Lead Independent Directors: The Definition

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In this episode, we talk about the role of the Lead Independent Director, who they are, how they help, and why Shore Capital Partners has invested in the role in every one of its Boards of Directors. This episode features interviews with Michael Burcham, Sean McEnroe, Jim Forrest, Dylan Bates, Bill Clendenen, and Kevin Offel.

Transcript

Introduction and the Role of LIDs

Bill Clendenen: I view the role of the Lead Independent Director, similar to being a pilot on a boat. And what I mean by that is when the big barge comes into the Mississippi River in New Orleans, look, there's a captain, there's a navigator, there's a chief engineer on that boat, and they'll always be those roles on that boat.

But what they do is they bring a pilot on board to help guide the ship into the treacherous waterways of the Mississippi River. And so I view the Lead Independent Director role as somebody joining the captain on the bridge to help them navigate those treacherous waters as there's transition. So big acquisitions, exits, hiring important key executives, and it's in those moments that you go on the bridge, to help that captain navigate those challenges.

Anderson Williams: Welcome to Bigger. Stronger. Faster., the podcast exploring how Shore Capital Partners brings billion-dollar resources to the microcap space. In this episode, we're talking about the role of the Lead Independent Director. Who they are, how they help and why Shore Capital Partners has invested in this role on every one of its boards of directors.

I'm joined by Michael Burcham, Chief of Strategy and Talent Development at Shore Capital Partners. He's a three-time private equity backed entrepreneur and Lead Independent Director for four companies at Shore Capital.

So Michael, what do you think about Bill's metaphor of the boat pilot? How would you extend that metaphor or further give color to it.

Michael Burcham: Well, what really stuck out to me when Bill was speaking is the comment, trusted guide.

Because the captain of the ship is always the CEO but for many of our CEOs, this is their first time in that seat. So our experiences having been in the waters before, navigating through some really difficult challenges and situations, we can offer insights as to what we did at the time we faced something similar, what we learned from that, even perhaps what we might do differently next time.

And then let the CEO make an informed decision on their own without trying to become the CEO, so I like the idea of the trusted guide.

The Three Legged Stool

Anderson Williams: Sean MacEnroe uses the metaphor of a three-legged stool. To describe the role the LID plays with the CEO and the investment team.

Sean McEnroe: I think we describe it as this three-legged stool. There's the management team, there's the investment team, and then the Lead Director is a bit of a translator.

The person who's been on both sides. I think of my job, frankly, as a little bit more management than investor. I'm not a professional investor. I am a professional operator, and so when I wake up in the morning, I don't think about balance sheets and debt covenants. I think about customers. I think about employees. I think about incentive comp plans. I think about how to grow. And so when challenged, I think I lean more towards management. But there's times when I've heard the question out of the private equity guys or the investment team 20 times before, and I know what they're asking.

I know how to translate it for our management teams, and I know how to challenge the management team to rise to the occasion and answer it professionally and give a thoughtful response to what is probably a reasonable question.

Anderson Williams: Sean makes a point of being a professional operator and this being key to his role as a Lead Independent Director. This is a critical point to make about the LID, they have vast experience as operators, as CEOs, and as board members.

Here's Sean again.

Sean McEnroe: I serve as a Lead Independent Director for four different Shore portfolio companies.

I got there really by working my way up through owning my own business. I was a physical therapist and ran 35 offices in four states. Took that to a place where it needed some equity backing and joined a larger platform. Became the Chief Strategy Officer there, and we grew that company from 300 offices to a thousand offices over the next five years.

Anderson Williams: This is Kevin Offel.

Kevin Offel: I've been in healthcare, operating executive for roughly 20 years. I've been a president, COO and CEO of several private equity sponsored companies all in the healthcare services space, and have been working with Shore Capital as a board member for the last six years roughly.

I've also done a lot of board work for other private equity firms as well.

Anderson Williams: This is Jim Forrest.

Jim Forrest: I was raised a navy brat, which means I lived all over the country. I went back to school, got a degree in business from Harvard in 1975, and joined an electronics company where I continued in the electronic industry for the next 14 years, and ended up running a business.

We made test and measurement equipment for the defense industries, for automotive, for healthcare. Very broad based business, sold into 33 different vertical markets, which helped me understand the basis of good strategy.

Anderson Williams: And now back to our boat pilot, Bill Clendenon.

Bill Clendenen: My background was, I started out as a professional scuba diving bum.

I was teaching scuba diving and ultimately bought a small CPR, first aid training business, in a two-stage leverage buyout. Quickly turned it into a medium sized business, and then partnered with a private equity firm to grow and expand it further. So did a number of acquisitions over six years, and then sold it to another private equity firm.

I'd probably categorize myself as a serial private equity backed entrepreneur.

Working with Shore

Anderson Williams: And Bill knows what it's like specifically to be in the Shore Captain's chair.

Bill Clendenen: I was CEO of Community Care Partners, which has also been known as Nova Health, Best Med South Star. So I've been a Shore CEO for three years, and so I understand what it's like to sit in that chair and start that journey with Shore.

Anderson Williams: Dylan Bates puts the challenge of the CEO in crystal clear perspective. And talks about how nice it would've been to have an LID when he was a CEO.

Dylan Bates: I was a physical therapist by background, and about 25 years ago, joined a little company, called ATI Physical Therapy, one location, joined the founder and partnered with him, and we grew that to over 900 locations, four rounds of private equity transactions.

Exited that business in 2019 and have a number of other business ventures going. I would say I didn't have the Lead Director role, and so I love what Shore's doing in terms of tagging people that have relevant knowledge and that can really get in and be a partner to the business.

Anderson Williams: So speaking of that, Michael, tell us a little bit about your experience as a CEO that you're bringing to this role and why that previous experience leads to not only CEO success, but to the success of the business.

Michael Burcham: What resonates most for me and my own experiences is that I actually scaled companies from very small to very large. Not many people have had the privilege to do that or survived doing that because each step along the way, the job of the CEO shifts. Early on my job was to assemble a team and share a vision. Next became, can I acquire and grow and build customers? And then how do I integrate all of this build margin and create something larger than life that everyone wants to be a part of.

Those experiences that we all share as Lead Independent Directors help us navigate this journey for our Shore CEOs, because they will go through a similar process as each of us have gone through.

Breakdown of Roles

Anderson Williams: This brings us to the critical relationship between the CEO and the Lead Independent Director. Dylan describes this role as one of translator working with the CEO to get everyone aligned and focused on the right outcome.

Dylan Bates: I would call it a liaison and somewhat of a translator. Listening to management and listening intently about how to best communicate to the lead partner on the deal. And the lead partner might be needing me to translate down to the team as well. And so I think it's a translator, it's a liaison, and it's a facilitator of trying to get to the right outcome.

Anderson Williams: Jim also describes his role as a translator.

Jim Forrest: You should translate between what Shore sees as requirements, make those understandable to the CEO, as well as make what the CEO's trying to do, understandable to Shore.

Anderson Williams: Getting to the role of successful translator, however, starts with earning a deep sense of trust.

Jim Forrest: It's developing trust. The only way you develop trust is by constantly working with one another. You can't buy it. You can't ask for it. You can't just be given it. You have to earn it. It's like swimming. You can practice swimming all you want on your living room floor, but eventually you gotta get in the water.

So you get in the water and you start working with the folks and proving yourself. Because you do have to prove yourself.

Anderson Williams: Kevin articulates that this starts with first clarifying the role of the LID with the CEO.

Kevin Offel: We're not responsible to manage the business or to direct the CEO to do his or her job. It's not our responsibility, right? And, and I think that's clear to set those boundaries out of the gate with the CEOs. Because oftentimes they wonder initially, all right, are you just here in case I fail and then you're gonna take my job? Or do you want my job. And other team members when I show up for a site visit, might think that they report to me and the answer is absolutely not.

In fact, at the very beginning, even of EyeSouth, I remember going there and they had a presentation for me, my first site visit and slides and so forth, and I had to share with the team, listen, this isn't a board presentation, this is me coming here to learn a bit about the business, get to know you, break bread, have dinner and so forth as well.

But also talk about things that are on your mind, struggles you're having, challenges you're having in a confidential environment, and I want to provide some perspective and experiences that may or may not help you. And it's really for your consideration. It's not for me to direct to you, you know, you should do A, B, and C.

It's, here's what I've seen work successfully. Here's some mistakes I've made that you may want to avoid. And then how do we get through this process? And so it was helpful for them to realize, all right, well this isn't, you know, when, when Kevin shows up, its not a board presentation, it's not a formal engagement. It is way more informal and he's here to help. And so how do we anticipate that and come with questions and things that, that we're preparing for the board or we're preparing to implement operationally so that he can help us do that successfully.

Anderson Williams: This trust and the deeper relationship continues to develop in regular and frequent conversations between the LID and CEO.

Kevin Offel: It's about multiple interactions and building that rapport and trust to the point where they know that the conversation that's going to happen between us stays between us. And I'll even ask them sometimes if they share something with me, hey, is that something you'd like me to elevate or, or is it just between us?

And they'll usually say, Hey, listen, I just needed to get it off my chest. I'll work through it, but I had nobody else to talk to and I just wanted to talk to somebody. So once you have a couple of those, they get comfortable. And then really, once I demonstrate them through my actions that I haven't gone and shared that elsewhere because it wasn't, you know, something that required to be shared with the board or the partner.

I think that really gets them comfortable that, hey, this really is someone that I can go to.

Rapport and Relationships

Anderson Williams: And as Sean makes clear, this takes time and the ability to ask open-ended questions.

Sean McEnroe: It takes about a year of leaning in and being an advisor and asking questions and trying not to put a bunch of you shoulds out there on the table, but ask questions like, 'what would happen if' and 'have you ever considered?'

Anderson Williams: Because as Bill tells us, it's empathy with the CEO and the shared experiences with them that build the critical foundation of the relationship. He defines this as his 'why.'

Bill Clendenen: Being a CEO is a very, very lonely job, and there's not a lot of people you can talk to about things. And last night I even had a discussion with one of my CEOs and said the only two people that really care are my wife and my dog, right?

And I asked, do they really care? And, he said, yeah, I think they do. And so for me, and I think for many LIDs what excites them or their why is to pass along, you know, your experience to, younger CEOs and help them really grow into becoming a world-class executive. And so, you know, my joy, my why is seeing them be successful.

And so helping them along that journey is what's important.

Anderson Williams: Michael, in your experience, particularly in those early days, what do you need to do to build that kind of trust with that CEO?

Michael Burcham: I start by first consistently showing up, listening first before I'm giving any thoughts of my own. Trying to stay away from advice, but instead asking good questions and recognizing that trust is built like with any relationship over time. It won't be today and it won't be tomorrow, but if I am consistently doing the job I should be doing within a few months, that CEO knows they can absolutely trust me to be their partner and guide as we make this journey together.

Anderson Williams: We heard previously from Sean that the LID sits as one leg of a three-legged stool with the CEO and the investment team.

So what about that relationship with the investment team? How does the LID role work in that direction? And what about the rest of the board of directors?

Sean McEnroe: My job is to tee the board up for success, so make sure they know what's most important to management, and ask the board their opinion on what they think is most important for us to discuss and, and where we should push on.

But there are definitely times when I know a topic hasn't been touched as deeply as we need to, or I know there's a voice in the room that we haven't heard from, and my job then is to facilitate those people and pull them back into the conversation and try and get the best answer from all the resources we have.

Kevin Offel: If there's a new initiative or recommendation coming from the CEO, you know, that is maybe going to be something that's going to be discussed and or debated at the board meeting. We'll probably have a conversation offline with the lead partner or the second partner just to make sure that kind of makes sense.

You know, what supporting data do we need to demonstrate that so that there's no surprises walking into the board meeting.

Jim Forrest: I always develop a few key success factors and make sure that everybody, the CEO, me, the team, and the partner in charge, are all on the same page. If we have that same script, we know if we do these three or four things well, that's gonna get us to the finish line.

That's where my focus is as Lead Independent Director. And if we tend to go off course, get us back on course. Why are we investing time over here when that's not one of the things that's gonna get us to the finish line.

Conclusion and Board of Directors

Anderson Williams: Michael, is there an example from your experience as a Lead Independent Director when that role has been particularly and acutely important between you, the partner and the rest of the board, and one of those sort of tumultuous waters moments?

Is there an example from your experience?

Michael Burcham: I think an example that sticks out in my mind was about year two and a half into a company when I saw the absolute need to strengthen our operating team. The CEO really felt Shore was focused only on acquisition and growth. I think the partner and the board kept saying the words acquisition and growth at every board meeting, and the CEO was really uncomfortable bringing it up.

But I could see that given the speed at which we were growing, things were going to break if we didn't invest heavily in operations. I remember that Sunday morning I called the partner to simply say, look, you are the partner on this. I am your confidant to the CEO. But I want you to hear me. This is going to break if we do not invest in operations and within the next week we were already interviewing for key operating roles to support the CEO. I don't think that CEO would've asked for another six months, and I think six months would've been too late.

Anderson Williams: Given their experiences as CEOs and with their own boards of directors, LIDs recognize firsthand the value of the investment Shore Capital is making and building outstanding boards of directors.

Kevin Offel: You know and Shore does a really exceptional job of putting a lot of operating experience on the board as well, versus having primarily sponsors and then the executive team. And so it allows for diversity of thoughts and experiences and really every one of my experiences with Shore on the board, they've been very engaged.

You know, they don't just, the other directors aren't just sitting there listening, taking information. They get very engaged in the discussion in every single meeting and provide a lot of value for the executive team and for me.

Dylan Bates: I think the variability and the spectrum of what Justin and team have assembled in terms of their boards is the secret sauce.

Anderson Williams: Michael, how would you describe Shore's approach to building boards of directors?

Michael Burcham: So when Shore constructs a board, it's classically certain members of the Shore team, usually the lead partner and one other partner. Also in the room will be key members of management, and then for each board Shore will engage four to five outsiders who have industry knowledge and expertise, or who have scaled something even in another industry that behaves similarly.

These individuals classically have scaled and run fairly significant companies, and they bring a wealth of knowledge to the experience because often, for Shore this is the first time we're doing this kind of company. We've done our research, but we've not done it live. All of these independent directors have done it live, so it not only helps inform the Shore team, they inform the management team and if run well, they'll ask great questions, they'll offer great insight.

And the fusion of all of those together is really what helps make a wonderful company that will be very successful.

Anderson Williams: This podcast was produced by Shore Capital Partners with story and narration by Anderson Williams. Recording and editing by Andrew Malone. Editing by Reel Audiobooks. Sound design, mixing and mastering by Mark Galup at Reel Audiobooks.

Special thanks to Sean McEnroe, Jim Forrest, Dylan Bates, Bill Clendenen, Kevin Offel and Michael Burcham.

This podcast is the property of Shore Capital Partners, LLC. None of the content herein is investment advice, an offer of investment advisory services, or a recommendation or offer relating to any security. See the terms of use page on the Shore Capital website for other important information.