Spinoffs: how to build just the right board; How many new CEOs have the chance to put together their own board of directors? And, best of all, to do it the right way?

• Author: Ingram, John
• Position: DIRECTOR RECRUITMENT

A SPINOFF OR SPLITOFF from the parent corporation is a once-in-a-lifetime opportunity for a public company management team to start with a blank sheet of paper and build a board that will help deliver long-term shareholder value.

Spinoffs and splitoffs typically are demanding times for the new team. (In a spinoff, shareholders get their proportional interest in shares of the new company; in a splitoff, the parent company exchanges shares of its stock for shares in the new company. The following analysis of spinoffs applies to splitoffs as well.) Most CEOs of spinoffs have little experience leading public companies or being scrutinized by Wall Street and the investment community. Further pressuring the new management team are spinoffs' strategic and operating issues, which can present obstacles to success. Other roadblocks involve external factors, such as regulatory activity or litigation.

Spinoffs are frequently undervalued. Evidence shows that market inefficiencies and biases result in mispricing of spinoff equities. Generally there is an immediate liquidation period of approximately six months, during which systematic selling occurs. Rumors often fly of predators lying in wait.

On the positive side, spinoffs often perform well over time. Frequently the large corporation where these businesses have been confined has misunderstood them. After a spinoff, management's interests become more closely aligned with shareholders' as the managers are compensated for their success in cutting costs, bringing new products to market, and operating more efficiently. Many spinoffs go on to achieve great success as management is allowed to focus on the core business.

Move quickly and smartly

As the spinoff gets under way, the pressures on management are intense and the learning curve is steep. The new management team must get up to speed fast. There is a danger that in this period of turmoil and uncertainty management will devote inadequate time to organizing and staffing the new board. This can lead to missed opportunities and long-term problems that can affect the building of the business.

In any spinoff company--large or small, struggling or established--smart executives realize that they do not have all the answers. They recognize that they need others they trust to question their assumptions and plans before they put them into practice. A thoughtfully selected board offers such oversight skills in abundance. A new company would be foolish not to take advantage of this great resource.

The right board is, among other things, a valuable team of mentors with a wealth of intellectual and operating capital. They help spinoffs get down to earth, shaping dreams into missions that can realistically be accomplished and turning creative ideas into strategies that have a reasonable chance of succeeding. They offer positive support, helping CEOs stay on track and adapt to changes in the market, all the while encouraging them to take the long-term view.

What to look for in the board team

At the outset of the board staffing process, it's essential to have a clear definition of the skills and experience needed on the board. It is vital to consider skills and experience across a broad spectrum of factors. Key concerns include where growth will occur strategically and the importance of having board members who understand the fundamentals of the business and those with direct operating experience in the spinoff's industry. Other factors and qualities to consider:

* Stature: Directors must bring prestige and stature, especially in the new company's business sphere. Employees and investors naturally want to know the new company will be well governed, so the new directors need related perspective and judgment. We have found that one or two "war tested" veterans can be a stabilizing force as well as "magnets" who help to attract other directors.

* Time: Spinoff boards need people who will take the time and have the capacity to...