Driving Good Governance
As classic car and boat insurer Hagerty quickly grew, CEO McKeel Hagerty realized that “trying to bring in a professional management team without a board [was] a disaster waiting to happen.” He also saw other benefits of a fiduciary board, such as the help directors could provide in shaping company culture and ensuring fair compensation for C-suite executives.
I had the opportunity to interview McKeel on stage during our most recent Private Company Governance Summit about his creation of a board. Hagerty is owned by the Hagerty family, some of whom questioned McKeel’s decision to create a fiduciary board. Top management talent, however, balked at working for a company without a board, and Hagerty’s new directors proved quite helpful at attracting and assessing talent.
The need for good governance is critical at private companies, given these companies’ growing importance to our economy. Public companies have been on the decline over the last two decades. Twenty years ago, there were over 7,500 public companies in the United States; at the end of 2017, there were fewer than 3,700. While a significant downward trend in the number of IPOs has limited the number of new public companies, over the last few years, M&A has sharply reduced the number of existing public companies. Although some may point to this decline as a response to the additional regulations burdening public companies from laws like Sarbanes-Oxley, Bloomberg’s editorial board wisely noted in April that the decline in public companies began before the passage of Sarbanes-Oxley and was likely “payback for the abundance of poorly conceived companies.” Moreover, as Bloomberg and others have noted, selling shares to the public is no longer a necessity to raise large amounts of capital, or the sole way for early investors or employees to cash out, resulting in firms staying private much longer.
This is in stark contrast to the more than 30,000 private companies in North America with revenues between $50 million and $1 billion, according to the World Economic Forum. Whether investor-backed unicorns like Lyft, multi-generational family firms, or owner-operated businesses, these companies are foundational elements of our economy. However, all too often they have nascent or non-existent corporate governance structures. While Lyft is lucky to have dedicated and talented directors like Maggie Wilderotter, who deftly articulates her private vs. public board experience in this issue of Private Company Director, all too often private companies lack boards, and when they do have a board, many do not have any outside directors.
In light of the growing number of private companies, the lack of proper governance at these businesses is a cause for concern. At our conferences, when we ask CEOs — especially those who are owner-operators or lead a multi-generational family business — why their company doesn’t have a board, the most common reply involves the perception of giving up control. It’s easy to forget directors’ mandate: They serve the shareholders and, in many companies, can benefit broader stakeholder groups. A high-functioning board can greatly aid a CEO, especially if he or she is a large shareholder of the business. Hagerty and countless other business leaders have reported that soon after they created their fiduciary boards, they were thanking the board members for their service.