The Effective Private Board
At a well-attended optional session before the start of Private Company Governance Summit 2015, four experts discussed the mechanics of creating and running an effective private company board. Moderator Steve McClure, Principal Consultant, The Family Business Consulting Group, led a conversation with directors Darcy Howe (Heatron, The Bama Companies), Jim McHugh (Southworth International Group, Inc. and Kennebec Technologies, Inc.) and Dennis Cagan, Copper Mobile, Acorn Technologies, Truston, HeartStories Inc., New Law Technology Inc.)
On the agenda were: preparation and engagement of the board, board leadership, board evaluations, effective director recruiting strategies and board independence.
Preparation and Engagement
“To have an effective board, the word that comes to mind is preparation—preparation at the management and chairman level, and also the preparation of the directors,” noted Jim McHugh. “The best performing board I’ve been on is one I’m on now, a family owned company, with four outside directors, two family shareholders and the CEO.”
According to McHugh, this board has three active committees: compensation, audit and governance. Each board meeting features extensive materials for review and analysis, and in addition to regular board meetings, conducts a two day off-site strategic meeting of the board once a year. But most important, “The board meeting begins where the board book ends. We don’t flip through the pages. We get into topics beyond what’s in the book.”
For Darcy Howe, this focus on what’s outside of the numbers is a key to an effective board. On one of her boards, she’s the only non-engineer or non-accountant director. “The reason why I’m on the board is that I have market experience and the owners had different ideas going forward as to what they wanted to do. While they had been running board meetings with what I call a traditional board book and numbers, they were avoiding—because they didn’t know how to tackle it—the topic of how we were going to get to where these shareholders wanted to go. My role is to help the board get out of the weeds.”
Staying out of the weeds only works, however, when the board is cohesive and well-led. For Dennis Cagan, board leadership is critical. “There is nothing in my experience that will make a board ineffective faster than a lack of leadership. The biggest dysfunctionality on a board can be a lack of cooperation and respect among the board members. The most pertinent cause of that is a lack of leadership. You need a board leader who’s willing to cut off or reprimand appropriately, whether that’s privately and separate from the board meeting, or during the board meeting itself.”
Cagan notes that board leaders should keep the board focused and on topic, without being dictatorial. “The goal is to keep a level playing field, so that all of the directors are encouraged to make comments, while discouraging repetition and grandstanding on certain issues when people have already said the same thing.”
But it’s important that this board leader—whether the chairman or a lead director—remain focused on what’s important at the board level. For Jim McHugh, one of the least effective boards he served on featured a chairman whom he considered “a meddler. He’d drive into minutia and berate the CEO about things the CEO didn’t and shouldn’t have known about, because it was so in the weeds.”
Board leadership can come from anywhere in the board, as Howe noted. “One of the traits of a good board member is that you need a high level of emotional intelligence—you have to know where the dysfunction is, know who the ‘pals’ are in the room, how to take disagreement offline, how to form a consensus.”
An excellent tool for building and maintaining board effectiveness is some form of regular board evaluation to ensure that the board is well-led, and the directors are engaged and contributing.
“I’m a believer in board evaluations, because they force conversations that may not otherwise happen,” said Howe. “Director term limit or age limits—sometimes these are signs of weaknesses on a board, because the board doesn’t have a mechanism for addressing underperforming directors. A really healthy board is willing to say to each other, ‘you’re awesome, but you need to speak up more, or take something off line.’”
Cagan recommends annual board evaluations, with the evaluation method designed around the board’s overall collegiality.
“What you’re trying to do is coax out the most pertinent information about what directors think of themselves and their peers. If they’re more likely to share this with someone they don’t know in a private verbal conversation, or if they’re more likely to do it in a written anonymous evaluation, that’s the way to do it. The board evaluating itself is just as important as the board evaluating management, which they’re going to be doing on a regular basis, no matter how formal it is.”
Recruiting Great Directors
Putting together the right mix of directors remains the largest challenge for any private company that wants an effective and high performing board. The first step is an effective recruitment strategy. The panelists recommend a variety of approaches, including:
- Use your industry’s trade association to identify potential director candidates
- Use governance group resources, such as the NACD’s BoardLink, the Private Directors Association, Women in the Boardroom, or Women Corporate Directors, among others, for recommendations and prospective candidates
- Hire a board consultant
- Retain a search firm
- Ask for recommendations from other board members
In any event, Cagan recommended that a private company board aim high. “The place where I encourage people to start is with people they know or know of or have heard of even, even famous people in their industry or region. Don’t undershoot who you can get. You can often get way higher quality and more experienced directors than you necessarily think you can.
“Being qualified doesn’t mean being suitable. There are more people qualified to be on your boards than are suitable for being on your board. Suitability comes more from their behavior, how they interact with other people—if you have a chest pounder who’s going to stand on the table and pontificate on everything, no matter how smart they are, that’s going to be bad for the board.”
“And beware of the person who is collecting a lot of boards,” cautioned Howe. “Boards take time. In this day and age, it’s not that you get the board book two days ahead, and then you go to the board meeting and then you leave.”
One of the most difficult areas for private company owners is to deal with the idea of director independence, and the potential of “loss of control.” But as the panelists pointed out, a board that isn’t at least partially independent of ownership and management isn’t as effective a group—and that the board members always serve at the pleasure of the shareholders.
“The acknowledged standard for a good private company board is to have a majority of independent directors, though there’s some discussion of what makes independence, “ said Dennis Cagan. “The number of directors is less important than having a majority of independent directors. What about control? The board reports to the owners, if the owners don’t like what they say, they can vote them out. The issue isn’t control, but to be exposed to the greatest variety of ideas and thoughts and opinions as possible.”
Jim McHugh serves on boards that have a majority of independent (non-family) directors. “An independent director, to me, is independent. You’re free to give your advice, speak your mind, offer constructive criticism—and take it yourself—but you’re there not to be a rubberstamp.”
Darcy Howe noted that family-owned businesses often have different board needs than other privately-owned companies.“ The family dynamics are really important, and having board members who understand this is really important. I call myself the keeper of the 100 year plan. You need board members who are the keepers of that plan—that’s not management’s role. Someone needs to own your family vision and your independent directors can really help here.”