Are You the Boss? Be Ready to Prove It

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by Wilson Harrell

Let me tell you a story about an entrepreneurial roller coaster ride. My friend, let's call him Bill, and his mother were cofounders of a successful company that went public on NASDAQ. He'd recently taken over the CEO's post, which had been occupied by other family members over the past decade, and asked me to join his board of directors.

This was Bill's idea: His company's sales were approaching $140 million, and its stock was trading at $13 -- a very unimpressive 10 times earnings. He felt the company had failed to position itself properly within the financial community, so he wanted to reconstitute his board and retain a big investment bank. Then, he planned to promote the company to stockholders.

The night before the meeting at which I would be elected, I had dinner with Bill and some of the other members. The board consisted of Bill, his mother, two company vice presidents, and three outsiders -- all picked by Bill's predecessor, who had no particular loyalty to him. We had a jolly time, with everyone telling me how great it would be to have me aboard.

The next day, the meeting came to order. I was introduced and nominated by Bill and seconded by his mother. I excused myself for what I thought would be a short discussion and vote. I was wrong.

Half an hour later, Bill and his mother came out of the meeting looking like two hound dogs after a fight with a bear. Not only was I not elected, but both of them were fired. It didn't matter that they were the cofounders and largest stockholders, that there was no stated cause for kicking them out, or that the five other members together owned less than one-tenth of 1 percent of the company's stock. Bill had no long-term contract with the company as board member or CEO. The upstarts also fired the company's general counsel and replaced him with their own attorney, who just happened to be waiting in the lobby. Clearly, they had seen the handwriting on the wall and decided to reconstitute Bill before he could reconstitute them.

After commiserating with Bill and his mother, I went home with my tail between my legs -- and soon was mad as hell. Those board members had broken bread with me, laughing on the outside and, no doubt, smirking on the inside at what they had planned for me and Bill the next morning. To me, their action was unconscionable, and I decided to ask them to "step outside.''

I called Bill and asked, "Do you have $500,000 and a big set of cojones? 'Cause if you do, I'd like to take that gang on your board for a little ride.''

"Keep talking,'' he said.

I proposed that he launch a proxy fight to replace the Gang of Five and retake the company.

"What's the half-million bucks for?'' he asked.

"To hire the best, meanest proxy lawyers on earth.''

"Let's do it.''

Now, I know more lawyer jokes than I could tell in a week, but when you've got a legal problem, you hire the best. Sure, they cost more, but a lawyer is like a brain surgeon: If you need him at all, you need him real bad. In a six-hour meeting with the proxy lawyers, the alternatives emerged: 1) Wage a long, expensive proxy fight that Bill and his mother would probably win. 2) Force the board to put the company up for sale immediately. Bill's heart was not set on being CEO for life, so he and his mother went for option 2.

Quiet Initiatives

I had already had some quiet conversations with several companies. I had a feeling the company might sell for $20 or more per share, not the $15 Bill hoped to get.

The lawyers went to work and did their job superbly. As a result, the board became very cooperative -- since getting in the way of a lucrative buy-out would have made them very vulnerable to a shareholder suit -- and in fairness, I admit, they played their part in the sale well.

The company sold for $21 per share, cash. The board is out. Bill is now a very happy, very rich entrepreneur, looking for new ventures and new fields to conquer.

What lessons can we learn from this story? First of all, if you're a CEO without a long-term contract, I'll put you in touch with Bill, so he can tell you how stupid you are. Second, be sure that the board is your board, and stay in regular contact with every member. Third, don't let internal directors get too cozy with the outside ones. Fourth, if a legal battle looms, hire the best -- they're cheaper in the end.

And last, when it's time to step outside, go find a street fighter to hold your coat.

Read Wilson Harrell's book, For Entrepreneurs Only.

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