Three years ago, Isaac Fogel was thinking about expanding his water bed manufacturing business into Canada.
In the end, he didn't do it, and he's still grateful. "I would have made the classic mistake a lot of private businesses make," he said: overexpanding into a risky new market instead of building around the strengths of his existing locations.
What stopped Fogel was the advice of three outside executives whom Fogel had invited to be on the board of directors of his company, Classic Corp. of Jessup, Md.
Fogel is one of a growing number of executives in private companies who are turning to outside executives for guidance in the difficult business climate of the 1980s.
It is a trend that goes hard against the grain of the owners of family businesses and other private, closely held companies, who traditionally have kept their finances and strategies as secret as possible.
"In private companies, the chief executive is responsible only to creditors and God," said Nicholas Taubman, chairman of chief executive office of Advance Auto Stores, a Roanoke-based chain of 100 auto-parts stores.
"The problem with that is you can't get a good reflection of what's going on in your business and you just get stale."
He and other executives are concluding that opening their books to a group of impartial outsiders may be the best thing for their businesses.
The outside directors "have kept me from making a lot of bad decisions," said Fogel. "The decisions seemed correct based on my limited knowledge, but their broader experience made me realize otherwise."
Taubman set up an advisory committee of three outside executives six years ago. Three times a year, the executives -- a member of a retailing company, the head of a data-processing firm and a management consultant -- meet to go over Advance Auto's books and long-range strategy.
Taubman recalled that he was very reluctant to set up his advisory committee, but did so under persistent pressure from a management consultant who told Taubman he needed outside expert advise if he wanted his family business to grow.
"I dread the meetings," Taubman said. "They are very hard on me. But they ask the right questions, such as 'What are you?' 'Where are you in the marketplace?' 'What do you want your business to be?' I had never asked those questions -- or at least never forced myself to answer them -- before I had the advisory committee. It has made me do a lot of things I didn't want to do. They made me make heart-wrenching changes and get rid of a couple of people."
In one instance, the committee challenged Taubman's choice for his successor. Although his choice was a good friend, the committee finally convinced him that he needed another executive.
In spite of the difficult decisions Taubman has had to make, he remains committed to the concept and to his committee. "A lot of good things have happened to our business" as a result of the committee, he said. "There is a material difference between the [financial] results when we started in 1979 and now. I have to link that directly to listening to what they said."
"The manager of a closely held company needs outside advice even more than a manager of a publicly held company," commented Theodore Cohn, the management consultant who is on Taubman's advisory committe.
"An advisory council of outside executives gives the manager accountability. It's helpful for a businessman to come to a meeting three or four times a year with people he knows and respects -- and pays money to -- and have to account for what he has done the last few months. It makes him start spending his time on the right things, because he has to set priorities and look at the long term. So many small companies are preoccupied with putting out fires that they don't think about their future," said Cohn, who calls himself "a missionary about advisory councils."
Cohn said he does not know of any companies that have been dissatisified with the councils and halted them. However, he added, he knows of many private concerns that refuse to start them, despite his missionary work.
"Many businessmen don't want to, largely because of inertia. They feel they are making profits, so there is no need for outside advice. They don't realize they could make more. Other executives are unwilling to face a group of peers' questions. And others have an arrogance, saying 'no one else can tell me about my business,' " Cohn said.
Outside directors are particularly critical for family-owned firms, according to Leon A. Danco, chief executive of The Center for Family Business. Among other things, he noted they can solve problems quickly and fairly that family members couldn't -- such as who is the right person to succeed the firm's founder when he or she dies or retires.
"If you don't get your affairs settled to assure continuity in your business, your lawyers and accountants will do it for you two cars back from the flowers," says John Cross, the 67-year-old chairman of Elphinstone Inc. of Baltimore.
For nearly 50 years, one of the company's main lines of business was to sell state-approved highway construction material to state contractors. The four outside directors asked Cross why Elphinstone -- whose main business is to rent construction equipment and machinery -- continued to sell the highway construction material, particuarly in light of the new competition and the sharp decline in Maryland's highway construction budget.
"They made us realize we should phase that line of business down," he said. "Without the board asking why, we probably wouldn't have reached that decision because we had been in the business for so long."
In some cases like Elphinstone's, the outside executives are added to the board of directors and can outvote the company management. In other firms, the outsiders serve merely as a committee of advisers without any of the legal liabilities and responsibilities inherent with a board of directors.
Either way, however, these outsiders typically meet with a company's chief executive three to four times a year. Before the meeting, the chief executive writes an agenda and sends it to the directors along with complete financial data.
"You must be totally open," said Warren Rubin, chairman of the Workbench, a 22-store furniture chain. "If you hide information, you hurt your own case." Rubin launched his advisory committee 10 years ago. "I wanted the brightest, toughest people I knew on my board. None had to be experienced in the retail or furniture industry, and I didn't want attorneys, bankers or accountants who worked with the company," he said. "You should know what they think through normal business relationships." Rubin pays his advisers $750 a meeting, which usually lasts half a day, partially to make sure he took their advice seriously.
Other companies pay a yearly retainer, often as much as $20,000 annually.
Company executives say it is surprisingly easy to get good people on your boards. Fogel's board, for example, included Frank L. Carney, the founder and former chairman of Pizza Hut. Carney was recommended to Fogel because he had taken a company about the same size of Classic and "done the same things I wanted to do. His experience would be invaluable to me -- and it was," Fogel said. Carney remained on the board when Classic became a public company in 1983. He left it last November, burdened by new business ventures in which he was engaged, Fogel said.
Outside advisers do not always make life easier, according to Allen Bildner, chairman of the Kings Super Markets Inc. chain in Northern New Jersey.
"Sometimes not all the personalities work out," Bildner said. "Sometimes, your advisers advise things that don't work out . . . Sometimes, because they are all successful, verbal people, it is very difficult to make decisions contrary to their advice." And, he noted, "'I've done things based on their advice that tured out to be costly or didn't work out. They are not foreseers. But I can't blame them for the mistakes. I have to accept responsiblity."
Still, he wouldn't do away with his 6-year-old board because, overall, "The board has been contributing more to the bottom line than it's costing."