At our June 2021 Private Company Governance Summit, the CEO of a large private business recounted how he recruited a close friend to serve on his company’s board. The friend was a very talented public company CEO and checked a number of boxes for an ideal director. And the benefit of bringing on his friend was obvious — he got a smart, competent person whom he trusted. Prior to joining the board, the friend and he had agreed that service on the board was appropriate as long as it didn’t jeopardize their friendship.
Initially, the friend was an outstanding director and helped the CEO become a better leader. However, eventually decisions came close to causing personal conflict and they jointly decided that the director should step off the board before their friendship fundamentally and irreversibly changed. Today, the friend still provides meaningful advice to the CEO and actually is a better personal advisor now.
A similar story has played out in many boardrooms over the years. Is it ever appropriate to have a close friend of the CEO on the board? Will other shareholders and management always assume such a director has the interests of the CEO and not the company in mind? Will other directors feel they are not in the inner circle and that the friend has preferential access?
In a public company, a potential director’s close friendship with the CEO generally would be a disqualifier. In fact, many search firms label such relationships “toxic.” And one reason cited in favor of director term limits is that friendships between management and directors frequently develop over time, potentially making it more difficult for the board to effectively push back, when needed.
But private companies, unrestricted by independence requirements, have much more latitude in their choice of potential directors. Unlike public companies, many private companies have a smaller number of shareholders who frequently are highly engaged in the business and who often have a deep understanding of the company and its employees, customers and suppliers. Many have found success with board members who have very close, long-term relationships with the shareholders, such as lawyers, bankers and long-time employees. Going in with open eyes, they find the relationship with the company and the deep knowledge of the business and industry can, in certain cases, outweigh any potential conflicts of interest.
Similarly, for private companies in certain circumstances, a friend or two on the board, among a number of independent directors, can be beneficial. You have seen the friend in multiple settings and know what you are getting. And the bonds of friendship can be helpful during challenging times when true friends tell you want you need to hear, not what you want to hear.
While friendship is not an automatic disqualifier for a board candidate in a private company, the right boundaries need to be in place. The friend must be able to talk candidly, both in the boardroom and in private. And most importantly, as the CEO at our Private Company Governance Summit noted, both parties should go in with open eyes to avoid the double jeopardy of harming the friendship and/or the business.