By James S. Cassel
A growing number of private companies are establishing boards of
directors with independent members after seeing the many benefits, which
include enhanced corporate governance similar to public companies as well as
easy access to good advice. Without doubt, privately owned companies and family
owned businesses large and small would be wise to follow suit, as the right mix
of board members can add tremendous value in terms of deepening a company’s
perspective, heightening its credibility and sharpening its competitive edge.
The trick is finding the right mix of board members. Based on my experience serving on the boards of private and public companies, and also working with both in a variety of industries nationwide, here are some general criteria I’ve found to be helpful:
Reputation: First, it goes without saying that board members should be respected and credible.
Objectivity: Look for objective, unbiased board members who aren’t mere “yes people” and can provide impartial advice.
Experience: Board members should have experience not only in your company’s industry, but also in other relevant industries, such as the industries in which your clients operate. For example, if your company sells billing software for medical offices, then it’s helpful to have board members who have experience in medical billing, in selling products to medical offices, or who have healthcare-related backgrounds.
If your company wanted to seek global expansion, then a board member with global business experience would be a wise choice. The key is to have a healthy mix of board members who represent a cross section of your industry and others who may not have any direct experience in your industry but do have experience in say, technology, social media, finance, law or accounting. A great find is always a board member who previously worked for a successful competitor and can bring additional insights and intelligence to your company (of course without violating any confidentiality agreements).
Knowledge: Board members who are noted thought-leaders, such as professors and authors, can bring tremendous depth to your board and also provide invaluable guidance in handling issues and helping chart your company’s future. For private companies that need to access capital to support their growth plans but lack experience in accessing the capital markets, board members with capital-raising experience can help put in place the processes, procedures and information that are necessary to raise capital.
Contacts: With relationships being such an important part of doing business, it’s smart to add board members who bring good contacts in terms of potential clients, referral sources, investors and other key influencers and stakeholders.
Diversity: In today’s increasingly diverse market, in addition to racial, ethnic and cultural diversity, it’s important to have gender diversity on your board to help ensure a broader perspective.
Independence: As the name suggests, an independent director is someone who’s truly independent — neither affiliated with the company nor related in any way to its owners or executive leadership. The benefits of having independent directors as part of the board are significant in terms of helping manage conflicts and providing impartial guidance. Although the Sarbanes-Oxley Act applies only to public companies, and private companies are not required to have a majority of independent board members, many lenders and institutional and private-equity investors today want assurances that private companies meet proper accounting and fiduciary standards. Those that have healthy boards and the right procedures in place are more appealing to investors by demonstrating the commitment of the company’s leadership to run the business with objectivity and integrity.
Moreover, in mergers and acquisitions, mid-sized private companies that have independent board members and in general are compliant with other aspects of Sarbanes-Oxley tend to have higher valuations. For many buyers, the ability to trust the internal controls and integrity of the financials is critical, as this means, among other things, fewer surprises after closing.
It would be virtually impossible to build a board that meets each and every one of your criteria or needs, so you need to prioritize and weigh what you need versus the best-available people to join your board. However, finding the right board members is only half of it. It’s also critical to implement the right procedures:
Before joining the board, every prospective member should disclose potential conflicts of interest upfront so that any necessary actions may be taken.
The board should have a fiscally sound policy for paying board members fairly for their services.
An orientation process should be established to educate new board members on the company’s history, growth, performance and vision, and ensure everyone is on the same page.
Written agendas along with supplemental information and financial details should be distributed in advance of every meeting so board members may be prepared to discuss the issues. A formal decision-making process should be implemented and full board meetings should be conducted to discuss issues that require action rather than making decisions through one-on-one conversations between the CEO and individual board members.
Minutes should be kept of all meetings.
It’s also important to take a forward-thinking approach to developing your board so that it truly supports your company’s vision. Keep in mind that you don’t need to fill all your board seats today. Some gaps in your board structure might be best filled at a later date, when your company has progressed in its lifecycle.
One of the most challenging issues to tackle, however, is to determine the extent to which the board will be involved in the company’s decision-making process. Will the board make the final decisions, or will it simply serve in an advisory capacity? For private companies owned by one or more family members, the reality is that the family will make the final decision. This should not upset or alarm the board members, as they still add lots of value. Every board has its own unique dynamics.
So, how do you find the right board members? Rest assured there’s no shortage of good candidates — you just need to know what you’re looking for and where to look.
In fact, some people make their living serving on boards professionally. Often, these are retired executives who haven’t quite resigned themselves to playing golf every day and want to continue to apply their experience and knowledge. Of course, you can always turn to professional headhunters, but it’s also good to ask around and look for yourself, too — talk to good lawyers, investment bankers, and accountants, as they usually deal with great candidates. Indeed, privately held and family owned businesses have much to gain from having a strong, effective board of directors. Those that do will be much more likely to achieve their goals and ultimately position themselves for growth, sale or whatever they choose as their end game.
James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. He wrote this column for The Miami Herald's Business Monday section.