How the Board Put the Bounce Back in Select Comfort
from
May/June 2007
by Lois Gilman
Back in 2000, when Select Comfort Corp.'s new chairman and CEO, Bill McLaughlin, looked at the seven board members who had just hired him to lead a turnaround, he perceived problems. They were all white; they were all male; not enough of them had the operating experience and Web expertise that he’d need to steer the bed and mattress manufacturer into a prosperous future.
To their credit, the directors were on exactly the same page and began to overhaul the company’s governance framework. Among other things, they set up a corporate governance and nominating committee, voted for an annual board evaluation, and established 15-year term limits for all directors, starting with themselves. Patrick A. Hopf, a venture capitalist who had served two terms as outside chairman, has already left––he stepped down last May––and the rest are scheduled to be gone by 2011.
“That was how we wanted to govern,” says Ervin R. Shames, 66, a professional board member who chairs the governance committee and serves as lead director. “The next step was to take the strategic plan and ask ourselves what sets of skills we’re likely to need for that plan. We then did a gap analysis versus where we were.”
One obvious gap was the double X chromosome. The absence of women from the board seemed bad for business, since women typically call the shots when couples buy a mattress. Moreover, a lot of Select Comfort’s factory and salesroom workers were female. “I was adamant that our board needed to reflect our customers and employees,” McLaughlin says. Again no fight from the guys, who set themselves to correct the imbalance. Today’s nine outsider directors include two women, one of them African American.
As the directors were doing their board thing, McLaughlin’s marketing team came up with a new campaign pinned to the notion that everybody has his or her own “sleep number,” an ideal combination of mattress comfort, firmness, and support that ranges from 0 to 100. According to the pitch, people who knew their number and bought a mattress that matched it would enjoy a perfect night’s sleep. A lot of folks were intrigued enough to visit Select Comfort stores and get their number, a process that involves lying on sensor pads that measure various pressure points, answering questions about preferred sleep positions, and so forth. Online buyers fill out a similar questionnaire. The company comes back to them with their sleep number, and, using a remote control, customers inflate the adjustable air chambers inside the mattress to match that number. The mattresses have dual settings so that a couple with different firmness preferences can both get a good night’s sleep. (Select Comfort’s board members have been through the same routine. McLaughlin is a 65, for example, and Shames a softer 35.) The sales pitch helped sell some 240,000 mattresses in 2002, boosting sales to $335.8 million, a 28% increase over the previous year. The company reported a $37.5 million profit, versus a loss of $12.1 million in 2001. An enthusiastic 2002 annual report predicted that “for the foreseeable future we believe we can achieve 15% to 25% annual net sales growth rate.”
Select Comfort has seen dramatic growth before. Founded in 1987 by Robert A. Walker, a Minnesota businessman who created the air-chamber technology, the company expanded rapidly during the 1990s, mainly by opening more stores. But the growth came at a price. Despite climbing sales, Select Comfort’s earnings were as limp as an old mattress, and in 1999 CEO Daniel J. McAthie stepped down. Hopf agreed to fill his place on an interim basis while the board searched for a replacement. It picked McLaughlin, at the time president of PepsiCo’s Frito-Lay operations in Europe, the Middle East, and Africa, to spearhead a turnaround.
Before it began the search for new directors, the Select Comfort board identified “icon” companies, including Apple, Coach, Dell, Nike, and Starbucks—outfits that had sustained high levels of growth over long periods and whose executive ranks might provide fertile recruiting opportunities. “We wanted somebody who had been where we were going, who had taken the company from a small size to a large size and understood the issues we were facing,” Shames says. None of Select Comfort’s board members were from these icons, and, says McLaughlin, “none had focused experience and strength in some of the areas that the company was looking at in terms of strategy. We didn’t have expert retailers. We didn’t have anybody international. We didn’t have anybody with systems understanding.”
Directors used these needs to build a template for how the board should look in terms of its members’ business experience, culture, skills, and diversity. Shames’s governance committee tracks the evolving strategy of the company so that director searches can be aimed toward candidates with particular abilities. “Directorships need to be driven by the needs of the business,” he says. “What we’ve been trying to keep in the forefront is not only the directors’ responsibilities but how we form a board that can add the maximum values for the shareholder. What are the sets of skills that we need to have?” Adds McLaughlin: “We identified the four or five areas we were interested in and then focused our search to try to tick as many of the boxes as we could.”
The first box they ticked went to Trudy Rautio, executive vice president and chief financial officer of Minneapolis’s Carlson Cos., a conglomerate that runs the Radisson hotel chain and resorts, the Carlson Wagonlit travel agency, and the TGI Friday’s restaurant chain, among other businesses. Rautio joined the board in late 2002. She brought a valuable financial background—and a familiarity with running hotels, where mattresses are a stock-in-trade. In early 2003, Michael A. Peel, senior vice president of human resources and corporate services at General Mills, signed on. His background in compensation got him an immediate seat on the comp committee, which he now chairs. Brenda J. Lauderback, a former group president at shoe retailer Nine West and a veteran of Target, joined the board in early 2004. Her store experience fit in with Select Comfort’s expansion plans, which include getting into specialty retailers.
Late that same year Christine M. Day, then president of Starbuck’s Asia Pacific Group, became a board member, the first from one of those icon companies. Like the other new directors, Day was recruited by a member of the Select Comfort board—in her case, Jean-Michel Valette, chairman of Peet’s Coffee & Tea. Valette had asked a director of Starbucks whom he knew, Howard Behar, to recommend a board candidate with experience in international business and IT systems. Day, a longtime Starbucks employee, had an abundance of both. “She had seen the company grow from the ground up, had run a lot of different divisions, was in charge of installing most of their systems, and was currently running a big part of their international business,” says McLaughlin. “It fit a lot of our strategies.”
The female head count of three directors was only momentary, however. The same day that Day joined the board, Rautio left it. Carlson’s Radisson hotels had decided to buy some 90,000 Select Comfort mattresses to go with their “Stay your own way” marketing campaign. Hotel guests get to try out various grades of firmness before, presumably, falling into a perfect night’s sleep. The deal was obviously great for Select Comfort, but Rautio, wishing to avoid a conflict of interest, stepped down.
In 2005 Stephen L. Gulis Jr., executive vice president, treasurer, and CFO of Michigan shoemaker Wolverine World Wide, joined the board, becoming what McLaughlin refers to as its “sitting chief financial officer.” He was a natural for the audit and finance committees.
The new board members have been playing a critical role in the company’s evolving strategy. Compensation committee chairman Michael Peel has been instrumental in shaping the executive stock-option process, for example. Brenda Lauderback has been reviewing website and retail-store strategies and serves on the governance committee. Gulis and Day have kept watch over the company’s plan to begin installing SAP software this year; Wolverine and Starbucks run on the same system.
Day has also talked with management and the board about what it takes to “pave a cow path,” as she puts it, for when a company goes international. Among her topics: How do you pick your partners? How do you set up licensing? Most recently she has been brainstorming with the marketing and product-development teams about how to invigorate the Select Comfort brand. “It’s a matter of picking our brains,” says Day about what she and other directors offer the company. “Select Comfort is using the board members to supplement the strength of the management team. It’s not as if we’re running the company; we’re consulting and advising. We’re there to add value and expertise.”
The original directors serve on various Select Comfort board committees, and, Shames says, “they sit on a lot of other boards too, so you get that cross-fertilization of experiences and perspectives.” Of course, they’re on their final laps at Select Comfort, though the board can take advantage of a loophole and keep them on longer. Venture capitalist Christopher P. Kirchen’s time is technically up, but the board has yet to reveal a precise farewell date. Thomas J. Albani, a former CEO of Electrolux, retail consultant David T. Kollat, and Jean-Michel Valette will reach their 15-year limit in 2009. Shames hits his in 2011 and, if the directors stick fairly closely to their term-limit deadlines, will be the last of the original board to go.
Meanwhile, the hunt continues for more directors who can bring specific skills to the party. Like so many other boards, Select Comfort’s covets a sitting CEO. “We have people who have been CEOs, but there’s something very helpful about having somebody who’s living it real-time with you,” says McLaughlin. The list of desirable talents, which includes entrepreneurs and product innovators, is long, with the specific needs constantly shifting to match an evolving strategy. “If we ran across somebody who really looked good, we could advance bringing them on,” Shames says. “We really do a rolling three- to five-year plan for our board, starting with strategy, translating that into skills required, looking at what we have on board and who could be leaving and what we need next.”
The board has signed up executive recruiter Spencer Stuart to help during the next phase of filling boardroom seats. This should serve to widen the six-degrees-of-separation look of the board (there’s a common Wolverine connection among some board members, as the list of directors on page 36 shows). Besides, says Select Comfort’s general counsel, Mark A. Kimball, “using an outside search firm brings another element of independence into the process and enables us to expand the scope of our search.” Not incidentally, “it also takes some very significant workload off our board members,” he notes.
How’s Spencer Stuart doing? “We haven’t yet made a match,” says the firm’s Susan Boren. “The more criteria a client has—and in this case the ideal person would be an entrepreneurial CEO who understands high-growth situations and might have experience in a multi-site retail concept—the more challenging. To put all that together with someone who has the time to do it, and the interest, is threading the eye of a needle.” Boren produces Spencer Stuart’s Minnesota Board Index, which examines data and trends in board composition, board practices, and director compensation for the 30 largest public companies based in Minnesota. Select Comfort is “not yet large enough to make this list,” Boren says, “but its directors stack up very well with other boards in terms of board effectiveness.”
Institutional Shareholder Services seems to agree. The proxy advisory firm gives Select Comfort the high corporate-governance-quotient rating of 91 out of 100. Among the progressive governance practices ISS has noted, says ratings manager Paul Wanner, are stock-ownership requirements for executives and directors, the annual board performance review, and the CEO succession plan. “They come out smelling very good,” Wanner sums up. Annalisa Barrett, senior research associate at the Corporate Library, a governance watchdog, has a similar reaction. She cites the company’s strong, independent board and also seems to admire its rotation of directors. “We’re concerned by a board that’s stagnated,” she says.
Select Comfort’s board takes its independence seriously. Every board meeting includes an executive session to which McLaughlin, who became chairman in 2004, is not invited. As lead director, Shames presides. At the end of 2006 the board adopted a policy that encourages directors to attend a continuing-education seminar at least once every two years—not so uncommon among boards these days. More unusual is the requirement that they submit a written report to the other directors to say what they learned at those seminars.
While Select Comfort is garnering kudos for its board policies, the verdict is still out on whether it will reach its goal of being a billion-dollar company. For one thing, its fortunes are closely tied to housing-industry trends, which have been weakening. But the company’s numbers are certainly looking healthier. Sales reached $806 million in 2006, versus $261 million in 2001, and 2006 saw a profit of $47.2 million, versus that $12.1 million loss in 2001. The number of company-owned stores rose to 442 in February, up from 328 in 2001. The number of “doors” (industry parlance for partner stores that stock Select Comfort’s wares) scored an even bigger increase, rising from four in 2001 to 822.
“The company has had a new life since Bill McLaughlin came on board,” says security analyst Joan Storms of Wedbush Morgan, who is quick to credit the board too: “It’s what we hope our clients would do, which is to look at the strategic plans for the company and ask what kind of talent do we need around our board table to ensure that we reach our goal.” That’s something for the directors to feel good about, once their self-imposed retirements kick in and they have the time to reflect on what they did.
