CCL INDUSTRIES INC.: BUILDING AND MAINTAINING AN EFFECTIVE BOARD Trevor Hunter prepared this case under the supervision of Professor Larry Tapp solely to provide material for class discussion. The authors do not intend to Mustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies of request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, co Richard Ivey School of Business, The University of Western Ontano, London, Ontario, Canada, NGA 3K7: phone (519) 661-3205; fax (519) 661-3882; e-mall casesivey.uwo.ca. Copyright @ 2002. Ivey Management Services Version: (A) 2009-12-03 "I have to work harder to ensure stakeholders don't think of CCL as a 'controlled' company. As CEO, / am accountable for the outcome of our decisions, not the board." Donald Lang reflected on the relationship between himself, president and chief executive officer (CEO) of CCL Industries Inc. (CCL), and the CCL board of directors. CCL had recently undertaken a major change in strategy when the planned and publicly announced sale of one of CCL's major divisions was abruptly cancelled. "We had specific conditions and they ultimately were not met, so I decided to cancel the deal. I then had to explain the rationale to the board." Fortunately for Lang, he and the CCL board had an excellent and effective working relationship. It was not always this way. In the past, the CCL board was much less involved and less effective. Through hard work, the CEO/board team was on pace to meet its goal of being the world's premier packager of consumer products by 2005. In order to ensure this goal was attained, Lang and the board felt that there were issues that needed to be addressed to further the improvements they had made over the years. CCL INDUSTRIES INC. CCL was founded in 1951 by Stuart Lang Sr., his brother and Stuart's two sons, Gordon and Jim. It was Gordon, however, who built CCL into the preeminent aerosol, custom manufacturing, rigid packaging and labeling business in North America. Fifty years after its founding, sales topped (see Exhibit 1) $1.6 billion and CCL employed 7,500 people around the world.CCL was originally named Connecticut Chemicals Limited and originated as a joint venture with an American company. Under the leadership of Gordon Lang, Conn-Chem (as it was more widely known in the early days) eventually outgrew its American parent and repatriated the balance of the equity it didn't own. Through a number of acquisitions, the lines of business expanded beyond aerosols. To reflect this change of direction, the company's name was further shortened to CCL Industries Inc. in 1980. Essentially an outsourcer to major packaged goods and consumer products firms, CCL produced some of the best-known name brands in the world, yet was largely unknown to the general public. The company produced its various products in close association with its customers and was divided into four divisions:" 1. CCL Custom Manufacturing - was the largest contract manufacturer of outsourced consumer products in North America and the United Kingdom. Products included some of the best-known brand names in the world for personal care, household, over-the-counter (OTC) pharmaceutical, oral care and specialty food products. 2. CCL Container - provided packaging solutions to the major global consumer products manufacturers from locations in North and Central America. Products included aluminium aerosol containers, tubes and jars. 3. CCL Plastic Packaging - from operations in the United States, this division produced plastic tubes, tamper-evident closures, dispensing closures, lined closures and jars. 4. CCL Label - was the largest North American printer of identification and information labels (paper and film pressure sensitive) with plants located in the United States, Canada, Europe, Mexico and Puerto Rico. CCL first went public in 1972. Its shares consistently performed well on the Toronto Stock Exchange (TSE) until the 1976 "ozone scare." Reports issued by the Environmental Protection Agency (EPA) and the Food and Drug Administration (FDA) had suggested that chloro-fluorocarbons (CFCs), the propellant in aerosol cans, lead to depletion of the earth's ozone layer. These reports seriously injured the global aerosol market. By this time, CCL had both diversified its product line (sufficiently that a decrease in aerosol sales did not cripple the firm) and converted away from use of CFCs (which were ultimately banned in the United States in 1978 and in Canada in 1979). Nevertheless, the "ozone scare" significantly depressed CCL's share price. Sensing an opportunity, management repurchased all outstanding shares and took CCL private. The firm went public again in 1980 and has remained public since then. Donald Lang Although he was the son of the man who built CCL, Donald Lang was not automatically given the job of president and CEO.After graduating from the HBA program at the Richard Ivey School of Business (formerly Western Business School), Lang worked at Nabisco Canada for two years. He knew that he wanted to eventually work at CCL, but felt it was important to gain some management experience in a larger, more formalized organization prior to joining CCL Industries. He entered the business in a plant operations role in 1982. By 1993, he had been appointed president of CCL Custom Manufacturing and later, president and chief operating officer (COO) of CCL. Finally, he became CEO in 1999. Although by 2002 he had held the top management position in CCL for only three years, he had been involved with the corporation's governance as a member of the board of directors since 1991. During his time as a board member, Lang had been considered a catalyst for change. He had often not agreed with the processes or extent of involvement of the CCL board. He had been only a minority voice, however, and was unable to effect change. When Lang wrote a letter that suggested he might resign from the board should not be forthcoming, the board responded by agreeing to some initial modifications. The CCL Board From its incorporation, CCL has had only three board chairs. The first was Gordon Lang. In discussion with the board, a succession plan was developed whereby he would step down from his position but would be recognized for his contributions with the new title, founder chairman. The chairman title and corresponding responsibilities were appointed to the then current president and CEO, a longtime senior CCL manager. In 1999, the first independent board chair, Jon Grant, was appointed (see Exhibit 2). In the heydays of CCL's rapid growth in the 1960s and 1980s, the board could arguably have been characterized as a rubber stamp to management. The senior management of CCL was composed of longtime employees who had been hired by Gordon Lang and had worked their way up the ladder through hard work. There was no doubt that they were exceedingly hard-working and competent, but decisions were made with the expectation that once made, they would have to be approved by the board. A quote from Edward W. Dobson, former executive vice-president and chief administrative officer and one of the builders of CCL, illustrates this point well. "We didn't have time for regular meetings, memos, reports or a rigid management structure. We just talked about it, made a decision and did it." Donald Lang recalls: After we went public we were trying to make the bridge to a public structure but we still clung to our past. We brought in outside directors, but we were still only providing a rubber stamp. The firm's managers were not being held accountable for their actions. Then we had U.S. directors who were getting frustrated with the situation and pushed for a change. I was in a better position as COO and together we were able to make the necessary changes. It was Donald Lang who ultimately instigated a formal evolution of the board including a change in the nominating and governance committee chairman, the hiring of a search company for new directors and a 'Quoted in D.B. Davies, Magic in the Mist: The exciting and improbable saga of CCL Industries 1951-2001, CCL Industries Inc., 2001, pg. 49.succession plan for his father to retire as chairman with the long-term plan of separating the chairman and CEO roles. Lang commented, "Unfortunately business performance has to get pretty bad before the board is compelled to take any action against a CEO. When I was appointed CEO, I wanted to make sure the CEO was held accountable to the board." The separation of the CEO and chairman roles was advocated by Lang, even though he was the incoming CEO. The focus on accountability went beyond management however. In 1994, the board itself decided to bring in a consultant to assist in a board self-evaluation. The purpose of the evaluation was to improve the process and contribution the board made to the operations of CCL to ensure it was acting as more than a rubber stamp. Three annual evaluations followed until 1997, when they were stopped. Lang suggested that the evaluations were both not welcomed by the board members and had received negative feedback: During that time (i.e., the period between 1994 and 1997) the company's strategy lacked focus. There was a need for the board to work better together and to be more aligned. They were not interested in being evaluated when there were other issues that were considered a higher priority. Lang was convinced that self-evaluation was critical to the success of the board as an effective group. "The intention (of the evaluations) was good, but the execution was wrong. We needed to find a better way to make them a priority and make them work," said Lang. A new evaluation process was introduced in 2000 that received more positive feedback. The addition of new directors, with differing opinions than those on the board from 1994 to 1997, helped improve the reception and effectiveness of the evaluations. In order to give structure to CCL's governance policies, a document titled "Statement of Governance Policies of the Board of Directors of CCL Industries Inc." was prepared in 1994. This document was updated regularly and was given to every current and new director. Its purpose was to: Set forth the mandates and principles adopted by the board of directors of CCL Industries Inc. for the good stewardship of the company. It is intended as guidance for the board, for each director and for the committees of the board in the exercise of their respective responsibilities in the governance of the company. The document contained policies on the following: The mandate of the board as a whole, The mandates of the audit, human resources, nominating and governance, and environment and occupational health and safety committees, The composition of the board, Related and unrelated directors The role of the chair The composition of committees The role of a director, Access to management and independent counsel New directors, Criteria for new director selection Orientation and training for new directors Duties of the president and CEO,Performance assessment procedure for the president and CEO, Proceedings and meetings, Meeting procedures Information The following is a list of some of the specific activities undertaken by the board that Lang felt significantly improved the performance of the board after his appointment as CEO in 1999: 1. The appointment of a non-executive board chair. Aside from the skills and experience Board Chair Jon Grant brought to the position, the fact that there was independence at the top allowed for constructive challenging of the CEO and other senior executives that pushed for performance, clarity and accountability. 2. Grant, like Lang, was interested in bringing in more unrelated directors to further enhance the independence of the board. Members were selected strategically. The contribution and skill set each potential member could bring and how each prospect could help improve CCL's performance were heavily considered. 3. On average, Lang expected that directors should spend one day's worth of preparation briefing themselves on the materials the corporation sent them one week in advance of meetings for each four- hour board meeting, aside from their additional roles on the various committees. 4. Board committees were chaired by outside directors with functional executives acting as secretaries. There was thus more direct contact between board members and other senior executives. Senior executives were also required to make presentations to the board on topics of business plans. This gave the board more freedom to critique their strategies directly and assess the ability of the senior executives the CEO had hired and promoted. 5. A two-day board member retreat entirely devoted to strategic planning was instituted. Day one involved presentations from the divisional presidents that included an exchange of ideas and opinions. Day two was reserved for the board and the CEO only. The CEO was challenged and pushed, while at the same time, the experience and skills of the board members were leveraged. 6. One board meeting per year would be held at one of the manufacturing sites as an opportunity to better understand the business details. 7. One half-hour was set aside at every meeting for the board to meet without the CEO present. This time allowed for frank discussion on such issues as CEO performance, compensation, evaluation or any other sensitive topic. 8. It was usual for the board members to meet for dinner informally the night preceding the CCL board meeting with, and sometimes without, management, which offered another opportunity for directors to converse and build a stronger relationship. 9. The splitting of the CEO and chair positions was a shift from the way the roles had been conceived and institutionalized at CCL in the past. There was frequent contact between Lang and Grant and a good working relationship was fostered. Lang was accountable to Grant, but while Lang often consulted Grant, decisions were made by Lang. As a non-executive chair, Grant was an "outsider." Although the two worked together closely, Lang ran the business.10. Board agendas were very detailed and included: Scheduled time for outside directors discussions General background information . . Consent agenda items; Items that could be approved with one motion, past board minutes, for example Committee reports Operations Update All pertinent information was included in advance briefing books, including a summary of the resolutions to be proposed. 1 1. The amount and type of documentation directors received was revamped. Agendas were set one month before the meeting and materials were delivered to directors no less than one week before the meeting. If an item missed the agenda, it had to be held for the next meeting (emergencies excepted). Thus, senior executives that wanted something on the board agenda had to be sure that their timing was on schedule. Meetings were scheduled on a two-year rotating basis to ensure full attendance. There was a conscious attempt to strike a balance between providing too much detail (thus overwhelming the directors) and too little information. These and other measures had led many of the directors to feel that the CCL board was one of the most effective on which they had served. MOVING FORWARD Although the CCL board and Lang had made an effective team and understood and fulfilled their roles with accountability, there were still issues that needed improvement. The latest board evaluation had resulted in some concerns that needed to be addressed." Three main areas in which the board could be strengthened emerged from the evaluation: the strategic planning process, succession planning and board composition. Strategic Planning While the directors noted that this process had improved over the years and that the value of the two-day retreat was clear, they felt that more of their time should be spent on reviewing strategic opportunities and risks, and the plans for execution, rather than management reports. There was concern over a lack of clarity and direction on the part of the board. While unanimity was not the goal, greater consensus was desired. Concerns as to how to reach a consensus in a timely and effective manner were raised. The directors felt that in order to effectively aid in the strategic planning process they needed to be involved in the process on a more regular basis. The content, amount and timing of the information they received regarding strategic planning needed to be reviewed. Did they need more information? Should they meet more often? Who should be at the meetings? What sort of information should they receive? These questions needed to be addressed.Succession Planning Nearly all the directors felt that more time needed to be spent on the issue of succession planning. Many felt that this issue was often considered secondary, which is why it had not been given its due attention. An annual discussion regarding potential successor candidates for all senior positions was suggested. The discussion would center on their readiness, development plans, retention risk and compensation. Another issue of key personnel involved a lack of clarity of the role of the board's HR committee and the degree of support the committee received. The HR committee saw part of its role as challenging the CEO on whether the senior executives were not only experts in their area, but also strategic thinkers and could take work off the desk of the CEO. This followed the philosophy of CCL founder Gordon Lang who said "I hired good people and then got out of their way. I had no time to constantly look over people's shoulders or question their every decision." Perhaps the content of the annual reviews needed to be changed. Perhaps the HR committee needed a broader scope for potential candidates. A further important issue that needed attention was the development of an emergency plan in case of an accident involving the CEO or other senior executives. Board Composition Although the majority of board members was composed of "outside and non-related" directors, there was a concern regarding the skills and experience that were needed at the board level to assist with strategic planning in the coming years. Criteria for future directors included: U.S. or international background (with a concern regarding the logistics problem for international directors) Experience in corporate finance and mergers and acquisitions Information technology experience A current CEO of a significant-sized public corporation operating internationally Human resources experience Although the board was always looking for the best candidate, there was a clear recognition of the lack of women and visible minorities at the board level. While not looking to fulfill a quota there was a desire to break away from the "white male" stereotype characteristics of many boards. THE CURRENT SITUATION After the change in strategy, Lang recognized the need and potential for greater board involvement in the strategic activities of CCL. As this sort of activity could be the norm in the future, the need for flexible, nimble strategic planning, along with informed governance, would only increase in the face of competition and global uncertainty. In 2002, CCL operated in nine countries around the world. There was a global economic slowdown and decreased consumer confidence. The effects of the terrorists' attacks on September 11, had further 'Quote taken from in D.B. Davies, Magic in the Mist: The exciting and improbable saga of CCL Industries 1951-2001, CCL Industries Inc., 2001, Prologue.exacerbated the poor economic conditions. Acquisitions and divestitures, keys to CCL's growth strategy, would be difficult in the coming years, particularly in new markets around the world. The challenge was to develop and execute strategy and appropriately develop and leverage the skills and experience of the board. Clearly, the board was working well now, however, there were issues regarding strategic planning, succession planning and composition that needed to be addressed if it was going to fulfill its role as steward in the future business environment facing CCL. Making changes to the board as an anticipatory change, tended to be difficult, especially when the change affected something that was working well. What needed to be done to increase the involvement of the board? How could the board's concerns be handled? Was it time to update or overhaul CCL's governance policies? There was a fine line between governing and running the firm; and neither Lang, nor Grant, wanted to cross that line. The Richard Ivey School of Business gratefully acknowledges the generous support of CCL Industries Inc. in the development of these learning materials