Jul 16, 2014
From the Audit Committee Institute
Board Perspectives Series
Shifting markets and business models pay no heed to corporate structure: Rapid changes and new risks and opportunities brought about by technology, globalization and other factors have made the boards of public and private companies an increasingly vital source of expertise and perspective to help keep the company on track.
For private companies, however, shaping the right board—e.g., expertise, independence, mentorship—can be particularly challenging.
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Often dominated by founders, families, business partners and direct investors, private company boards tend to have deep knowledge of and passion for the business, but may lack the independence, expertise and objectivity equired to clearly see and effectively respond to new risks and opportunities.
When asked what attributes were most important for director recruitment, private company directors cited industry experience, leadership and financial expertise as their top choices. It’s a healthy question for every private company board today: Where are the company’s gaps, and how can the board help to close them?
Does it make sense to recruit independent directors to fill gaps in governance practice or management skill? Are there other board advisers whose experience and counsel can help the company grow or navigate particular issues? In my interactions with owners and directors of private companies who have wrestled with filling gaps on their boards, a few themes tend to stand out:
Don’t feel the need to cover all management functions. The board can stay nimble by just focusing its oversight in areas particular to the company’s current stage or challenges. For highly technical companies operating in energy exploration or biotechnology, for example, an outside industry expert—who could serve as a fully independent director—can fill the board’s knowledge gap and help the company navigate myriad risks and opportunities.
Third-party financial experts can be invaluable. Former corporate finance and business analysts can help ensure that the company’s balance sheet or path to liquidity aligns with the long-term strategic plan and operating model.
Private companies can be greatly served by an advisory board. A formal or informal network of third-party individuals can assist the board and consult with management on strategy, innovation, risk or other challenges facing the company. (An advisory board can also serve as a proving ground for future directors.) According to the latest NACD Private Company Director survey, only 17 percent of private companies utilized a formal advisory board; yet, at recent events hosted by KPMG’s Private Markets Group, a number of directors emphasized the advantages of an informal advisory board. (Keep in mind, however, that informal advisers aren’t necessarily fiduciaries.)
Finding truly independent sources of third-party non-financial information can be particularly challenging. Often resource constrained, many private company boards wrestle with “information gaps”—around third-party risk, social responsibility, human resources and other areas that may be beyond the scope of traditional corporate, legal and financial advisers.
Private company directors can also play a key role supporting the company’s leadership. Whether serving as a mentor to the CEO or CFO, counseling on key management decisions, serving as an interim officer of the company or helping guide the company through a crisis, an outside director who has “been through it before” can bring a seasoned perspective to the table.
To this point, truly independent voices on the board are essential. As one independent private company director succinctly put it: “You can’t feel beholden to the party that recruited you.”
As private companies of all sizes look to enhance their governance and drive long-term value, taking a hard look at the board’s composition—and considering the need for formal or informal independent voices and expertise in the conversation—can be a major stride.