[Editor’s note: the following is the first installment of our Private Company Director Q&A series. We will continuously update this section with responses from different directors of private companies covering a wide range of topics.]
Dennis J. Cagan
Boards: Acorn Technologies, Copper Mobile, Prista, Heart Stories, Tavros Technology
What makes private company board service different than public company board service?
There are of course a myriad of governance specifics that are the same between public and private companies. The differences primarily stem from the shareholders, and to some degree the financial objectives. In terms of the shareholders, the owners of a private company are usually very identifiable, much smaller in number and with much more concentration than a public company. Typically this simplifies the job of determining exactly to who the boards’ fiduciary responsibility is. While the private board agenda no longer has to include the regulatory requirements of exchange listings and public shareholders, they are replaced with all the politics and emotions tied to partners, family members, and large shareholders (including controlling interests) versus minority holders. In terms of financial objectives a public company is usually focused on shareholder value, which is typically measured in share price and dividends. With a private company there can be a variety of complimentary, or even conflicting objectives that have to be factored into the governance equation. Is the company being built to go public or be merged or sold? Does it, or will it, require additional capital infusions to meet its objectives? Is the firm being run to simply provide income to the shareholders over a long period of time, as in a multigenerational family business? Is the enterprise employee owned, as an ESOP or partnership, and therefore needs to provide for the build-up of value for individual shareholders in order to provide enough liquidity to buy them out at retirement? Is the cap schedule such that the returns to shareholders are severely skewed, as when controlling employee owners take out a disproportional share of the excess capital in the form of compensation? Or, is it skewed in the other direction, as when controlling non-employee owners take out a disproportionate share of the excess capital in the form of dividends or distributions? All these things can uniquely affect the responsible exercise of a private board’s fiduciary responsibilities.
What are your biggest challenges in executing your role as a private company board member?
In my experience the biggest challenges in executing the role of a private company director is understanding the unique ownership structure of the company, clearly understanding who you owe your fiduciary loyalty to, and faithfully and responsibly keeping on that path within the boundaries of reasonable understanding and a strong ethical foundation. One note here is that this job can be made easier of much more difficult depending on the relationship of the CEO to the controlling (or majority) of owners/shareholders. To what degree is the CEO part of the controlling ownership structure, or simply a hired manager? Sometimes getting to the truth in certain circumstances is challenging.
Tell us about your first board experience. How have things changed for you since then?
In my case that is a little bit of a trick question. My first board was a software company I co-founded in 1968. In that case the board was only the three founders. It was relatively informal and the meetings were less about governance than they were about operational, technology and growth challenges. Strategy, risk assessment, best practices, and other concepts common now were non-existent. Today my boards are somewhat more organized, somewhat more formal, much more involved in higher-level issues like strategy, risk mitigation, and best practices. All are comprised of 50% or more independent directors. Even the one company where I was one of four co-founders, only two are left on the board – one is a VP and I am not an employee at all. The remaining directors are our non-founding CEO, our largest investor (non-executive chairman), an independent world-renowned academic and Fortune 100 director, and an independent high level technologist/operating executive. The board is very congenial, but all business and by the book – I set it up that way from the start in 1998.
How important is gender diversity on private company boards?
This is an interesting question since I authored an article of diversity in the current issue of Private Company Director – When Is Board Diversity Actually Diverse? The piece covers it in much more detail that I care to here, but when asked ‘How important is gender diversity on private company boards?’ My answer is somewhat provocative; it all depends, but perhaps gender is not important at all. Allow me to point out the extremes. If the company employs all women, sells it products to only women, and has only women shareholders, then I would argue that they in fact should not have any men on the board. Of course the reverse is also true. A man owned, man run, male employee-only company selling products only to and for men, does not really need a woman on the board. However, to whatever extent the stakeholders of the enterprise are both men and women – the shareholders, the employees, the management, the customers, any strategic partners, etc., I believe that the best performing board would be a capable mix of gender. The same goes for race, age, skills, domain expertise, and demographic and geographic knowledge. The best board is one that is balanced, containing all the key knowledge that the business requires, that which is not adequately represented by management.