Small Company, Major Crisis

The longer I serve on small private company boards, the more convinced I become that our greatest vulnerability is not lack of capital or market access — it is the belief that serious crises are proportional to company size. They are not. Small private companies experience the same governance failures, operational breakdowns, leadership conflicts and reputational risks as much larger enterprises. What differs is not exposure. It is insulation. We do not have deep internal functions, surplus cash for specialists on demand or the ability to buy certainty when something goes sideways. Yet fiduciary responsibility does not scale down simply because resources do.

The Company, a composite drawn from several small private company boards I have served, was built intentionally. From its earliest days, it sought defined governance, documented policies and clearly articulated values. It wanted a real board. It wanted financial discipline. It wanted a culture grounded in behavioral insight and wellness. The aspiration was mature. The infrastructure was not. That gap between intention and capability is where governance becomes real, because it is where directors must decide whether structure and values are decorative or operational.

The first significant test came in the form of an attractive transaction. The Company’s services arm had developed meaningful synergy with a complementary firm, and a larger organization expressed interest in acquiring the combined entity, provided our two smaller firms merged first. Several majority shareholders were openly enthusiastic. An early liquidity event would have been meaningful, and expectations began to form quickly. The excitement was understandable. As diligence progressed, structural differences became evident. The other firm had credible talent and strong client relationships, but it operated with a sole owner, limited fiduciary rigor (a bookkeeper), minimal internal controls and no independent oversight. Financial reporting was informal. Duties were not meaningfully segregated. At an equal valuation, governance maturity was not equal. The tension inside the boardroom was not philosophical. It was practical.

Shareholders wanted the opportunity pursued. Management wanted momentum preserved. But the central question was whether the combined entity would survive the level of scrutiny a serious acquirer would apply after the merger closed. The accounting evidence suggested it would not. Informal classification practices and weak controls would likely be exposed. Merging first and failing second would have compounded risk and damaged credibility with employees, customers and potential investors alike. As a board advisor at the time, I had to press that point more than once, alongside counsel, because independent governance requires someone to slow the room down. Cultural misalignment at the leadership level reinforced the concern. Integration would have required constant attention and discipline, and the board would have inherited governance risk it did not create. Preventing a bad merger was not considered obstruction. It was the most direct way to protect shareholder interests and preserve optionality. The discipline exercised in that moment also forced the Company to confront its own financial maturity and raise its standards before the next opportunity presented itself.

A second test emerged operationally. The Company produced a highly differentiated product requiring tight manufacturing tolerances. Early production occurred in-house — literally the founders’ garages — operating at full capacity with intense manual labor. Scaling required engaging a contract manufacturer, and the transition initially brought enormous relief. Larger orders became possible. Distribution channels expanded. Growth felt less constrained by physical limits. The move required trust on both sides, as the first manufacturing partner invested in equipment to meet the Company’s specifications.

Then quality began to slip. What started as manageable issues escalated into entire batches that required return. For a small private company, defects at scale threaten more than margin compression. They threaten trust at the very moment you are asking customers to deepen it. Cash flow pressure existed, but reputational exposure was more serious. Every customer mattered. Every failure carried weight. The board faced a difficult choice. It could attempt incremental remediation and preserve forward momentum or it could temporarily revert to in-house production to reassert control while seeking a more capable partner.

Restarting production was labor-intensive and symbolically regressive, but it was a bridge and a survival move. Leadership aligned around that reality, even though it felt like stepping backward. The CEO personally managed customer communication and navigated termination of the initial manufacturing relationship, thankfully without litigation. The work was exhausting and required careful relationship management to avoid escalation. Ironically, the increased order volume that had exposed the quality issue also created leverage. The Company was now credible enough to attract a more mature manufacturing partner that previously would not engage. Growth created optionality because quality discipline was not compromised when it mattered most.

At the same time, governance infrastructure was evolving. The earlier M&A experience underscored the importance of financial rigor. The Company transitioned from a bookkeeper to a more experienced accountant, and eventually to a small accounting firm. The shift was intentional and tied to future exit-readiness. A more disciplined review surfaced state and local tax filing gaps and transaction classifications that had been handled informally. Statements such as “I was told to code it this way” are not a control environment. They signal blurred accountability and management override risk, even when no one intends harm. The board suspected vulnerabilities before they were fully documented and chose to confront them directly. An audit committee was formed, even though it felt ambitious for a company of our size. That decision created a formal space for uncomfortable questions, documented follow-up and clearer reporting. Insurance coverage was reassessed more carefully to ensure it matched actual exposure rather than assumptions. Internal controls were strengthened in practical ways, including clearer approval thresholds and segregation of duties. These steps did not transform the Company overnight, but they moved it from informal adequacy toward credible discipline. Governance maturity in small enterprises is built through deliberate corrections made before crisis forces them. That work proved critical later.

The most acute challenge came when serious allegations involving senior leadership were presented to the board. The Company’s identity was closely tied to its stated values, including a strong emphasis on wellness and behavioral awareness. Policies addressing conduct and harassment existed and the board believed they reflected a zero-tolerance posture. It became clear that the language was not as strong or as enforceable as initially assumed. The individual at the center of the crisis was a major contributor whose departure would materially impact operations. In a small company, there is no bench waiting quietly in reserve. Commissioning a large-scale independent investigation was explored, but credible independence carried a cost that was not trivial relative to company size. Lower-cost alternatives lacked sufficient objectivity.

The board reframed the decision. Rather than pursue procedural perfection that the company could not realistically afford, it asked what alignment with the Company’s values required if the allegations were true. Counsel framed the discussion in direct terms. Assume the allegations are accurate. Determine what responsible leadership demands. That reframing clarified the obligation. Acting in alignment with values would carry operational cost and risk. Avoiding action would erode the culture the Company claimed to protect. Leadership ultimately changed. Policies were strengthened to be explicit and enforceable rather than aspirational. The Company stabilized, not because the path was easy, but because governance decisions were consistent with stated commitments and because the board accepted responsibility within constraint.

Across these episodes, the through-line is not crisis itself. It is the repeated choice to align action with values under constraint. In each instance, The Company faced a path that appeared easier in the short term. It could pursue transaction momentum and hope scrutiny would clear. It could preserve manufacturing velocity and tolerate quality drift. It could delay financial rigor until required. It could avoid difficult leadership decisions because the operational cost felt too high.

Each time, the board chose discipline. Small private companies do not have the insulation of scale, but they do have proximity. Directors see the consequences of their decisions quickly and personally. Constraint sharpens judgment and exposes whether values are operational or merely rhetorical. Boards of small private companies cannot outsource responsibility. They must exercise it. The absence of abundant resources does not diminish fiduciary duty. It concentrates it. A small private-company board can become more rigorous and more effective without pretending to be something it is not. The work is uncomfortable and incremental, but it is also decisive. Small size does not reduce exposure. It reduces insulation. Governing under that reality forges a board with uncommon fortitude, one that will serve the company well into the future.