Private Company Boards

Posted September 25, 2017 by Cathleen Coté , Charles S. Lachman

In closely held businesses, there is often a culture of conventional wisdom that pervades the enterprise, and the addition of outsiders with other experience often yields highly rewarding results. We are proponents of company boards of directors for many of our privately-owned business clients.

There are some distinct advantages to an outside board:

• Proper governance  A formal board will help the majority owners provide fiduciary oversight for all shareholders, including employees.  
  
• Broaden company expertise  As a company grows, there are other complex issues to evaluate, many of which require experience that is not resident in the organization, eg foreign corrupt practices, multi-country organization structure, tax and HR requirements, succession planning.  Many outside directors contribute mightily through their network of contacts, in enhancing selling efforts and fostering other partnerships and joint ventures.
  
• Strategic guidance  One of the most important roles of the board is providing strategic, operational and financial guidance, with an outside perspective, while the CEO is shepherding the day to day business.
  
• Building enterprise value  The board is a valued partner to the CEO in his/her most important role – building enterprise value, assisting on strategy to grow the business, both organically and through acquisition.
  
• Preserve the culture  Most of our clients have been successful over many years. A board can be effective in helping to preserve the culture, heritage, legacy and core values of the company.
  

In order for the board to be effective, however, we find that there needs to be the right kind of environment and culture in the company.  Board members need to be comfortable that it is a “open” culture – one that encourages and is receptive to other opinions.  Outside directors will be hesitant to join the board of a company in which there is not an atmosphere of collegiality.  Most important, it is critical that the CEO is one who listens, and is unafraid to step out of his comfort zone.

The benefits of an outside board, in our view, can be achieved through both a board of advisors or a more formal board of directors with fiduciary responsibility; that is, the important ingredient is providing the CEO with a broader view based on their varied experience.

We recently suggested to one of our private clients that we attract some outside investors with other business experience, to form a board that includes several independent directors.  We structured a minority equity recap, which provided a structure for these outside directors to purchase equity in the company, and therefore have an ownership position alongside the founding shareholders.  This structure has contributed to an environment of shared interest, and an engaged and collegial board that provides an outside perspective for this closely held business.  The independent directors have contributed to a number of important growth considerations for the business, including organizational structure, a strategic plan and international expansion.  However, none of this would have occurred if the CEO was not a broad-minded, open individual.