Independent directors venturing into closely held businesses enter a world with sometimes conflicting agendas.  Director fiduciary duty is the same as with a public company; living up to that duty sometimes runs afoul of internal politics.  How does a closely held family business with outside directors achieve good governance in times of company transition?

The Company:  American Electrical Products, Inc. ["AEP"] is a significant New England distributor of electrical products to manufacturers, construction companies and consumers.  It has grown and continues to grow steadily in sales both organically and by a series of small acquisitions into a leading regional player with revenues of $120,000,000.    Its founder,  K.C. Sparks, has just retired, although he still maintains an office at the company and the deep respect of his offspring:  CEO Sam Sparks and CFO Russell Sparks.  The sibling rivalry between the two second generation executives is fierce and the company's ranks are split between loyalists to the two sons.

Equity and Balance Sheet:   The equity in AEP is owned 30% by each son, 30% by their sister, Tesla, a college professor, and 10% by Nantucket Trust Co., Trustee for the benefit of their mother, Clio, who is disabled with Alzheimer’s disease.  Payment for the purchase of their father's equity is not yet complete.  The company continues its tradition of seasonal working capital borrowings to build inventories for its construction customers, but eschews any material long term debt.

The Board of Directors: The board includes the two sons of the founder active in the business; a professor from MIT, Georgia Easthome; an investment banker, J.P. Goldsmith; and, a consultant to family enterprises, Carl Young.  The board was created five years earlier and has gained increasing respect from the shareholder control group.

The Problem:  The electrical products distribution market stands as one of the last highly fragmented segments of the distribution industry.  However, it  has become clear to the owners and the board that consolidation among the company's suppliers and its customers is soon to be matched by consolidation among its competitors.  A private equity firm has just announced acquisition of AEP's financially ailing, but largest regional competitor, and a Netherlands based global competitor has recently made its first American acquisition, acquiring a significant Mid-Atlantic distributor owned by long-time Sparks family friends.  Significant acquisition opportunities remain presently for AEP, but whether to undertake these acquisitions, which are larger than their historical purchases of competitors and the debt they may require, consumes the attention of the directors as their next quarterly meeting approaches.  Resolution by the board of directors of this strategic issue is complicated by the contradictory strategic objectives of the two sons: CEO Sam Sparks wants to grow by leading his own roll-up of the industry and CFO K.C. Sparks wants to conserve cash flow for (A) distribution to the family, particularly for the care of their mother, an issue on which he is supported by the trustee for Clio, and (B) payment of the deferred portion of the redemption of their father’s shares.  Resolution is further frustrated by both the explosive personalities of both brothers and by their rivalry, which infect virtually every discussion at the board. 

The Board:

Sam Sparks, CEO, is portrayed by Roger Berkowitz, President & CEO of Legal Sea Foods.  Berkowitz is on the Board of Directors for Century Bank and Trust. In addition, Berkowitz serves on many non-profit boards including:  Dana-Farber Cancer Institute; Boston’s Children’s Hospital, UNICEF, the Children’s Museum, Environmental League of Massachusetts, and the Blue Frontier Campaign.  He also serves on the leadership council at the Harvard School of Public Health; he is a member of the Board of Overseers, Brandeis International Business School and a Trustee of Salem State College. Berkowitz graduated from the Newhouse School at Syracuse University.

Professor Georgia Easthome is portrayed by Dr. Lucinda Doran, an independent director, interim executive and consultant to middle market companies through CagSolutions Inc.  Having served on three corporate boards (two of which were of family-controlled companies) and on a number of non-profit boards, Lucinda is both a licensed organizational psychologist and holder of a doctorate in Strategy, Management and Organizational Behavior from NYU’s Stern School.

J.P. Goldsmith is portrayed by Hugh Taylor of Newbury Piret & Company, Boston investment bankers to the middle market.  A sitting director at Claremont Flock Corporation and Paramount Insurance Company, Hugh holds an MBA in Finance from Boston College and previously held several senior positions at Bank of New England including direction of all middle market lending and leveraged buyouts.

Carl Young is portrayed by Ira Tatelbaum, a consultant to family and closely held businesses through his company BP Solutions LLC.  He has served as board member or advisory board member of several closely held companies, advises companies in a wide variety of industries, is a member of the Family Firm Institute, and also consults through Narva & Company, Advisors to Family Enterprise.