Dec 01, 2014
From the Audit Committee Institute
Board Perspective Series
What is the role of your board? What are its expectations and what are the expectations of management and owners? How is the board organized? And how does it stay fresh and refreshed?
These are fundamental questions—usually tackled during a company’s formation or even its formative years. But our recent dialogue with 100 private company directors at the 2014 NACD Board Leadership Conference Private Company Forum was a powerful reminder of how important it is to get the basics right, whatever the company’s stage or age.
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Our discussions touched on specific challenges—from governance impediments for private firms and public company examples to talent management and ethics. Not surprisingly, many of the topics came back to improving board effectiveness.
Without a regulator or stock exchange to impose oversight guidelines, private companies often “write their own rules” when it comes to governance. And while such flexibility has benefits, it also requires greater discipline to ensure the board is delivering real value to the business. Our working groups coalesced around a number of essentials that distinguish high-value boards of private companies, whatever their size, industry, or investor makeup.
The first challenge: defining the board’s role and focus. Should the board serve in an advisory function only—essentially as a consulting team to the chief executive officers and owners—or should it be empowered as a governing board to oversee operating principles; confirm the strategy and risk appetite; and monitor ethics, compliance and financial reporting? Once the owners have formed their view of the board’s role (and how it should differ from the role of ownership), the board needs to confirm that the charter captures its duties, expectations, and processes. That said, the board should beware of good governance that exists only on paper. “Codification of processes is empty when the board itself lacks discipline,” noted one director.
The board needs to take the lead, with buy-in from owners and managers, on articulating its role—as one director suggested, “having an understanding and astuteness around governance and oversight. The key here is knowing as a director where to draw the line between oversight and decision making.”
With that understanding, the board can then evaluate its own inner-workings to create a structure that makes sense. If the existing charter is too strict or too narrow—doesn’t allow for committees or special committees, lacks consideration for certain transactions, etc.—what is the process for expanding the charter? Have the company and its governance needs evolved since the charter was drafted? Along with crafting the right committee structure, establishing qualifications for independent directors and management representation on the board can be critical to ensuring the board has the depth and breadth of expertise and views it needs to help guide the company.
Disclosing and managing conflicts of interest was raised by multiple directors as an ongoing challenge for private company boards, which tend to be tighter-knit and less transparent. Some “conflicts” are obvious and part of the standard tension that may come with a diverse board that includes multiple generations of family ownership, outside investors, or even business partners. Other conflicts may be more subtle and difficult to ferret out. The key here is building an effective approach for identifying existing and potential conflicts for sitting directors as well as board candidates.
Finally, no board can stay on top of its game without a program to keep the board fresh (and refreshed). Establishing and setting a rhythm for meaningful board evaluations and committee rotation helps the board stay on top of its own responsibilities.