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The Challenge of Managing Investors and Time Horizons at a Private Company

Board Perspective Series

Private company boardrooms are often disrupted by their own invitation. High-net-worth individuals, large family offices, and private equity investors are increasingly being brought in as critical business partners or capital providers and, ultimately, as directors. At the same time, these investors can bring different expectations, time horizons, and the potential for conflict to the boardroom.

Mixing minority investors with family members, employee-owners, and founders, if not effectively managed, can add a disruptive element to discussions on everything from growth and dividends to leadership transitions and exiting a business. At times, these differences of opinion can lead to a stalemate in the boardroom and missed opportunities for the company. “Months and even years of time can be lost by directors bickering among themselves,” one director recently told KPMG.

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But conflicting views aren’t always counterproductive and, in fact, can contribute to an engaging and robust discussion. A keen awareness and open understanding of what has brought everyone to the table and, more importantly, what outcome compels them to remain engaged can be the key to building consensus and managing the boardroom dynamic. Consider what motivates each director: Are family members divided? Do various financial investors have different time horizons? Are employee-owners appropriately represented?

Moreover, outside investors can bring conflicting fiduciary duties, particularly if they represent a fund or investment group with a greater focus on short-term returns. Has that new investor caused the company to focus too heavily on cost cutting to the detriment of the business, impacting customer relationships and damaging employee morale?

A transaction-focused, shorter-term mentality can be mitigated if directors put themselves in the mind-set of a new or existing customer or a potential buyer. “Get out and meet with customers, employees, and suppliers. Understand if the company is actually structured correctly to achieve the business goals approved by the board,” we heard recently.

Differences of opinion among outside investors, founders, or family members and executives tend to peak around key transitions, such as a potential ownership or management change. In the months leading up to such a change, a healthy board evaluation process can determine if the board has the right competency, skills, and understanding to guide the company where it needs to go. “The board owes itself that level of transparency. What perspective can help the company make this transition?” asked one director.

Here, the value of independent directors shines through, helping to balance the conversation between short-term goals and long-term opportunities. Does the board need an “independent” spark? What is the scope of the role and expectations for an independent director? Are independent directors nominated or introduced by outside investors truly independent? Do they understand their fiduciary role?

To gauge the dynamics, independent board members, both sitting and prospective, should consider the following: How does the ownership structure inform how decisions are made? Who sets valuation and the dividend policy? Are there formal compensation and audit committees? What is the level of transparency and information sharing from management? Does the board need to be refreshed? Do other directors embrace their role, or are they simply filling a seat?

Armed with insight and understanding of the boardroom, true independents and independent-minded directors can help the company both benefit from the critical capital and experience brought by outside investors while helping to manage any conflicting agendas and time horizons they introduce.