Medical Device Link.

The best boards do more than govern; here's how to help ensure that your board adds true value to the bottom line.

Gone are the days of rubber-stamped approvals from boards comprising the friends of the CEO. Today's boards, in addition to fulfilling their traditional roles of setting and monitoring the implementation of business strategies, are called upon to provide greater contributions in operations, succession planning, compensation, risk management, tactical decision-making affecting mergers and acquisitions, product development, marketing, distribution, and many other facets of the business itself, says Richard Cohen, president of the Walden Group Inc. (Tarrytown, NY), a firm specializing in mergers, acquisitions, and strategic transactions for the healthcare sector.

Partly as a result of their increased scope of responsibilities, directors today take their jobs much more seriously than they may have 20 or 25 years ago, reports James Kristie, editor of Directors & Boards magazine. "The role of director is performed with more independence, seriousness, and professionalism today," says Kristie. "Directors certainly have a raised consciousness of liability for product releases, shareholder interests, and the like. Plus, a new cadre of executives who have risen through the ranks as companies faced more public scrutiny are now being named to boards."

Just as directors now approach their roles more thoughtfully, so, too, should companies carefully consider the composition and purpose of their boards to make certain both their products' and their shareholders' interests are served.

Less Is More

"In addition, companies always want to have an odd number of directors because even numbers can become deadlocked on issues and stunt the company's growth," continues Carmichael. "Finally, there should be an even split between inside directors [directors who work for the company] and outside directors [directors who are unaffiliated with the firm] to ensure a company examines issues from a more balanced perspective."

In the past, boards were heavily stacked with inside directors. Traditionally, a company's CEO doubled as chairman of the board. The trend now, however, is to split these roles, naming an outside director as chair. The CEO is typically joined on the board by the CFO and corporate counsel as well as by the head of sales and marketing or technology. And while in previous years corporate board seats were awarded to the friends and colleagues of company leaders, today's product- and profit-focused companies seek directors who will truly help to build their business, and they're looking outside their companies to do so.

Since the "ideal" board is rather small in number, the importance of directors' backgrounds and credentials cannot be overstated.

On a personal level, directors should be independent, informed, and possess great integrity so that they'll have the courage to challenge management if they sense a strategic plan is lacking in some area, says Kristie.

"The greatest benefit of a board is that, based upon their knowledge and understanding of the industry, members go beyond absorbing information to providing objective feedback," says Tony Dimun, executive vice president and CFO of Vital Signs Inc. (Totowa, NJ). "Good directors challenge a strategic plan that's presented. They ask questions and start a dialogue about the merit of the plan, its assumptions, current reality, aggressiveness, and whether the company has considered other avenues of opportunity. This interplay of feedback and discussion makes for a better plan and product."

When considering a potential director's background, business expertise is certainly a prerequisite, but savvy companies also strive to sign on directors who may deliver additional perks.

"The overall theme is that directors must be able to add value to the business due to their expertise or relationships," says Cohen. "Medtech companies would benefit by electing directors who can open up new customer relationships and new markets for the company, or who have experience in a technical manufacturing process or other areas critical to its operations or future plans. Smart companies find the expertise they can't afford to hire full time and convince those experts to contribute through a directorship."

Investment banker Carmichael says his company looks for firms that have a well-rounded board of directors. "In addition to the CEO serving on the board, we want to see at least one semiretired industry professional serving," says Carmichael. "From an investment point of view, we like to see someone with significant industry experience at a senior level come in to help advise a company and set direction, but not be too involved in day-to-day tasks. We'll especially take notice if that industry expert is also putting some of his own money into the company to help it grow."

Medtech companies often appoint well-known doctors and chief clinicians to their boards, and Carmichael says this tendency has both advantages and drawbacks. "Having a big-name doctor on your board is great window dressing—it promotes a certain amount of market acceptance," says Carmichael. "But so many doctors sit on so many boards; it makes you wonder just how much they're contributing. And if the doctor is receiving too many royalties, his credibility weakens."

The Walden Group's Cohen suggests that companies recruit retired executives who worked in the medtech industry or current professionals who have applicable marketing, technological, or production backgrounds as well as bottom-line responsibility for growing their companies.

Carmichael advises medtech firms to look outside the medical device industry for at least one of their directors. "It's important to benefit from the experiences of senior executives from the general business world who can provide a whole different perspective," recommends Carmichael. "For medtech companies, a director's significant experience in manufacturing or a technology-related area would be appealing. For example, someone with a strong background in fiber optics should be able to provide valuable knowledge."

Lawyers and accountants are also among the most frequently annointed directors. Companies should consider naming outside counsel to their boards for several reasons. "When an outside lawyer sits on a board, he becomes more intimately involved in corporate affairs so he is able to advise the company on a more meaningful level—and at a much lower fee than the company normally would have paid for the advice, since it's being offered at a meeting rather than at normal hourly rates," says Cohen.

Outside counsel also lends support and enhanced expertise to in-house legal representation, helping to ensure that companies do right by regulatory, legal, and other requirements. Tony Dimun credits his board's inside and outside attorneys for ensuring that Vital Signs abided with the Securities & Exchange Commission (SEC) 2000 mandate that every public company's board have an independent audit committee consisting of at least two directors, one of whom should have sound financial experience. While the SEC requirement goes into effect this June, many companies haven't paid it much attention and may see consequences later, says recruitment firm Spencer Stuart (New York City).

Surprisingly, many boards lack financial acumen. "It's strange—boards are made up of senior executives whom you'd think would be financially savvy, but that's not always the case," says Kristie. "Not enough board members know how to read and analyze a balance sheet." Ideally, everyone on the board will have some basic financial background; at the least, an accountant should sit on the board to lend the appearance of stability to potential investors.

Medtech companies also may wish to stock their boards with directors who have regulatory environment experience, fundraising know-how, and connections with and knowledge about overseas markets, suggests Kristie. "Companies are increasingly looking to do business in Europe, Asia, and South America," reports Kristie. "Having someone on the board who understands the business environment in these markets, and already has established relationships with distributors and regulators in these countries, can save companies countless dollars and energy."

Finding Finesse

Recruiting appropriate directors can be a challenge for even the largest medtech companies. The first step in selecting a director is analyzing the company's current board and determining which skill and background sets may be lacking, especially in light of the company's future plans. "For example, if a small company has trouble accessing certain markets, it would be well served to find a director who has relationships in those markets," says Cohen. "Medtech executives may find it worthwhile to discreetly advise certain current and potential customers that they're looking for directors with certain credentials and see whom those customers respect and recommend."

"It's all about networking. By networking with consultants, outside contract and research firms, customers, and colleagues in the regulatory, manufacturing, and technology areas, companies can find directors who are well respected by those sectors and who may then be able to build a bridge between the company and those groups," continues Cohen. He also advises companies to consider as directors top executives running companies that have addressed similar problems in a different environment—perhaps an automaker that has instituted a new manufacturing process which might have application within the medtech industry. Diversity in thought processes and approaches is key to crafting a winning corporate strategy; so boards should mirror a Chamber of Commerce meeting to some degree.

Once potential directors have been identified, companies should perform background checks to see if a candidate's credentials are appropriate and to ensure that the candidate does not have interests in any competing companies or industries.

The wooing process then begins. "You need to market your company to a prospective director in a manner that portrays the potential for prestige in being associated with your company and being involved in a dynamic medical environment as well as the possibility of rewards both tangible and intangible," says Cohen.

Compensation varies widely among medtech firms. "Smaller companies may not be able to afford to pay their directors any cash compensation; they may compensate directors with options only," reports Cohen. "Compensation ranges from just a few thousand dollars a year at small companies to $60,000 or $70,000 a year with the ability to obtain stock options at larger medtech firms. Certainly, rewarding directors with stock options can help motivate them to keep a close eye on the company's activities and plans."

"We like to see board members have some equity in the company so that they'll be aligned with shareholders' interests," says Carmichael. "We look to see if directors are locked in for the long term with long vesting schedules. Of course, 'freebie' options don't carry the same weight as stock a director has purchased with his own money. Directors who use their own money to buy stocks in the company send the strongest message about a company's future—a message that investors will listen to."

Vital Signs followed these very recommendations in recruiting its current board and has reaped the rewards: annual company sales have grown from $103 million to $150 million over the past three years.

"For a long time, we had four inside and two outside directors," reports Dimun. "Two years ago, one of our outside directors left, and we ended up attracting three new outside directors to the board. We focused on finding people who had superior business expertise within the healthcare sector. Director Stuart Essex is CEO of Integra LifeSciences (Plainsboro, NJ). We met him when he was a managing director with Goldman Sachs (New York City) and helping us with an acquisition we were making at the time. We also recruited David Hetz, a former healthcare investment banker with Robertson Stephens (San Francisco), after he retired; and we approached another retiree, Ray Larkin, former CEO of an $800 million healthcare company, because he had such extensive experience in our product niche.

"We believe strongly that stock options are a very good form of motivation and compensation and put our directors in line with our shareholders," continues Dimun. "Vital Signs offers two forms of options. All board members get 4000 stock options each year. And our employees have a two-for-one plan in which they get two shares for every one that they buy. We now encourage our directors to participate in that plan as well. They're not required to participate, but most of them do."

Carmichael cautions companies to study SEC requirements to make sure that they comply with all regulations when it comes to compensating directors with stock. "It can be very difficult for directors to buy the stock of a company in the open market due to insider-trading stipulations," says Cohen, who is also a corporate lawyer. "It's best if a company has an internal program that directors can participate in. The fact remains: the bigger the personal stake a director has in a company, the more focused that person will be on its strategy and success."

Meeting Talent

Realizing that today's directors play a much more integral, intense role in a company's future, investors look for boards that limit their directors' terms to ensure that burnout and love of the status quo don't wreak havoc on a company's future.

"We prefer to see new people coming onto and rotating off the board every three years," says Carmichael. "Stagnant boards don't do anything. There's a tendency to get comfortable and employ the 'we've always done it that way' mentality, which gets in the way of growing the business. Active boards that question strategy promote good management."

Vital Signs's directors are reelected annually, and the company seeks its board's input on strategy throughout the year. "Periodically we invite our board to sit in on long-range strategy meetings where we'll go off-site, bring in an outside facilitator, and look ahead three, four, and five years and determine where the company should be then and how we'll get there," says Dimun. Vital Signs's board typically meets for a full day five times each year and in between meets via conference calls as needed. Dimun coordinates the meetings, checking with both in-house staff and all outside directors about items that should be placed on the agenda.

"We give our directors as much information as possible to help them make intelligent, reasonable decisions," notes Dimun. Directors receive research and technology reports, updates on the industry, competitive intelligence, news releases, quarterly and annual financial reports, market and resource analyses, and other materials they may find useful,
following the philosophy that "the better informed directors are, the better their decisions will be."

Value Flows Both Ways

After companies have performed due diligence in determining that potential directors possess impeccable credentials and expertise, companies should make sure that both they and their intended directors approach the board's role in the right manner to gain the greatest value possible.

Just as important as a potential director's background is his chemistry with the company's current directors, says Cohen. "There will be enough conflicts between directors when ascertaining the appropriateness of new strategies without throwing personality conflicts into the mix," reports Cohen. "Companies need to find directors who won't look at serving on their board as an obligation, but rather as an opportunity and source of professional enjoyment. Look for someone of a like mind with a singular purpose—to advance the organization and be very interested in operational matters—and who has demonstrated the capacity to do that in the past."

Likewise, companies shouldn't view their board of directors as a necessary evil. "Rather than seeing the board as 'just another obligation that we have because we're a public company,' companies that take the time to assemble an effective board and processes can earn a tremendous return from their directors," says Directors & Boards's James Kristie. "To gain the greatest value, be sure directors are provided with enough information and enough latitude to intelligently guide the company and engage management in informed dialogue and decision-making."

Stacey L. Bell is a freelance writer specializing in business and marketing issues and a contributing editor to MX.

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