Onboarding the new director, lessons for private companies from public company governance, and private company governance appointments and news.
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Three Lessons for Private Companies from Public Company Governance
Closely held companies may not be able to afford to accept the mom-and-pop style governance that has long separated public and private concerns. Increasingly, private company executives are embracing the more structured governance processes used by their public counterparts.
There’s a challenge for closely held companies: strengthening governance without compromising the flexibility that many see as their primary advantage in the marketplace. While most public companies have clear rules and strict procedures to ensure everything from regulatory compliance to risk assessment, private companies may be wary of becoming too bureaucratic or beholden to process.
Based on our research with both public and private companies, Deloitte has identified three key areas in which private companies can emulate public company governance in developing their oversight.
1) Board Composition
Companies should consider the type of board they need. How many committees can address the company’s needs? Generally, management and directors overlap more in private companies than in public ones, so boards could include outside directors to encourage fresh perspectives. Having more outsiders on the board can make discussions of risk, strategy and succession more robust.
To determine the type of outside director a company needs, the existing board should assess long-term goals and identify gaps in the expertise of the current directors. Does a company need more financial experience on the board? Should it hire a director who has a background in international expansion?
Private companies also should consider evaluating diversity. Family-owned businesses may have multiple generations represented, but age isn’t the only consideration. Is there ethnic and gender diversity? In ad-dressing these issues, companies may want to consider their customer base and whether the makeup of the board reflects that base.
It’s also important for private company directors to understand their fiduciary duty to stakeholders, just as a public company board does.
2) Succession Planning
Planning for the replacement of a chief executive officer or founder can be difficult, especially for a family-run business. But companies should be prepared for the unexpected, such as the sudden passing or disability of the CEO. Both the board and the CEO should agree the successor and how that person will be selected. Succession stability benefits not just the company and its employees, but also customers, vendors, lenders and other stakeholders who could be affected by the uncertainty of a leadership vacuum.
This isn’t a single-discussion or decision. Even after a plan is adopted, boards should consider regularly revisiting the issue to ensure the plan is still effective and that the chosen successor still meets the company’s long-term strategy goals.
Recruiting and talent retention is an outgrowth of succession planning. Public companies typically identify key employees and determine who will fill their roles if they leave. Private companies should be equally prepared for key executive changes, even in family businesses where the possibility of turnover may seem remote. The board may consider creating a compensation and nominating committee to handle these processes.
3) Strategy and Risk Oversight
Boards should consider regularly addressing strategy and risk management issues. Strategy often is identified by companies, both public and private, as one of their greatest challenges. Boards and executives should consider regular strategy retreats or meetings in which they discuss strategic ob¬jective and set metrics and develop a strategy for achieving them. Once the goals are set, these sessions should focus on executing such objectives.
Risk management is a key part of corporate strategy, and the board may consider creating a separate risk committee. Depending on the industry and size of the company, the audit committee may be responsible for overseeing risk management. Generally, the committee is responsible for overseeing the risk policies and program. The full board ultimately is accounting for risk oversight and is responsible for discussing the strategic risks to the business.
As the challenges facing privately held companies grow more complex, many find that the board structures adopted by public companies can help position them for long-term growth. For companies of all sizes, more formalized boards, with greater diversity of directors, appear to becoming the standard.
While the needs of private companies vary widely based on their size and type of business, adopting the leading governance practices of public companies can help them move beyond insularity and invite fresh ideas for building the business.
Onboarding the New Director
Is there a such thing as a “feeling out” process for new directors? There was a time in years past where a new director wouldn’t say much during his first couple of board meetings. In fact, there was an old rule of thumb that said a new director should take about a year to get accustomed to a board, its members and how the company runs.
In today’s business world, private companies do not have the luxury of waiting that long. It is imperative that the new director be brought up to speed on all aspects of the company before the first board meeting. Three directors—Janet Morrison Clarke, Bernard H. Tenenbaum, and Ed Smith—shared their best practices for new director orientation at the Private Company Governance Summit 2015, in a discussion moderated by Ray Judge of Diligent Corporation.
These directors focused on vital issues such as addressing the role of the board chair, lead director, the CEO and key managers in onboarding the new director, what types of documents and training materials are needed and what can reasonably be expected of new directors.
“You’ve got to get them prepared for the first board meeting,” Morrison said. “How do we best prepare that new individual to be hitting the ground running?”
There are many steps that an organization should go through in the process of selecting a new director. When picking from a group of candidates, there should be a pre-selection process to make sure you are picking from the right group of people.
Once that decision is narrowed down to a few select candidates, the company needs to zero in on the right fit for its board.
“Write a document of what you’re looking for,” Tenenbaum said. “You’ve begun the process of evaluating. Do they get our DNA? Do they get who we are? Then there’s less friction in the process. You have to start with the right candidate. After that it becomes more mechanics and information flow.”
Briefing the New Director
The mechanics and information flow are important to the selection process and will ensure that the new director is well versed on all matters within the company. One question that the panel addressed was how much should directors know before they are chosen? The panelists gave a list of questions and recommendations for this process:
• What materials do they receive in advance?
• Who do they meet with once they arrive?
• Facility tours: who conducts them?
• Onboarding agenda
• Set up a meeting with shareholders and/or family members/family council
• What do you share: what solicitation materials are needed?
It’s important for new candidates to come into the first board meeting with a set of expectations and knowledge about the company. To keep a new director informed about the company’s history and future direction, the organization should provide historical documents, minute meetings, promotional catalogues and white paper write-ups.
“You want to educate them in advance,” Tenenbaum said. “You should have them talk to the people who actually move the levels of business. You want to ask the hard questions.”
To make sure your company is hiring the right person, Tenenbaum gave his reasons that any good director should have for joining a new board. He said they should: think they can learn something, think they can contribute, and like the management team. He added that the wrong candidate wants to join a board for money, compensation and prestige.
“Hiring the right person is a critical first step in keeping talent,” Tenenbaum said. “It’s much easier to do that than get new ones.”
It’s also important to select the right candidate the first time around because it could be extremely difficult to make a change after that.
“It’s easier to divorce your spouse than to get rid of a non-performing director,” Janet Morrison Clarke said.
Input from the New Director
“Get them into an orientation so they can meet key executives to see how the company looks at itself and its strategies,” Tenenbaum said. “The board will come in later. Get the new director in the day before the board meeting, and get them oriented then.
“There was a time where they would say, ‘Don’t say anything in the first meeting, wait until the second meeting,’” Tenenbaum said about old practices. “Now you are expected to be an expert on things you don’t even know about.
There should be somebody bringing that person forward into the first meeting. If a new director has a different point of view, he or she should feel comfortable saying it.”
The panelists stressed how bringing on a new director can be a bit of a beauty pageant where the newest board member will want to show off. He or she will be eager to show the rest of the board how smart he or she is, how good he or she is, how talented he or she is and how much value he or she will add.
“Generally speaking, it takes two or three meetings for a new director to be honest and not pump himself up at all,” Tenenbaum said. “Getting to that place of honesty, it will make the board functional.”
Registration is now open for the fourth annual Private Company Governance Summit, May 11-13, 2016 in Washington, DC.
Session topics include:
- The Board’s Role in a Crisis
- Dealing with Conflicts of Interest on Private Company Boards
- How to Interview Director Candidates
- Cybersecurity and the Private Board
- Preparing for the Board Meeting
- Private Company Capitalization, Liquidity and Shareholder Return
Expert briefings on:
- The IPO/M&A-ready Board
- Onboarding independent/non-family directors
- Board liability and risk
- Board strategy
- Board diversity
- The dynamics of family members on the board
- Private board committees
- Director and board evaluations
- The board’s role in talent oversight and development
There have been recent advances in gender equality on boards in the last few years, however, women continue to be underrepresented.
In the United States, women hold about 19% of the directorships of S&P 500 firms, according to a report by Professor Bettina Buechel of the International Institute for Management and Development (IMD). In Europe, about 17% of directors of the largest public companies are women; in Japan, the proportion is only 1%.
Buechel wrote that aspiring women directors must overcome three incorrect perceptions: that they lack the right leadership style, don’t have the right experience and are hesitant to take risks.
She offered three suggestions for women who want to increase their board readiness:
1. Build your network.
2. Understand what it takes to be board ready.
3. Develop your story.
Foley & Lardner LLP has announced the recipients of its third annual National Directors Institute (NDI) Director of the Year awards:
- Public Company Director of the Year: Alvin R. “Pete” Carpenter, independent director for Regency Centers Corporation.
- Private Company Director of the Year: Patricia Diaz Dennis, independent director for Massachusetts Mutual Life Insurance Company (MassMutual).
The recipients will be recognized at Foley’s 14th annual NDI Executive Exchange corporate governance conference on November 3 and 4 in Chicago.
Click here for more information on the event.