Independent Directors Accelerate Growth
A breakdown on how they can add value.
Mead & Hunt, a private architectural-engineering consulting firm, takes its cues from public companies when it comes to governance.
“The best private companies govern themselves as if they were public companies,” says Rajan Sheth, chairman of Mead & Hunt and CEO overseeing the company’s growth from $10 million to $100 million since 1994. “We hold ourselves accountable to our shareholders and maintain the transparency to give our shareowners confidence that we are acting in their best interest.”
To that end, the firm has independent board directors limited to two three-year terms, thus diminishing the chance directors become too entrenched.
Private companies are also increasingly adding expertise and skills by adding independent board directors as a way to bolster growth.
“Governance practices among leading family-owned and other private companies are shifting as more business leaders recognize that better oversight can have a dramatic impact on the success of their organization,” writes Maureen Bujno, Center for Board Effectiveness, Deloitte LLP in a blog post about private company governance. “Increasingly, private companies are considering outside directors to encourage fresh perspectives and assist in making discussions around risk, strategy and succession more robust.”
Some see the shift to more independent boards as a function of changes in the public company sector.
“Sarbanes Oxley created dramatic changes for public company boards. The audit committee was tasked with new responsibilities, including signing off on the company’s financial reports,” explains Karen Kane, a governance expert and Private Directors Association board director. “The trickle-down influence on private company boards was felt as well.”
There is a host of ways independent board directors can add value:
Independent viewpoints are outside the circle of many decades of owner/family/management involvement. For growing, expanding companies, international expertise may also be needed.
New skills are added at the board level, maybe in technology, digital, marketing or human resources, and often more valuable insight than from a paid external consultant. Knowledge is gained at the board level through someone who is now part of the company and supporting the mission and vision.
Due diligence and another look at finances, and growth is mandatory. Directors who have led companies that are larger; who have experienced mergers and acquisitions; and who have been involved with cash flow issues are a good option. It provides another layer of financial acumen to support and assess the treasurer and CFO.
Elevate the view on strategy from outside the inner workings of day-to-day operations and management. At the 45,000-feet level look at long-range implications for strategy and add case study experiences from different backgrounds.
Public company governance best practices help—and seeing what fits for a particular private company. From Deloitte’s Bujno: “Strategy is often identified by companies of all types as one of their greatest challenges. Some private company boards are emulating their public counterparts by adding regular strategy retreats and enhancing board discussions with regard to the development and monitoring of strategic objectives. Acting more like public companies enables them to focus more on strategic objectives and identify metrics for success and enhance prospects of achievement.”
Evaluating business plans, potentially CEO succession, and management performance against goals. Independent board members can provide insight and give feedback on an equal footing with the CEO. They can be a voice and lend an ear with objectivity
Sarbanes Oxley created dramatic changes for public company boards. The audit committee was tasked with new responsibilities, including signing off on the company’s financial reports,” explains Karen Kane, a governance expert and Private Directors Association board director. “The trickle-down influence on private company boards was felt as well.”
New ideas and connections support the success and growth of the company. They can offer ideas based on successes and failures experienced outside the company that can add insight and wisdom to this company’s decision process; connections that can facilitate new business; bank, accounting, or legal relationships; and bridges to M&A prospects.
Decrease risk with the objectivity of independent directors. They can appraise generational changes in leadership and readiness for promotion and evaluate potential M&A ideas from "a bird's eye" view.
Energize and bring enthusiasm to learning about the company and seeing how the business works from a fresh perspective. They can provide excitement about the role to add value and increase success.
New diversity of thought, expertise, background and possibly gender or ethnicity via independent members: Diverse boards are better boards.
Term limits are especially important for independent board directors. After 15 years with a company, is a board director still independent in thought and perspective? Limits are also an opportunity to refresh the expertise and skills that are needed on the board.
When corporate boards include diverse perspectives, boards are able to make better decisions for the company and its stakeholders. For diversity to add value and add to the bottom line, it’s important to select board directors after a thoughtful assessment of what expertise and skills are needed in relation to a current board matrix of skills while also thinking about future company challenges and board retirements.
Clearly, the increase and the importance of independent board directors can contribute to the success, oversight and growth in private companies.
Cindy Burrell is CEO of Diversity in Boardrooms and a founder of Private Directors Association