience they bring. At times, especially with mature ESOPs, a sense of, “This is how we’ve always done it,” can creep in and keep the company from changing and innovating. And of course, all companies have to continually change and evolve. These outside board members bring experience and lessons learned from their own backgrounds that can help with this evolution.

In this particular case, our client also has some challenges that are inherent with a mature ESOP (capitalization, re-purchase, etc.). They needed someone who understood those types of challenges and who came with strong financial experience overall.

Give us an example of what you ask clients to better understand what they’re looking for in a candidate.

I like to discuss their situation in terms of strategy and business planning. For example, I’ll present clients a scenario such as: You are $50M organization today, and you want to be a $100M organization 10 years from now. What are the biggest bottlenecks to keep you from getting there? Is it operations - you can’t build enough to keep up with sales? Or is it sales? You can’t sell enough to get to $100M? Or, could it be finance? You can sell really well and build really well, but you’re not as profitable as you should be. Which of those three things are the biggest bottleneck in holding you back?

Of course, there are a lot of other questions to understand the business and culture, but really the key is, “Where do you see yourself going and what will it take to get there?” This gives us a great sense of the backgrounds and experiences that will be of greatest help to the organization.

What questions do you ask potential candidates for this role such as this, to ensure KeyStone is presenting individuals aligned with client expectations.

Of course, I want to understand their key experiences, what happened in the companies they led and what their contribution was in those companies. Also, all senior leaders “grow up” in one (or more) of the functional areas, so I make sure to understand how this person looks at the world. Are they primarily a Finance type, a Sales/Marketing type, an Operations type etc.

I also ask questions surrounding their leadership style, and what it was like when they were in an operating role. This is mainly to understand how they will fit into the culture of the client. Are they command and control or more collaborative in nature?

I also want to understand the candidate’s other board experience, if they have any. In this particular case the client was looking for their first outside board member, so I knew this person would need to be someone who is patient and could be a bit of a teacher/counselor as this would be a big change for the client to have an outsider in their board meetings.

What traits in a candidate defines success in a role such as a board seat?

When a board candidate can speak to specific challenges or projects that are similar to what our client is experiencing, as well uniqueness of what they can bring functionally-speaking. For this client, we found someone with great experience but also someone who could help the company build a stronger governance structure, which in the long run will really benefit the ESOP.

So, the big question - was the search successful?

Yes it was, in the end the client really got everything on their wish list in terms of a candidate!

I’d have to say that’s the bonus of working with a search firm like KeyStone for a board seat. Many companies will simply tap their personal networks for board members instead of doing an exhaustive search for the very best candidate/s. Through our research/search process, we’re able to identify a large number of candidates with the right backgrounds and bring them to the table for the client. Of course, it’s more expensive than doing it on your own, but when you consider the value a great board member can bring to a company, it’s well worth the investment.

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