When you think about what sorts of directors should compose the boards of private and family companies, the short and unsatisfying answer is, “It depends.”
There are two dimensions to consider in deciding board composition: general considerations that apply to all boards and specific criteria that vary by your company’s situation.
General Considerations
General criteria you should always consider in selecting board members include the following:
Independent voices. A board composed entirely of insiders lacks the insight and questions that outsiders are best at asking. (Individuals with a financial connection to your company — lawyers, bankers, long-term consultants or customers — are not independent.) But understand that “independence” fades over time: Board members who serve for too many years, even as independent directors, may lack the ability to drive change. Define a term of service and retire any outside member who has served on the board for more than three terms.
Industry-specific expertise. This is vital, but not required, for all board members. Include some board members with experience in other industries. They will help the board detect potential disruptive competition and surface fresh opportunities.
Proven board experience. It can be learned in nonprofit settings with strong governance boards (as opposed to working boards).
Diversity. It still matters, but it’s about diversity of perspectives, not necessarily demographics. To promote diversity of thought, consider board members beyond just CEOs. CEOs have many skills, but they are not always the most strategic minds in the candidate pool. They may be too operationally focused, which is a mindset that your management team brings. CEOs may also lack the passion and time your business deserves. Additionally, the board’s composition should align with your customer base. A largely male board for Victoria’s Secret (a women’s lingerie company) was likely a key driver of steep market share losses starting in 2016.
And make sure you avoid the “fear of missing out.” Don’t automatically include an expert in emerging technologies, such as AI. Instead, the board should first assess how the technology will impact the organization in terms of both risks and opportunities. If you decide to bring an expert onto your board, make sure the individual can add value in other areas.
Situational Specific Considerations
There are seven key lenses that will help you evaluate specific skills, talents or expertise that will best benefit your board.
Board purpose. The CEO and directors must agree on the board’s purpose. For example, an advisory board will operate differently from a governance board. A family board will operate differently from a private equity-owned board. Ownership and role require different members. It’s surprising how often nonalignment arises, leading to frustration among directors and leadership teams. Shared purpose also defines the boundaries of board actions and the management team’s obligations to the board.
Company ownership. A family business benefits even more from independent directors than a privately held company does. Family relationships are complex and outside directors offer dispassionate advice. They also send a strong signal to stakeholders, including employees, vendors and customers, that the company will be run effectively.
Family businesses should establish a family council, a multigenerational group of family members that operates independently of the board. It educates the family on the business and sets policies guiding family interaction with the company. For example, the family council should define the criteria for any family member to serve on the board or in the company and provide educational opportunities for future family board members. The council chair should serve on the organization’s board to act as a bridge between the company and family members.
Private equity or venture ownership firms generally add partners to the board, but those members may not necessarily have the industry background or skill sets the company needs to scale. Make sure you bring that expertise onto the board. For example, private equity acquirers of a nonprofit organization’s spinoff technology failed to meet this need. They appointed the nonprofit’s chair and vice chair to the new board, but they lacked the necessary marketplace expertise. As a result, the new company made an ill-informed fixed-capital investment, and the organization is now penalized by too-high fixed costs.
Company performance. Consider a company with a successful financial and execution track record and a clear strategy for future growth. It has different board hiring needs than one facing current or emerging serious challenges. In the former, you replace directors whose terms are expiring with new members offering similar skills and cultural fit. In the latter, first identify root causes for performance issues. Then, recruit directors who can help the management team address them most effectively. For example, a promotional products company lost market share because the costly relationship-selling advantage it had relied on had become less relevant as its customers sought to engage digitally with their vendors and use lower-cost suppliers. The outside board directors were the company’s lawyer and banker, who were not truly outsiders, and lacked the expertise needed to identify the issue or challenge the management team. This company needed directors with deep expertise in digital transformation.
CEO status. Has an effective CEO been in place for a while? If a forced or planned transition is ahead, ensure the board includes an experienced senior manager with chief executive experience to guide the new CEO search. Search firms are great at surfacing candidates. But the final selection must combine knowledge of the company with an assessment of the CEO candidates’ skills.
Board effectiveness. Is your board only now bringing on outside directors? Or is your board new? Ensure early members have financial and governance skills. These are also the first two committees you will form as the board grows.
Do you have an existing board that is effective, consistently adding value and maintaining good relations with the CEO? If not, identify the failure point and take corrective action. Here are some examples:
- If a board is divided on strategy, a new director should be a bridge builder with strategy and communication skills to turn conflicts into deeper learning for both sides.
- If a board is stagnant and adding little value, bring in catalysts for change. Such a director should be able to “bring the future to the present” and help board members understand the urgency of change.
- If tensions exist between the board and the CEO over agendas and roles, bring on a director with strong governance experience to support both the CEO and the board.
Future plans. Consider the company’s next five years. If an exit or acquisition is planned, there’s significant value in having board members with relevant experience and financial-sector connections. A family company will benefit from a family company CEO who has navigated more generational transitions.
If your future vision is a clear break from the present, bring on directors who have done what you want to do. CEO Stephen Schlecht almost went out of business with his first enterprise. In establishing Gempler’s in 1986 as a catalog marketer, he brought Lands’ End executives onto its board to ensure success. The company had a successful exit to Grainger, with Schlecht keeping a small business, Duluth Trading, which he has since grown and taken public. Directors like the ones Schlecht selected are headlights in the fog. It is no surprise that Duluth Trading — a durable, comfortable and functional casual and workwear clothing company — has a former executive from Cabela’s (a company well-known for outdoor workwear) and an expert in digital transformation on its board.
Skill needs. Is there a weakness in the company’s skill set, perhaps because of a new manager or changing role requirements? Directors who can mentor, evaluate and oversee a potential new hire add a lot of value here. When the company’s strategy skills are weak or the board feels uncomfortable with the management team’s strategy, bring on a highly strategic thinker with board experience. By suggesting new processes, challenging hidden assumptions and orthodoxies, providing coaching and offering insights from a higher balcony, the new director will strengthen the organization’s growth engine. The same goes for branding and marketing backgrounds, as well as operational skills.
A Simple Test for Board Value
While we have answered the question of who belongs on a board, an easier question is the reverse: “Who does not belong on the board?”
The answer is anyone who cannot add value to the company in more than one area. In selecting candidates for financial expertise, for example, make sure they also have strong strategy skills to ensure your budget reflects strategic execution needs.
Selecting the right directors is critical to the future of your family or privately held business. Each year, assess your board’s performance. Identify strengths and weaknesses, value drivers and critical gaps. Select new directors appropriately. And do not hesitate to ask non-value-adding or disruptive directors to leave, provided you have tried coaching first.