I’ve noticed an active trend towards instituting private company boards. Owners are using boards to help mentor, validate, and monitor family members in senior leadership roles, and to assist with succession when it’s time for those leaders to step aside.
But there are still many family businesses that are hanging back, concerned about the potential risks of establishing a board of directors. These fears come from a misconception about the ways that a private company board differs from a publicly held company board.
I have spoken with hundreds of families over the last few years about corporate and family governance. Many are struggling with managing succession, or with handling transformative change in their industry or in their business itself. I ask them if they have a board, and most of them don’t because they don’t want to give up control.
I can understand their concerns. We all hear a lot of horror stories about the risks of establishing a board, but many of those risks don’t apply to private companies.
Differences between public and private companies
Boards of Publicly held companies:
- Work for the shareholder of the hour or quarter
- Are often hostile and have activist shareholders
- Can vote the chairman and CEO off the board
- Have directors who are not in alignment with one another
Boards of privately held companies:
- Work for the current and next generation of shareholders
- Are very aligned with each other since each director represents all of the shareholders
- Are often very congenial and work towards providing guidance and resources to the CEO
- Don’t have the power to vote off the chairman of CEO because the family can call a shareholders meeting in a matter of minutes and call an election to remove the slate of directors
Private Company Boards Reduce Risk
In a privately held company, shareholders are much more aligned, even if there are diverse opinions. They share a long-term perspective on the company, taking a patient capital or stewardship approach. When you look at what a fiduciary board does for you, they’re spreading out the risk that you’re going to mess something up as chairman or CEO. They help make sure that you’ve thought of all the different angles, all the different risks, and that you have the resources you need to be successful. With a fiduciary board, the CEO and chairman have resources, somebody to talk to and think things out with.
Managing CEO and Chairperson Succession
Thirty percent of the family businesses in the United States are going to go through succession in the next 10 years. That means a lot of inexperienced leaders stepping into crucial roles. Often, when we’re transitioning leadership from one generation to another, there’s an education and experience lag with someone who is a generation younger than the person they’re replacing.
Boards can help you mentor and grow the skills of a potential successor. They can help validate your choice and make sure you haven’t chosen a successor who’s not qualified to move the company forward over time. And after the transition has taken place, the board can step into a more active role, bridging between the previous generation of leaders and the new generation. They can provide backup for an individual who doesn’t have the experience of the senior generation and help maintain the value of the company over time.
Boards can also help the new leader gain the trust of the family. If the board is well respected by the family, their approval can help a new CEO or chairman get buy-in, and it can be much easier for them to move forward as a credentialed individual who has the trust of the family.
Managing Family Council Succession
In addition to helping with the succession of a CEO or chairman, the board can also help replace an outgoing family council chair or family director quite easily. That way, people walk in having been validated by the board, and there are fewer question marks about whether their selection was strictly nepotism. While you can’t completely avoid nepotism in a family business, you can at least make sure new leaders are also selected based on their skills and experience, not just their family relationships. Having a well-regarded board in place helps immeasurably with this process.
My family has gained a huge amount of value from our board. We are in the midst of replacing two family directors who are stepping down. Our board is going to interview all of our family director candidates and make a recommendation about who is the most qualified, which will increase our chances of getting the best possible people for the job.
In most cases, private companies can benefit greatly from having a board. They provide crucial support to the CEO and chairman, and help reduce the risks involved in replacing the company’s leaders. They come with fewer problems than the boards of publicly held companies, and their benefits greatly outweigh the risks.