The advantages that independent board members can bring to a board are well documented. But how many independent members does a board need? We asked several experienced board members to weigh in on this question: How important is it for a private company board to have a majority of independent directors?
Majority-independent boards bring strategic expertise
If I were a CEO or shareholder of a privately held company, I’d require the company to have a high-performing fiduciary board composed of a majority of independent directors, for three reasons.
Independents bring:
- A willingness to challenge historical thinking and support actions that are right for the business but may be unpopular with shareholders. One example is a decision to exit a legacy division that family business owners love but that doesn’t deliver target ROI. Independents can help to avoid emotionally driven business decisions with recommendations best for both the business and shareholder returns.
- Objective viewpoints on executive performance and potential. For example, does an internal CEO candidate truly have what it takes to move into the CEO role? Would the company and shareholders benefit more from an external candidate with broader experience? What about the 20-year nonfamily CEO who is in place because of shareholder loyalty but is “phoning it in”? Independents can help family directors understand the risk to shareholder value of retaining underperforming executives or the benefits of having a mix of internal and external executive hires.
- Deep strategic expertise and experience to help shareholders fully understand trade-offs between short-term distributions and building total shareholder value. If there is an opportunity to acquire the best competitor but the acquisition requires either significant debt or reduced distributions, independent directors will make decisions to drive total shareholder value as a result of their wide range of experience.
When private company owners desire to retain long-term ownership, majority independent fiduciary boards will help to achieve that objective.
— Lynn Clarke
Clarke is lead independent director of The Vollrath Company, director of A. Duie Pyle Inc., Basic American Foods and Diana’s Banana’s, and operating partner of Jelly Belly Sparkling Waters.
Independent directors ensure good governance
Independent directors are essential to good governance because they are beholden to their fiduciary duty and not another agenda that may create even the appearance of a conflict of interest. The latter point merits further elaboration: An independent director must be someone with integrity as well as mastery of the skills required to enhance the value of an enterprise. An independent director must be selective about his or her board commitments so that any potential conflict of interest – real or perceived – is minimized and to ensure that the necessary time can be devoted to each board commitment.
Independent directors give enterprises the opportunity to bring unique skill sets to the board as it considers mergers or acquisitions. Boards should elect as independent directors people with experience in executing complex transactions who can play a critical role in asking questions and providing insights.
I conclude by cautioning that a board should have a balance of independent and nonindependent board members. To me, the duty of care requires a board of directors featuring a diversity of thought, talent and background.
— Anne Mervenne
Mervenne is a director of LifeSecure Insurance Company and Blue Cross and Blue Shield of Michigan, and president and founder of Mervenne & Company.
Independent directors help companies succeed
Independent private directors can have a significant role in shaping the direction as well as the success of companies where they serve. We provide a diverse skill set, strategic insight and fiduciary responsibility to increase shareholder value and effective decision-making. Tenets of good corporate governance encourage management to work with independent board directors who have a broader set of experiences to collaboratively address business challenges, growth strategies and exit opportunities.
There are differing views on the question of whether private companies should have a majority of independent directors. Does it really matter? In most instances, a board that has a majority of independent directors is likely to mitigate conflicts of interest, offer a proactive succession plan that considers the interests of shareholders first and possibly ensure that insiders don’t exercise an overarching influence on key business decisions. A board that is majority independent could be better suited to provide relevant and impactful oversight and strategic advice to the CEO vs. a board composed of a majority of closely associated directors.
That said, the conflict resides in the fact that entrepreneurs are typically strong-willed, Type-A personalities, and some are not accustomed to “interacting with” or “answering to” similarly strong-willed independent directors about how best to manage change, the creation and implementation of strategy, inclusion expectations from a next-gen workforce, cybersecurity threats or digital transformation investments. The debate on “majority-independent vs. majority-insider boards” is just one of the needles business leaders must thread if effective corporate governance and providing returns that maximize total shareholder value are the prime objectives.
A board with independent directors also helps private companies build trust with other organizations. For example, some capital market lenders require private companies to have boards as a condition for extending financing. In addition, a well-functioning group of independent directors signal to suppliers and customers that they are partnering with a reputable organization.
As a private company grows, the owner’s role will change, as will its management processes. In smaller start-up companies, owners usually take a hands-on role, and processes throughout the organization are informal. As the company grows, new people are added to the team. The owner’s role becomes more of a manager, and the need for formalized processes, knowledge sharing and independent thinking increases. Experienced independent directors can provide critical insights to CEOs as their role changes and allows them to partner with governance professionals as they set the short- and long-term strategic direction of the firm.
Finally, governance should add value to an organization. Private companies that view independent board directors as an instrument of accountability, growth and strategy will realize that value. Independent directors’ wealth of knowledge and experience enhances the owner’s capabilities and brings a range of new ideas to strengthen the company and favorably impact the bottom line.
— James Mitchell Jr.
Mitchell is an independent board director of both Aegion Corporation and Fora Financial.
A majority independent board ensures duty of care
A private company board seated with a majority of independent board members, whether an advisory or fiduciary board, has the best chance for long-term success. Board independence provides an objective framework to avoid insider conflicts, business model stagnation and the potential for myopic viewpoints. These situations are especially likely to occur if the board consists entirely of insiders (owners or their family members, company executives or paid advisors to management).
Shareowner-majority boards can foster groupthink, such as “We have never ventured into new markets in the past. Why would we consider such a risk when we enjoy respectable market shares today in the markets we serve?” Although company legacy is culturally important, navigating a company’s future with experienced independent board members provides shareowners with the best chance of sustaining long-term shareholder value.
Independent board members provide skill sets that either complement or are incremental to the experience of company owners, management or insider board members. Such skills can include marketing/sales, M&A/strategic planning, financial planning, product innovation/commercialization or succession planning. Many independent directors have CEO or C-suite leadership experience at other companies, which means they have been battle-tested for strategic decision-making. And in many cases, independent board members have built, purchased or sold companies based upon a rigorous strategic business planning process.
Independents who have board experience at other private or public companies can better “see what is around the next corner,” because they have been there before. They understand what it takes to build shareholder value for the long run, because in many cases they have done it.
In addition, the diversity of backgrounds, experience and career paths in an independent board provides for a more robust discussion of the company’s risks and opportunities.
Because of independent board members’ advisory or fiduciary duty of care and responsibility to shareowners, private companies benefit the most when their boards have a majority of independent members.
— Mike Airheart
Airheart is a director of HUB Corporation, advisory board member of Quartix and president of the Charlotte chapter of the Private Directors Association.