Outside Directors and the Privately Held Enterprise

Outside Directors and the Privately Held Enterprise

In our experience, a private-company Board of Directors is often comprised of select and small groups of shareholders and non-shareholder top executives. Most private companies have a Board to advise the Chief Executive or its owners with the conduct of the business, engage in strategic decision making or attend to the matters outlined or required in the corporation’s bylaws, business (loan) agreements or policy.

The activities of the Board can be anywhere from highly structured to ad hoc. As an organization matures, it is normal for a Board to increase in size and reflect the diversity of ownership amongst shareholders.

In a family business, this increase in structure & process often occurs around the transition from 2nd to 3rd generations, but may occur earlier.

At some point in its growth, an enterprise will generally consider the inclusion of outsiders to the ranks of its Board of Directors. By outsiders we generally mean Board members that are: non-owners, non-family members (stakeholders) or non-company employees (directors without direct company ties). The duties and inclusion of outside directors within a publically-traded company is directed (or suggested) by regulators.  This is not so for the private enterprise. But, we think their use within a privately-owned enterprise is a good idea nonetheless.

Should outside directors be on your Board? If you see yourself in one or more of the following situations, the answer may be yes:

  • Your Board practices and activities are somewhat disorganized and lack focus. This is undermining Board effectiveness, and may actually pose a risk.
  • There is a lack of external perspective in Board discussions and deliberations. Sometimes it is hard for members to see outside of the building.
  • As the operations and scope of the company become more complex, it is apparent that this growing sophistication is creating a challenge for current Board members.
  • Industry expertise on the Board (or available to the Board) is more limited than is needed or required.
  • The annual (compliance and other) workload of the Board—as a whole—is increasing at a pace that is beyond the ability of current Board members to absorb its volume and scope of deliberation. Much (too much) is left on the table and undone at the end of each Board meeting.
  • The company staff-support work available to the Board is either weak or inadequate to addressing the issues at hand, and Board members do not know to ask for or affect needed upgrades.
  • There are a majority of younger generation shareholders on the Board. They collectively have little business experience, but can vote their shares. The lack of gray hair is telling.
  • There is much family-member stress between generations regarding such matters as policy, resource allocation, pay and capital spending. The Board meeting has become a place for these differences to be aired, and consequently Board effectiveness is being compromised.

Sound familiar? It may be a good time to consider outside directors for your Board. If so, read on and I will outline for you how you can expect an outside director to help “raise the bar” for your Board. My comments will also suggest what type of person you should seek to nominate or retain. Let me summarize with three things an effective outsider can do for your Board and enterprise—right out of the gate:

  1. Add the experience of an already seasoned member of a board of governance to your review and decision-making processes. If you are unsure regarding Board or process “how to’s,” or if things do not run smoothly, an experienced hand will help fix that promptly.
  2. Add the expertise of someone who has solved tough, marketing, sales, human resource, pay and partnership problems with industries or companies—just like yours. With their help, you should be able to rapidly clear away those nagging impediments to growth and profits.
  3. Add the ear of an unbiased (un-affected) 3rd party to discussions and decisions within the company and amongst Board members (or other stakeholders). Sometimes it is difficult for an insider to tell a relative that they are missing the point, without emotion or the appearance of bias. An outsider should and will speak his or her mind. Their job is to increase long-term shareholder value, and they will generally (and diplomatically) cut through the baloney and point all efforts to that end.  

However, at the mere mention of adding outside members of the Board of Directors, some owners will bristle because “no one but a shareholder should be able to vote on or decide matters of company policy.”  That is a very credible argument (and may be true according to your company’s bylaws), and is an understandable position. On the other hand, the company does not need to broach this issue if it adds non-voting directors, or outside advisors to the Board. In this way the company can enjoy all of the added experience, expertise and objectivity discussed above. In any event, we advise that you consult company bylaws, existing Board policies and your chief legal counsel to assure that outside members or advisor are added to the Board in an appropriate and effective manner. Be sure to do it right.

Are you in a position where you think it is time to add outside knowledge and perspectives to your Board, or have your tried and it has not worked? In either case, ask yourself 4 questions: 1.) Why do we need to do this? 2.) What should (must) the outsider bring to the table? 3.) Who do we know that will fit the bill?  And 4.) What must the company and Board do to make outside Board members or advisors both welcome and effective?

Ask, and answer, the above questions, and I think you will be happy with the outcome.

Wilkening & Company has advised clients for 30 years in areas of strategy, organization, resources allocation and governance. If you would like to discuss Board effectiveness in more depth feel free to write us at bob@wilkeningco.com.
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