INTRODUCTION Pay It Forward

The Purpose of This Book

We are products of our experiences. Two of mine have greatly influenced the views about governance expressed in this book. In both cases, I was there at the creation. The principals involved had high aspirations and a stewardship attitude toward governance. Results over more than two decades have been strong and positive.

My boss, Dean Gil Whitaker of the University of Michigan Business School, walked into my office in Ann Arbor with a guest. "Hi, I'm Paul Gordon," he said with a deep voice and a big smile. "We have a little family business in Grand Rapids. I'm wondering if you could help us with governance and a few other things."

Paul was a graduate of the school where I was a professor and associate dean. He was in his mid-sixties when we met. Paul had recently begun to think deeply about the long-term future of Gordon Food Service (GFS), the growing private company he headed with his brother, John. Gil thought I might be able to help Paul because I had just returned to the school after a six-year stint in the real world at Cummins, Inc., the diesel engine and power systems company in Columbus, Indiana.

Paul and I hit it off immediately. He told me about his family and the food service business. I related some things I'd learned at Cummins about quality, leadership and change. Together, we visited GFS's new, automated distribution center in nearby Brighton, Michigan. A few weeks later, I went to Grand Rapids and met his brother, John, and their three sons in the business. I liked them and what I saw. The feeling seemed to be mutual.

I learned later that Paul was having a similar conversation with another person, David L. Gray. Dave also passed muster with the Gordons. So, at Paul's and John's request, Dave and I began to work together to help the Gordons create a modern board of directors and an orderly senior management succession process. Together, we became the first outside board members in their ninety-year old, family controlled company.

That was twenty-seven years ago. At the time, GFS had revenues of $400 million, two distribution centers, a few retail cash-and-carry stores, and a market area comprised mainly of Michigan and northern Ohio and Indiana. Today, revenues exceed $10 billion. The company has more than 20 distribution centers and 150 Marketplace stores that serve much of the U.S. and Canada. In 2013, GFS was the thirty-fourth largest private company in America in Forbes magazine's annual ranking. In December 2013, the employee profit sharing plan's assets exceeded $1 billion for the first time. It's been a remarkable business story.

Sam Zell called me on a summer day in 1993. By then I was dean of the University of Michigan Business School, Gil Whitaker's successor. I knew Sam; everybody at Michigan did. His one-page biography at the time began, "Sam Zell was born in Chicago and graduated from the University of Michigan." Sam liked to point out that the richer he got, the more interested the University became in him. So it was a surprise for him to be calling me.

I picked up the phone in my office.

"Joe," said Sam in his gravelly voice. "We're creating a new public company—a real estate investment trust. We believe this is a time of tremendous opportunity in the apartment business. We'll be doing an initial public offering soon. We're assembling a board of trustees. I'll be chairman. We'd like you to be a trustee."

I knew, liked and trusted Sam. I recalled his sitting in my university office recounting how he and his late partner, Bob Lurie, got started in the real estate business in Ann Arbor when they were students. Sam and Bob worked briefly for Don Chisholm, a local real estate entrepreneur. It didn't take them long to figure out that they'd rather be owners than employees. So they began to buy apartments in Ann Arbor. Forty years later, Sam recounted to me the purchase of each property in detail: street address, owner, price, down payment, and terms of the mortgage!

After graduation, Sam and Bob set up shop in their hometown of Chicago. Over the years, their private firm, Equity Group Investments, became a major owner of apartment properties across the country. They invested in other businesses as well. But apartments were their first love.

By 1993, Sam was a legendary real estate investor. While his public persona was arresting (e.g., as the leader of Zell's Angels, buddies who rode fast motorcycles in exotic places), it was clear that he had an uncanny knack for finding value in real estate. One of Sam's monikers was the "grave dancer" in recognition of his penchant for scooping up unloved properties at rock bottom prices and making big profits on them. He also ran first class companies.

It didn't take me long to do my due diligence on EQR. I was impressed by the game plan and by members of senior management I met. So I accepted the invitation to join the board. Thus began my first adventure in the governance of a major public company, Equity Residential, Inc. (EQR).

Twenty-one years have passed and EQR has thrived. At the time of the initial public offering in 1993, the company owned 25,000 apartments and had an enterprise value of $800 million. Today, EQR owns over 100,000 apartments in premier properties on the east and west coasts, has an enterprise value in excess of $30 billion and is an S&P 500 company. Annualized total shareholder return since the IPO has been 13%. Like GFS, EQR has been a remarkable business story.

GFS and EQR have grown and thrived over the last two decades. So have I—from a novice director of GFS and a new trustee of EQR to one of both boards' senior members and, at EQR, chair of the corporate governance committee. During those years, I completed a decade as dean, was the University of Michigan's interim president, and served five years as president of the University of Illinois. I also served on numerous nonprofit boards and reported to two as the chief executive officer of major public universities.

Professional school faculty at top universities get a lot of opportunities to do outside work related to their academic specialties. You have to be selective in saying "yes" because the university limits the amount you can do and your hard-earned reputation is always on the line. What attracted me to GFS and EQR were the high aspirations that both Paul Gordon and Sam Zell had for the companies they headed.

"We've been around almost a hundred years," said Paul. "We need governance that will enable us thrive forever."

"We're going to be a prodigious user of capital," said Sam when the board asked me to be the first chair of EQR's audit committee. "Your job is to make sure our credibility with the capital markets is rock solid."

The Gordons and the EQR board took a risk on me. As a business school dean and professor and former Cummins executive, I liked business and knew a fair amount about it. But I was green as a director. I also took a risk on GFS and EQR. Over the years, people have asked me whether they should join a particular board. I advise them to do proper due diligence on the company or organization involved then answer this all-important question: How do you feel about having your reputation in the hands of the company's chairman and CEO? In twenty-seven years with two chairmen and two CEO's at GFS and twenty-one years with Sam as chairman and three CEO's of EQR, my comfort has always been high.

I owe a debt of gratitude to the many people who helped me go from being a novice board member to an experienced and capable one. At the university commencements where I presided as dean and president, I always asked the graduating students to thank those on whose shoulders they stood: parents and family, teachers, coaches, counselors, friends. Now it's my turn to do the same. I thank the directors and executives of Cummins, where I supported the board. I thank members of the several volunteer boards of the University of Michigan business school who helped us achieve great things while I was dean. I thank members of the university boards to whom I reported: the regents of the University of Michigan who appointed me interim president and the trustees of the University of Illinois who appointed me president. I thank my colleagues on the many non-profit boards on which I have served including St. Joseph Hospital in Ann Arbor, the National Merit Scholarship Board, the American Council on Education, Argonne National Laboratory, and currently the W.E. Upjohn Institute for Employment Research. I thank my colleagues on other corporate boards of which I have been a member, especially Kelly Services and its executive chairman, Terry Adderley, and M Financial and its chairman, Peter Mullin.

You can never pay back all the people who created opportunities for you and helped you learn and grow. But you can pay it forward. That's why my purpose in writing this book is to share with directors the most important things I have learned about how boards can excel. This includes how to be a good director, how to ensure board effectiveness and how to serve as a positive influence on the organization—for profit or nonprofit—for which the board is responsible.

My goal is to help less experienced directors move rapidly down the learning curve to become effective and responsible stewards of the companies and organizations they serve. I also hope that my insights will serve as a reminder to experienced directors of things they may know but have not put into practice.

I have a broader audience in mind also. Because the boardroom is a place of privilege and privacy, most people never experience it. Yet almost everyone—investors, employees, customers, suppliers and communities—is deeply affected by what takes place there. I hope I can demystify governance and help readers understand it better.

Let me say a word about my perspective on boards. As a director and trustee, I am a governance practitioner. As an academic who teaches business and law students about boards of directors, I am a constructively critical observer. A large body of research on governance helps inform my views in both roles. I say helps versus informs because few governance studies produce findings that a director can embrace or a professor can teach as definitive. In this book, I will highlight a few insights that rise to this standard. But on many governance questions—such as whether the chairman and CEO roles should be filled by one person or divided between two—research findings are equivocal. Knowing this has helped motivate me to share insights from my experience so others can decide whether, when and how they apply to situations they face.

I learned at a young age that boardroom decisions are highly consequential and can affect people in deeply personal ways. I grew up in Kalamazoo, Michigan, a paper industry capital at the time. My dad was employed by a medium-sized public company, KVP-Sutherland, the product of a merger of two local family paper manufacturing businesses. As a boy, I thought that Kalamazoo was the center of the universe and KVP-Sutherland was a permanent fixture in my family's life.

One morning I woke up and discovered I was wrong. There was a new name on the main building. Brown Company had acquired KVP-Sutherland. Soon my dad left the company. Later, the Brown Company operations in Kalamazoo had yet another owner: James River Corporation. Eventually, James River closed down the entire operation and laid off everyone who worked there.

Equally stunning is the story of another public firm that everyone in Kalamazoo considered permanent: the Upjohn Company. Upjohn was a powerful, independent pharmaceutical company. The founding family was generous to the community.

In 1986, Upjohn celebrated its 100th anniversary. The chairman, Ted Parfet, a man I knew and admired, stated at the time how much he and the entire company were looking forward to Upjohn's next hundred years.

Nine years later, Upjohn merged with Pharmacia of Sweden, which then merged with Monsanto. The new Pharmacia focused on pharmaceuticals, retaining the G.D. Searle operations of Monsanto while shedding its agricultural businesses. Three years later, Pfizer acquired Pharmacia and all that remained of the original Upjohn Company. Today, Pfizer maintains some manufacturing activities in Kalamazoo and a veterinary medicines research group that has has been split off into Zoetis, a new public company. But employment is down drastically and the beautifully austere Upjohn corporate headquarters, designed by Skidmore, Owings and Merrill in the 1950s, has been demolished and the site returned to its original state: an open field.

Boardroom decisions contributed to these sad outcomes for my hometown in the same way that decisions made at GFS and EQR over twenty-plus years have led—so far—to growth and prosperity. While I accept the inevitability of creative destruction in a market economy, I want boards comprised of directors who know how to maximize the prospects for success.

Boards that excel provide great governance to the organizations—companies and nonprofits—in their charge. In my experience, the bookends of great governance are high aspirations and strong results. We begin, next, with these topics.