Latest private company director compensation metrics, hard-won lessons from a governance giant, and The Private Company Governance Summit.
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Private Company Governance 101
Hard-earned lessons for private company owners and directors.
During my career, I participated in over 500 meetings of Fortune 100 boards and a substantial number of meeting of boards of closely-held companies, including one family-owned firm. I frequently concluded that I had seen everything—only to be reminded unceremoniously that I hadn’t. Probably the strangest thing I witnessed was a hostile takeover attempt involving two very large corporations where we each wound up owning a majority of the other firm’s stock. In spite of such experiences, a disproportionate share of the troubles I encountered were with closely-held firms, not Fortune 100 firms.
The good news regarding closely-held firms is that they suffer less external compliance. The bad news with closely-held firms is that they suffer less external compliance. The latter places far greater demands on their board members.
The first lesson for a governance board of any genre is to be certain that the CEO and other top managers are individuals of the utmost integrity. The greatest risk in serving on a board is reputational, not financial. The second rule, especially for closely-held boards, is to be certain that the strategic objectives of the owners are clear, consistent, compatible and documented. Governance becomes an insurmountable challenge when some of the owners (especially family members) decide they want to liquidate and the others are there for the long haul.
In large public companies, the owners are generally relatively detached from the governance process, whereas in closely-held firms they are often very close, a circumstance that can create great challenges if the board is to govern effectively and fairly represent all shareholders. In fact, the extent of this challenge appears to be inversely proportional to the square of the distance of the board from the owners! For example, in closely-held, especially family-owned firms, it can be particularly perplexing for a board to select the senior management, let alone fire it.
The Board’s Responsibility
Probably the most common mistake of boards, other than electing an incompetent CEO or, worse yet, a CEO possessing flexible ethical standards, is to fail to recognize that the board’s responsibility is not to provide good management. Rather, it is to assure that good management is provided. The difference is immense.
Another of the essential ingredients of good boardmanship, particularly for closely-held firms, is to select board members who have “been there”—people with lots of scar tissue. Trying to save money on board compensation is very expensive (although the best board members are often ones who are not motivated to serve because of the financial compensation). Further, all board members should be selected by the board itself, with the concurrence of the CEO, not the other way around—no golfing buddies. The board should set its own agenda, again with the input of the CEO, and all boards should engage an independent audit firm.
A key part of the role of board members is to be willing to “tell the emperor he has no clothes” (Warren Buffett once indicated to me that this was the most important lesson I should teach my students when I was in the “professor” phase of my career). “Single-issue directors” should be avoided (individuals with unique skills are to be welcomed, but the director who sees every issue through the same, narrow lens is not likely to serve the firm well—or to fairly represent all shareholders).
The Board’s Ideal Size
Most large, public corporations seem to be best served when governed by boards with around 11 or 13 members whereas closely-held firms seem to function better with boards having only 5 to 7 members. Finally, having a majority of independent directors is, in most instances, highly desirable. (In the case of the board of the family-owned business on which I served, it was only through the efforts of the independent directors that a family business dispute was able to be resolved.)
With all the oversight, bureaucracy, certification and investigation that was imposed after the Enron implosion, it is my view that the most valuable requirement that was added was also one of the simplest: Boards should meet at regular intervals without members of management present.
Finally, it is critical for the owners of a closely-held firm to delineate whether they are seeking an advisory board or a governance board. The difference in their respective roles is about as great as that between the canonical pig and chicken at a ham and egg breakfast (“the chicken is involved; the pig is committed”). Similarly, the disparity in the members’ legal liability is equally distinct. With regard to the latter matter, the best advice I ever received came from Jack Byrne, then the CEO of Fireman’s Insurance: “The best way to avoid being sued as a director,” he said, “is always to vote last…and with the minority!”
Norman R. Augustine is the retired chairman and chief executive officer of the Lockheed Martin Corp., the nation’s largest defense contractor, and a former undersecretary of the Army. He is a former member of the board of directors of ConocoPhillips, Black and Decker, Procter & Gamble, and Lockheed Martin, and has served on a number of private company boards.
Private Company Director Compensation
Results from a 2014 board compensation survey offer some benchmarks for private company owners and directors.
Private companies continue to struggle with the question: “How much should we pay our directors?” There are many variables that determine director compensation: number of yearly meetings, industry, business size, business structure and more. The challenge private companies’ face is that there are few data points against which private companies can benchmark their Board compensation plans.
Lodestone Global recently completed our 4th Annual 2014 Private Company Board Compensation Survey. The survey included 235 companies across 31 different industries and 35 countries to analyze current board practices and compensation around the world. All the respondents were members of the Young Presidents’ Organization (YPO-WPO), an international group of Presidents and CEOs. The organization unites approximately 22,000 business leaders in more than 125 countries. The 235 respondents were all CEOs of companies ranging from $10 million to over $1 billion in revenues.
With over 34% of the respondents representing 35 different countries, this survey continues to explore the variances between domestic and international private company director compensation. In 2013, the survey showed domestic companies paid their directors 12.7% more than their international counterparts. This year, the gap narrowed, due to a 4% increase in median total compensation for international boards. The rise in international director pay was driven primarily by a 17% increase in annual retainer slightly offset by a reduction in per-meeting fees. Domestic director compensation also showed a 10% increase in annual retainer, but was completely offset by a reduction in per-meeting fees to arrive at comparable total compensation levels to 2013.
Public company comparisons
While international private companies are closing the compensation gap, public companies continue to increase their pay versus their private counterparts. The 2014 compensation statistics suggest that public directors are paid more than quadruple their private peers. The results of the survey do not necessarily prove that private company directors are underpaid, but rather, they highlight current compensation trends around the world. The significant increase in number of respondents, from 54 in 2012, to 235 in 2014, indicates that board compensation is becoming an even more important topic of discussion for many private and family run companies. As private company governance grows in importance, perhaps director talent and compensation will also increase.
Public director compensation in the 2014 BDO 600 survey of companies between $25 million and $325 million in revenues totals $139,048, with 45% representing full value stock awards, 39% the annual retainer, 10% stock options and 6% committee retainers and fees. Public director compensation for similar sized companies grew 36% versus the 2012’s total compensation number of $102,164, driven primarily by a 96% increase in stock awards. Total compensation for public companies represents a 4.4x discrepancy with their private peers.
Note that a statistically insignificant number of private companies used equity to compensate their board members in the survey. This continues to validate the widely held belief that private companies do not use equity as a key element of their compensation programs.
Retainers and per-meeting fees
One would expect the annual retainer to rise in line with company revenue size. Our data set generally shows this trend. The one outlier in the 2014 data, the $500 million-$1 billion category, can be explained by a number of respondents using higher per meeting fees this year to reach total compensation numbers appropriate to the size of the company.
In 2014, while median annual retainer decreased for the $100 million-200 million segment, actual total compensation remained the same as companies shifted towards increased per meeting fees and lower annual retainers.
In the segments greater than $500 million the decrease in median annual retainer can be explained by a number of family majority-owned businesses that pay family members significantly below market rates for annual retainer.
One would expect per-meeting fees to also rise in line with company revenue size. Our data set generally shows this trend as well. The largest appreciation in per-meeting fees happened for companies below $500 million with nearly every group showing a substantial increase. The $50 million-$100 million bracket paid 25% higher annual retainers but slightly less (-17%) in per meeting fees this year.
In the segments greater than $500 million, the decrease in median per meeting fees can be explained by a number of family majority-owned businesses that pay family members significantly below market rates for per-meeting fees.
MEDIAN ANNUAL RETAINER BY REVENUE
MEDIAN PER MEETING FEES BY REVENUE
Family-owned company benchmarks
Of note, 42% of the survey respondents were family-owned companies. The high participation rate of family majority-owned respondents highlights the importance of professional corporate governance to family companies. The median number of board members was six, with three independent directors. This has not changed over the four years the survey has been running. A significantly larger board leads to inefficiencies, while a smaller board risks limiting diversity of perspective so essential to driving effective strategy.
Interestingly, 84% of respondents say board compensation is not linked to performance, the same percentage in 2013. Without the pressure of public scrutiny, private companies seem immune to this trend. Perhaps that is why public companies continue to widen the director compensation gap.
Bernie Tenenbaum is Managing Partner of Lodestone Global, and has personally been a member or assembled nearly 50 Boards of Directors. His experience spans the public, private, and non-profit board environments. He currently serves on the Advisory Board of Diesco, one of the largest Caribbean-based manufacturing companies, as well as an Advisory Board member for the Woldenberg Group, a Chicago based conglomerate specializing in learning aids, laboratory distribution, and real estate businesses. Additionally, Bernie serves as the President of Children’s Leisure Products Group (CLP). He led CLP’s acquisition of Vivid Imaginations, Ltd., the largest privately held toy company in the United Kingdom. Vivid’s revenues at the time of the acquisition were in the $50 million range. Today, Vivid’s revenues exceed $360 million after a number of follow-on acquisitions, and the company now exports to 32 countries. Research assistance provided by William Tenenbaum, Lead Associate of Lodestone Global.
There is still time to reserve your seat at the governance conference for directors, owners, and advisors of family-owned, closely-held and private-equity owned businesses of all sizes.
Speakers include: John J. âJackâ Brennan, Chairman Emeritus, Vanguard Group; Director, General Electric Company Lansing Crane, Chairman Canal Insurance Company Julia H. Klein, Chairwoman and CEO, C.H. Briggs Co. Jeffrey A. Sonnenfeld, Senior Associate Dean for Executive Programs & Lester Crown Professor in the Practice of Management, Yale School of Management; Director, Lennar Corp. Meghan Juday, Director and Family Council Chair, IDEAL Industries Gerry Czarnecki, Director, State Farm Insurance, MAM Software Group, Inc. Darcy Howe, Director, Heatron and Advisory Board Member, The Bama Companies George Isaac III, Director, Findley-Davies, The Isaac Group Edward D. Horowitz, Co-Founder and Board Member, U.S. Space LLC Jim McHugh, Director, Southworth International Group Inc. and Kennebec Technologies Inc. Cynthia Watts, Director, Furst-McNess Company B. Joseph White, President Emeritus, University of Illinois and Director, Gordon Food Service Bernard H. Tenenbaum, Advisory Board Member, Diesco, Woldenberg Group Dennis Cagan, Director, Copper Mobile, Acorn Technologies, Truston, HeartStories, Inc., Tavros Technology Challis Lowe, Director, Seaway Bank & Trust Paul Bartelt, CEO and President, The Vollrath Company Steve McClure, Principal Consultant, The Family Business Consulting Group Nina Henderson, Director, CNO Financial Group, Regus plc, Walter Energy Janet Morrison Clarke, Director, Cox Enterprises, Forbes Media Holdings Seth Goldman, President & CEO, Honest Tea
LoJack Corporation, a provider of safety, security and protection for an ever-growing range of valuable assets and people, has appointed Alan L. Bazaar to its board of directors, under the agreement with Engine Capital LP, according to a GSN Magazine report.
Bazaar, 44, is chief executive officer of Hollow Brook Wealth Management in New York Citym and chairman of the board of directors of the NYSE-traded Wireless Telecom Group, Inc.
LoJack and Engine Capital will work together to identify one additional mutually agreeable director for appointment to the board prior to the 2015 Annual Meeting of Shareholders.
The Securities and Exchange Commission (“SEC”) adopted final rules amending Regulation A (“Regulation A+”) under the Securities Act of 1933, as mandated by the Jumpstart Our Business Startups Act.
The new rules, according to a Womble Carlyle article, which are part of the government’s efforts to give private companies greater access to capital, will expand and modernize existing Regulation A by providing new registration exemptions for privately-held companies making securities offerings of $50 million or less within a 12-month period.
The new rules provide for two tiers of offerings:
- Tier 1 offerings may raise up to $20 million of securities in a 12-month period
- Tier 2 offerings may raise up to $50 million of securities in a 12-month period
Companies issuing up to $20 million of securities may choose whether to proceed under Tier 1 or Tier 2.
Billy M. Atkinson, the chairman of the Private Company Council that helps set accounting standards for privately held companies, said Wednesday that he will not seek a second term as head of the group after his current term expires at the end of this year, according to an Accounting Today report.
As a result, the Board of Trustees of the Financial Accounting Foundation, which oversees the PCC along with the Financial Accounting Standards Board and the Governmental Accounting Standards Board, has issued a request for nominations for candidates to succeed Atkinson next January and to fill other potential vacancies on the Council.
Farient Advisors has announced the launch of the Global Governance and Executive Compensation Network (GECN), with Farient as the founding member representing the United States.
The GECN brings together a select group of premier independent advisory firms specializing in the compensation and governance challenges that are increasingly faced by companies and other institutions today, both globally and within their respective markets.
Through the network, GECN clients will have access to senior advisors in multiple, strategic locations who can provide best-in-class advice on their respective markets in order to address the increasingly complex compensation, tax and regulatory landscape.