The way you structure your board goes a long way toward determining how well your board runs. One of the first decisions private company owners must make when building a new board is whether it will be advisory or fiduciary. As Caleb White reminds us, those are two very different things.
“A really well-functioning advisory board can give almost all of the value that a good and well-running fiduciary board can,” says White, who is a sixth-generation owner and director of Ensign-Bickford Industries Inc. and a former CEO of the company. “But remember that when it comes to the advice being given by an advisory board, there’s no obligation by ownership or the chair, depending on who that advisory board is set up for, to take that advice. While when it comes to a fiduciary board, the fiduciary board members are making recommendations on behalf of the entire shareholder group that they are representing. So that is a very different type of relationship.”
Stephanie Kim, chief administrative officer of Telamon, says her family-owned company has the best of both worlds. Telamon received a Private Company Boards of the Year Award in 2022.
“We have a fiduciary board that governs the entire corporate structure to make sure that we’re doing the things that we need to be doing from a business perspective to drive value to the shareholders,” says Kim. “But because we have several businesses within our company that are vastly different from each other, we also have advisory boards in each division to help guide the leader of that business unit. So if the business unit leader has some questions that they would like to address and get some meaningful feedback specific to their business, they are also able to do that without worrying about the financials.”
Who will chair the board is another important decision. Should the same person serve as both CEO and board chair, or should two different individuals hold those positions? Jim McHugh, director of Southworth International Group Inc. and Kennebec Technologies, prefers a separation of those very important roles. At Southworth, a family company, the CEO and chair posts are split between two members of the family. At Kennebec Technologies, the CEO and chair roles are also separate.
Says McHugh, “I think it’s a healthy balance. The divided responsibility works well.”
Kim agrees with McHugh though she notes that while Telamon now has split the CEO and chair roles, previously one person held both titles. She says the change was not made to resolve a problem; it was simply a way to change the dynamics of the board and allow for new conversations to take place.
“When the CEO was also the chair, I felt like the agenda at the board was driven by the CEO, and you discussed business things that the CEO wanted to cover. But with the differentiation between CEO and chair, it drives different types of conversations. It opens it up a lot more.”
McHugh says another benefit of separating the chair and CEO roles is the opportunity for executive session.
“The chair is the one who conducts the executive session with the independent directors, and the CEO leaves while we have that conversation. If they were the same person, that might be a little awkward.”
The number of management personnel on the board can influence not only the how meetings are conducted, but also the culture of the board and the organization in general. Both Kim and McHugh say their boards have just one member of management included among the roster of directors: the CEO.
According to Kim, “Only our CEO, who is also a family member, has a seat at the board. The leaders of each business unit then will report into the CEO. If there is a particular issue that the board needs input on, or if they need feedback from the business unit, the leader of that business unit will be invited into the meeting to present so that the board is able to ask questions specific to the business that the CEO may or may not have all the information on.”
McHugh notes that inviting members of management to board meetings can help the board identify those who might advance in the organization.
“We encourage the participation of management in the board meetings, and it’s not the same people all the time. We rotate depending on what the topics are,” says McHugh. “It’s important for us to look at potential members of management and how they could rise up to bigger roles.”
For White, the willingness to have different members of management included in board discussions is especially important, given that Ensign-Bickford Industries Inc. includes divisions as disparate as aerospace and defense, agriculture, pet food and explosives.
“Unless travel or customer issues dictate otherwise, all of the business unit leaders are attending all of the business presentations, even if it’s primarily about, say, the aerospace and defense business for that whole period of time. The CFO is there. The chief human resources officer is there. It’s been a very good move because it’s really continued to raise the bar of the level of expectations around best practices.”