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WPI
Venture Forum Interviews Jay Fialkow
Jay Fialkow, partner at RossFialkow
Capital Partners, was recently interviewed on WTAG, AM
580, on the WPI Venture Forum’s weekly business radio
program. Excerpts of Jay’s interview will appear in
this, and future editions of the RossFialkow SpotLight.
In the first installment, Jay discusses aspects of the
business of advising and counseling the leaders of
commerce.
What does RossFialkow do,
exactly?
Jay Fialkow: I wish I could
explain it all in one sentence, but fundamentally, we
are counselors to mid-sized companies, and that means we
help them do strategic planning, we help them do
financing, we help them when they are ready to either
buy or sell, and last but not least, we’ve been setting
up advisory boards for companies.
The kind of thing we do for the
presidents of a lot of companies is ask these tough
questions, like “Why are you doing it this way?” “Why
do you do this?” “Why do you do that?” “What’s your
mission?” “What do you want to do when you grow up?”
“What’s your long-term plan?”
And he’s got nobody to talk to, as
is the case with most businessmen that I know. Most
mid-sized companies, I’ve discovered that the
entrepreneur is either a great salesman or a great
production man. He’s an active participant in the
day-to-day operation of the business. He doesn’t sit at
a desk and become a visionary and think about all the
problems.
And most entrepreneurs that I’ve
met, frankly, are just very good salesmen. But when it
comes to planning their business, they really have no
one with whom to talk. They don’t have a board of
directors; they don’t have a group of people to ask
“Where are we going to be next year?” “What are we
going to about this product or that product?”
Most people in the mid-sized area
are reacting rather than acting, and they’re not really
planning ahead. And that’s kind of like the things that
we’ve been doing for them.
What kinds of businesses do you
seek to work with?
JF: Well, in terms of numbers,
anything from $5 million to $50-75 million, but the kind
of companies that are owned by one or two people,
instead of outside stockholders. Mostly families – most
of them are family businesses of one kind or another,
and most of them don’t have active board of directors.
They have the legal board, the principal and his wife,
and someone else… but they’re not active boards.
When I practiced law, I would say out of all my
corporate clients, I don’t think there were more than
one or two of them that had an active board that had
real meetings. We’d put together papers for them,
saying they had a meeting, they’d waive notice and sign
the papers, and these meetings never really took place.
And that’s why we came up with this idea of the advisory
boards. Most mid-sized companies, privately held
companies, most privately owned companies, do not have
active boards of directors. Generally speaking, boards
of directors come about as a result of various
stockholder interests. When one or two people own a
company, by and large, they do not have an active board
of directors.
What is the difference between
advisory boards and boards of directors?
JF: Let me start by telling
you that my experience in 50 years of practicing law, is
that very few people wanted to be on boards of directors
– “outside” people. There is a liability factor, and
people always worried about it, so we created something
called a board of advisors.
There is a host of friends of ours,
very bright, successful businesspeople, who have
retired, and everyone I know who is retired is looking
for something else to do. So we came up with the idea
of putting together a board of advisors. Now, number
one, a board of advisors has absolutely, positively no
legal structure, no legal standing, it doesn’t appoint
to the president, it doesn’t approve compensation. It
has no legal responsibility whatsoever. All they do is
advise, and even if they were unanimous in their advice
to the president, he can still do whatever he wants
because he can fire them at will. They don’t even have
terms of duty. I say that because they don’t have
insurance, they’re not afraid of being sued because they
can’t be sued because they’ve not done anything that’s
improper, just by giving advice as such.
Having said that to you, what we do
is find some very bright businesspeople who want to
share their experience. And they want to help mid-sized
companies. “Why don’t you try it this way? In my
company, this is the way I did it.” “I’ve got a friend,
let me introduce you to him. He’s got a line of
products maybe you want to sell.” “I’ve got a friend
with a machine; maybe you could try that machine.”
Etc., etc., etc.
Now, as interesting as that may be,
something came about two months ago that shocked the
legal community, and it’s something with which you may
not be familiar. A privately held company held three
public companies, and the principal of the privately
held company ultimately had financial problems, the
privately held company went into bankruptcy, and the
trustee in bankruptcy sued the company and its
board of directors because of a whole host of things
done improperly. And this is the first time a privately
held company had its board of directors sued. They were
liable for some $30-odd million because of the activity
of the president and things that the board of directors
should have done. These were not stockholders, they’re
creditors.
There is a legal structure behind a
board of directors, and there is not behind a board of
advisors. A board of directors is governed by the
statutes of the Commonwealth of Massachusetts. And they
are voted in by stockholders, while an advisory board is
appointed by the president of the company, who in all
probability would be the major stockholder. And because
it’s only advice to the president, if there are other
stockholders, they would probably have no say in who is
on the advisory board.
Who should be on an advisory
board?
JF: I have been a practicing
attorney for 50 years. I would never recommend, and
never do recommend, that the company lawyer be on the
advisory board. Nor do I recommend that the accountant
be on the advisory board. The reason for it is that
both of those professionals are obligated to the
company, and there is no way of knowing what is going to
come up. There are some very embarrassing things,
difficult problems, and sometimes the lawyer and
accountant ought not to be involved in them.
Oftentimes, we ask questions about
certain key employees, and a sense of loyalty is
something the board members don’t have. They’re
concerned about the business and not about
relationships, per se, and they are asking questions
that are difficult questions. And bear in mind that
they are all completely independent of the president;
they’re not currying his goodwill, they’re not looking
for ongoing relationships. They’re tough-minded
businesspeople, both men and women. And those kind of
people, last but not least, we certainly don’t want to
put friends and buddies on these boards because, again,
they’re not going to ask the tough questions, and
they’re not going to be involved, so the best board
members are true strangers, professional people,
businesspeople, and this businessperson, the president,
gets a terrific view. They get the same benefits that
the major corporations of America get from first-rate
people. And we can utilize these people at very
reasonable rates because they are retired and are
looking to share what they’ve learned.
Go to Part II>>
© 2003
RossFialkow Capital Partners, LLC
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