Great directors are essential to the success and longevity of a business. They bring a wealth of experience, strategic insight and diverse perspectives that can shape a family-owned or privately held business’s trajectory in significant ways. In an environment where rapid changes and unforeseen challenges are the norm, directors who possess a deep understanding of the industry, sharp analytical skills and the ability to navigate complex situations are invaluable. They are trusted and impartial guides for important processes like ownership and leadership succession, business strategy, and the sources and uses of capital.
It’s no wonder that years after creating a board that includes independent directors, owners often remark that it was one of the best decisions they ever made. Ninety-one percent of companies reported increased EBITDA since implementing a board, according to the 2023 Private Company Board Compensation Survey from Compensation Advisory Partners and Private Company Director. In this article, we’ll discuss how to recruit the best directors to help create effective boards.
It Starts with Owners
A fundamental role for owners is to elect directors to the board — not just to fill seats, but to ensure the business stays on course and thrives.
Company owners discuss and agree upon a vision, values and expectations for business performance. Expectations typically address things like growth, returns, risk and liquidity. This framework is communicated to the board, ideally in one voice.
Executive leadership is responsible for developing and reviewing with the board a strategy designed to power the enterprise to achieve the owner vision within the framework of values needed to achieve business performance expectations.
The role of the board is to see that the enterprise is well-led to achieve owner goals.
Experience shows that family businesses with boards that include three or more independent directors perform better in the long run compared to those with fewer or no independent directors.
Qualified family owners can also play an important role on the board when they have a deep understanding of the family and the leaders.
Additionally, before owners start the recruitment process, it’s important to acknowledge common concerns and be prepared to address them. Discussing topics like board versus ownership decisions, the cost of director compensation, the misconception of losing control and fear of accountability will be helpful. While addressing these concerns, it’s essential for owners to communicate transparently and inclusively with family and involve third-party support where needed. Unpacking these challenges from the start helps reap the rewards of an effective board.
Questions to Consider
- Why recruit independent directors to the board now?
- Is there any fear or resistance to creating a board with independent directors?
- Will the executive decision on director selection be made by specific family members or owners, or will it require a unanimous vote?
- How can we leverage a professional search firm to conduct an unbiased and effective search rather than managing it internally?
- Do you understand the difference between a fiduciary and advisory board?
Criteria for Serving on an Effective Board
A large family business had a board comprised of the owner/leaders of the business. Board meetings were really executive leadership team meetings. Family shareholders who were not in leadership saw the board as biased in matters of succession and the uses of capital. Together, the family decided to create a board with independent directors in which the only owner/leader serving on the board was the CEO. The shift had a profound effect, as the board was then broadly seen as a fair arbiter and more valuable in its role of ensuring that the business was well-run in line with the goals of all owners.
In creating an effective board with independent directors, owners can consider some fundamental questions like:
- What are the experiences and skills needed on the board to achieve the envisioned future?
- How does that compare to the existing board?
- How is the board as a whole and directors — as members of the group — performing?
- How will the gaps be filled now or in the next few years?
- How can we diversify our board to bring a unique perspective and enhance value? What term limits or policies can we put in place to ensure we keep the board innovative and effective?
We know an independent director isn’t the CEO’s golfing buddy. But what is an independent director? Here are independence standards of the type often used for family business boards. A director will be presumed to be independent if the director of XYZ Company:
- Is not an existing XYZ owner or the spouse of an existing owner; an immediate family member or descendant, or spouse of same; or the beneficiary of any trust established by persons described above or the executor, administrator or personal representative of any person described above who is deceased or legally incompetent.
- Has not been employed by XYZ in the past three years.
- Is not affiliated with a significant customer or supplier of XYZ.
- Is not an advisor or consultant to XYZ and is not employed by or affiliated with a company that is an advisor or consultant to XYZ.
- Has no personal service or consulting contracts with XYZ.
- Is not employed as an executive of another company where any of XYZ’s owners or leaders serve on that company’s board.
- Is not an immediate family member of an individual who is or has been employed during the past three years by XYZ as an executive officer.
- Is not a financial partner with an XYZ family member in another property or business venture.
Family members applying to be on the family business board may or may not be required to meet the same criteria as independent director applicants. Common criteria for family member applicants include:
- Owner of this business.
- Deep understanding of the family and the leaders in this business.
- CEO of this business or leadership experience in another business of a size equal to or greater than this business.
- Experience on at least one other profit or nonprofit board.
For family members who are owners or beneficial owners, there is often the possibility of a stint as a board observer with mentorship from the existing board to aid in orientation and development. This helps to exercise the oversight skills needed in the boardroom.
Independent directors have a critical and unbiased role in the business. Using these criteria for an independent director can avoid the pitfalls of prioritizing familiarity over expertise.
Questions to Consider
- Are you prioritizing familiarity over expertise?
- Are your current directors independent? If not, in what ways could there be a conflict of interest?
- Are you willing to seek independent directors outside your personal network?
- Are you creating a board that serves as window dressing or a rubber stamp or will the directors be active problem-solvers for the business?
Great Processes Create Great Boards
It came down to three finalists for two independent director seats on a family business board. All three were invited to headquarters for tours and individual meetings. The culmination was a simulated board meeting in which all three finalists participated. A strategic opportunity was presented and discussed. Two of the finalists participated in a collegial way. When they disagreed, it was in a professional way with the good of the company in mind. One of the finalists who was smart and experienced unexpectedly acted in an unfavorable way. He tried to dominate when he should have been listening to his peers. He disagreed in a way that put others down. Because of the group process, the decision was easy about the two individuals that would receive an invitation to join the board.
When embarking on a process to fill one or more board positions, a board prospectus can be created. The prospectus is an attractive, attention-getting document that typically includes history, business mission, roles and responsibilities of the board, ownership, key leadership, position requirements, board compensation and the meeting schedule. Importantly, it includes the essential and desirable criteria for the new independent director. There is a nonconfidential version for broad distribution that may not include the name of the company. Top candidates will sign a confidentiality/nondisclosure agreement before receiving the confidential prospectus that includes the name of the company, financial information and other details. These can serve as primary sources of information for candidates.
Candidates can be uncovered through networking and associations. Often, an outside firm is brought in to help ensure exposure to a broad array of interested and qualified candidates. Outside firms typically maintain networks that they can tap into and also have processes for reaching out to candidates in new areas. Candidates uncovered through owner networking can be fed into the process to help create a level playing field for narrowing down the initial candidate list.
Submitted cover letters and CVs are reviewed. After an initial cut, a broad number of candidates are asked to answer some questions in writing to get specifics on how they view themselves fitting the criteria. That’s preceded or followed by a virtual interview with the outside firm. At that point, interested and qualified candidates may be asked to sign a confidentiality/nondisclosure agreement. Then they receive the confidential prospectus.
Those who are strongly interested and able to invest the time needed for membership on a new board typically engage in a follow-up interview with the nominating committee or a subset of the owner/board group. Coming out of that process, the field is further reduced and the final candidates are invited for in-person meetings, typically at company headquarters.
Boards involve collegiality with the ability to share ideas and differences of opinion in a respectful way. Since it’s a group process, in-person interviews can include a simulated board meeting. Candidates may be asked to consider a real opportunity or challenge as if they were already part of the board to see how they listen, assert and interact. If there are, say, three finalists for two independent director positions, they may all be with the board at the same time for such an exercise.
Preparing and integrating new board members is an important follow-on step. It’s advisable to have tours and a general orientation. There is often a dinner the night before the board meeting to create some informal interaction time. The aim is to ensure that the board, with its new independent directors, gets off to a highly productive start.
Why Would a Talented C-Suite Leader Want to Serve on My Board?
A CFO of a large multinational corporation expresses interest in joining the board of a regional retail chain in California. She was near retirement and was motivated by a desire to help smaller businesses navigate financial complexities and drive growth. This role offered her a chance to directly influence strategic decisions and make a tangible impact on a growing company. The family board she ultimately joined was thrilled to have her; it was a win for the family business and her.
Family business owners sometimes wonder why talented leaders might want to serve on their board. The truth is there are many who would like to serve and take advantage of the vast benefits of board service.
CEOs can broaden their horizons and develop as leaders by serving as an independent director on another board. They often feel they just don’t have the time. But if they wait until they’re close to retirement, they miss out on the development opportunity and find themselves behind others with more board experience.
Boards typically want independent directors with a generalist perspective. But they also value forms of diversity that offer different viewpoints valuable to the enterprise. That opens the door for CFOs, chief operating officers, chief marketing officers, chief information officers and business unit leaders with profit responsibility.
Presenting to or serving on their own enterprise board is a great way for aspiring directors to get started. Serving on a nonprofit board is a way to be engaged in the community for a good cause. It typically also offers the opportunity over time for board leadership.
Board experience is more valued than board education. But engaging in organizations that provide board education and networking opportunities is helpful. Board legal duties and director liabilities are examples of aspects that can be learned through education.
The reason directors serve on boards is generally not for the pay they receive. But they do want to be recognized for the time they invest and the value they bring. Board compensation studies show broad ranges that generally increase in line with enterprise revenue. While serving on boards can be a great process of continuing engagement in business during or after leaving active leadership, it should not be for the money.
Many senior executive leaders, whether active or retired, have a passion for positively impacting businesses. These individuals thrive on solving complex issues and turning around struggling mid- or large-cap companies. Again, their motivation is not driven by the need to replace their salaries but by the desire to contribute to the development of solid strategies that ensure a business’s long-term success.
What’s Possible for Your Board?
Some family-owned and privately held business owners may be skeptical about their ability to attract and recruit high-quality independent directors. In our experience, many active C-suite executives from large companies are eager to serve on smaller, less complex boards. They see these opportunities as a chance to learn, offer guidance and make a meaningful impact on family-owned or privately held businesses. Each director is driven by a desire to contribute positively and help shape the future of these organizations.
Common misconceptions that hinder director recruitment are
- A great director wouldn’t be interested in our company.
- We can’t afford to hire an independent director.
- Our company is too small.
- Our company is underdeveloped.
Directors Can Help Businesses Prosper for Generations
Recruiting the best directors means finding family and independent directors that bring skills and experiences that help support the owner’s envisioned future. Great directors bring important value and act as a team in seeing that the business is well-run now and in the future.
The best directors stand out by embodying key attributes that set them apart, such as:
- Respect and integrity. They uphold the highest ethical standards, fostering trust and transparency within the boardroom and the broader organization.
- Diversity. They bring various perspectives and experiences, enriching discussions and enhancing decision-making.
- Business acumen. They possess deep industry knowledge and strategic insight, enabling them to provide valuable guidance on complex business challenges.
- Collaboration and consensus. They excel at working with others, building strong relationships and achieving consensus on critical issues.
- Oversight and strategy. They balance governance with strategic thinking, ensuring the company’s long-term success while maintaining rigorous oversight.
By focusing on these qualities, you can recruit directors who will meet your current needs and help future-proof your business.