June 13, 2005
Entrepreneurs Should Cultivate Employee Satisfaction, Personal Discomfort, Says Kelleher
by Erica Grieder

Although employee satisfaction has always been the top priority at Southwest Airlines, its founder advises entrepreneurs to forget about their own preferences when looking for directors. “Pick people for the board who you’re uncomfortable with,” said Herb Kelleher in his keynote lecture at the 21st Century Governance for Early-Stage Companies conference, held June 9-10 in Austin.

Directors who hail from different backgrounds, he explained, can fill in gaps in the experience of a company’s founders. In building Southwest’s board, for example, Kelleher looked for directors who could help meet the needs he anticipated. “All in all, we had 16 members, which I might call our “show board” to be honest about it,” said Kelleher. “Political figures, financial figures, airline industry executives.”

“I knew six out of the 16,” Kelleher continued. “In other words, as the founder, I didn’t just say ‘I want people I feel comfortable with or who I’d like to be in a bar with until two in the morning’—although that is not a disqualification, I hasten to add.”

Having a board of directors with diverse professional qualifications also helped allay the concerns of potential investors.

“The airline business is expensive to get into, and it’s operationally very complex. It’s not like opening a Dairy Queen,” Kelleher explained. Some observers “regarded our quest as one by Don Quixote and Sancho Panza—that it may have been noble, in essence, but it was also wacky, in practice.”

By building a board of directors from various industries, Kelleher was able to send the message that Southwest was serious and savvy about pursuing its goals.

The chief hazard of having directors with whom you are uncomfortable is that there may be friction between the company’s founders and its directors on various points of strategy. Kelleher did not make much of this issue, possibly because he became inured to opposition from all sides during the company’s early days, when he “was attacked everywhere.” As Southwest’s CEO, he took a number of actions that were questioned widely at the time. Anticipating deregulation, for instance, Southwest had five public offerings in the 1970s. And Kelleher prioritized “intangibles” like employee satisfaction that other companies barely considered, and which Kelleher now says is “our greatest competitive asset."

Kelleher learned to be sanguine in the face of criticism, whether from his directors, the press, investors or analysts, and responded by proving them wrong.

 “People with Big Chief tablets and a crayon would say, ‘You need these six or seven things to survive,’” he said, “and I would say, ‘I must be talking to you through a swami, because from your point of view we should have been dead years ago.’” With Southwest reporting the best net profit margins in the airline industry for years on end, its directors began to put more confidence in Kelleher’s decisions.

Kelleher added that Southwest Airlines, which saw two rival airlines indicted for anticompetitive activities against it, has always hewed to conventional wisdom when it comes to corporate governance.  When Sarbanes-Oxley was passed, he said, “We didn’t find it an insuperable burden. If you’re conducting your business with the utmost probity, it’s just a gloss on what you’re already doing.”

The 21st Century Governance for Early-Stage Companies conference was sponsored by The University of Texas at Austin's IC2 Institute, School of Law, and Herb Kelleher Center for Entrepreneurship.
 

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