Could Your Company Benefit from Outside Board Members?

Summer 2010

Given the size of your company and your entrepreneurial temperament, you may not want to be encumbered by an independent board of directors. But if you are an aging CEO or even a younger one with plans to someday turn over the reins of power to the next generation, the steadying hand of a board that has a healthy dose of directors from outside of the family may be what the company needs to survive and prosper into the second, third and fourth generation or even longer.

A case in point is Meritex Enterprises, based in Minneapolis, Minn. In a recent NAIOP Solution Series online program titled, "Standing the Test of Time: Keeping the Company Nimble," Alex Klatskin, partner, Forsgate Industrial Partners, Teterboro, N.J. questioned Paddy McNeely, chairman and CEO, Meritex, about the benefits of forming a board of directors made up of some independent members, among other topics.

Alex Klatskin

Alex Klatskin

Paddy McNeeley

Paddy McNeely

Founded in 1916, Meritex has truly stood the test of time. Its founder, Harry McNeely, grandfather of the current CEO, formed the St. Paul Terminal Warehouse Company during the First World War. In 1929, as many companies were swallowed up by the Great Depression, McNeely’s firm expanded by taking over the management of warehouses in Minneapolis and eventually in other locales. By 1969, the company entered the underground warehouse market and in 1970 it was renamed Space Center Inc.

All in the Family

By 1990, as the result of tensions in the family-owned business, it was reorganized into two separate asset-owning companies — Space Center Enterprises, owned by Harry McNeely, Jr., father of the current CEO and son of the founder and Space Center Inc., owned by Donald McNeely, another son of the founder. Shortly after this reorganization, the current CEO began working for Space Center Enterprises as manager of properties in St. Paul.

In 1991, the then-CEO, Harry McNeely Jr., took the step to establish a board of directors that for the first time in the company’s history was made up of a majority of independent members. As the century came to a close, the firm was renamed Meritex. In 2001, the board elected Paddy McNeely CEO and chairman, his current position.

Klatskin asked Paddy McNeely about the benefits of having a board set up with a majority of outside directors. "A crucial element of our success is our board of directors," he suggested. "The business has been through a number of generations. In generation two, my father’s generation, there had been issues with family members that almost undid the business. Had there been a better governance mechanism in place at that time, we might have been dealing with a different situation."

With that governance mechanism in place for almost 10 years, the company has thrived, even through the current recession. The company has a well-situated, diverse portfolio, a "war chest" and it is looking for new development opportunities as well as acquisitions. McNeely explained: "In 2001, we refined our portfolio. We had approximately nine million square feet of property at that time but many of the assets were large, complex legacy properties. We also had a significant concentration of investments in the Minneapolis-St. Paul marketplace. At the time I became CEO, we felt it would be good time to clarify where we were going to take the company and why. Over the next several years, beginning in 2004 with a lot of liquidity in the marketplace, we were able to transition the real estate portfolio and also to invest in markets outside of the Twin Cities."

McNeely described the board as a seven-member body with four independent members and three family members. There are seven shareholders in the company but Paddy McNeely is the only family member working in the business. The shareholders elect the board and then the board represents their interests to management.

"This type of governance structure allows outside perspectives into the business, which helps management and helps the shareholders," explained McNeely. "One of the board’s great assets in our situation is to help assure management and the employee group that business issues like strategies, tactics, the performance of the company, compensation, management development—real core kind of business issues—are debated in the context of the business. But it also assures the shareholders that issues like ownership succession, shareholder duties and responsibilities and family participation stay in the shareholder or the family realm. The separation of those issues into those respective areas is really important."

The shareholders set the goals and the objectives—basically what they want their investment to accomplish. "The shareholders really have a right to decide at a very high level how they want the business to be run," continued McNeely. "And management’s duty is to help them earn the return on their investment."

McNeely said that another aim of shareholder input into the business is to give the family a continuing emotional stake in the business as well as an economic stake. "Otherwise," he asserted, "if they were to treat the business purely as an economic investment, which they have the right to do, they may choose to take their capital elsewhere. As a management group, we would much rather have them keep their capital in the company--especially in an environment like today."

Attention Must be Paid

As a company that survived many downturns including the Great Depression, what advice does McNeely have for other firms that wish to last multiple generations? "Clearly, you have to pay attention to your business," he cautioned. "A lot of people in our industry feel that it was the real estate industry or real estate economy that has given them a hard time in recent years, which may be true. What is also true, if they were to take a step back, is that it was a risky proposition to be over-leveraged in this environment or to have bet on continued price appreciation to bail them out of the deal that put them on the edge. Real estate is illiquid and highly leveraged and it can come down quickly."

What opportunities is Meritex looking at as the economy improves? "We would like to expand our portfolio of multi-tenant properties in the markets that we are in and also look at new markets as well. 2009 was pretty much a surprise--it was really a choppy year for a lot of people. People who were acquisition-minded thought that there were going to be more opportunities served up than there were. We are getting the feeling now that there could be more deals done in 2010. We are focused on making acquisitions. Right now we are also making an effort to develop relationships with institutional investors that could be equity providers to us."