Tl;dr - Private company owners sacrifice opportunity when they resist strong governance. Loss of control, and the cost of a board and governance are common concerns. Those are ill-founded, and rapidly maturing and increasingly effective governance best practices can deliver significant value for owners.
The Case for Private Company Board Directors
Private companies power America.
Recent stats (unverified) indicate that small businesses contribute 44% of the GDP. Since 24% of GDP is government spending, that means that small businesses are actually 58% of the non-government GDP!
But it's not just "small" biz.
96% of businesses with >$100MM are privately held.
They're vital to the economy, to communities, to employees, to owners, and to the industries in which they operate. They're doing well.
But could they reasonably do better?
The answer in many cases is likely yes.
The improvement could come in many small areas. Perhaps days receivable outstanding can be tightened up. Maybe more sales reps can be trained and coached so they hit quota. Strategic partnerships might help them reach new markets and incorporate technology without the burden of development and support. And talent management could become a differentiator in today's challenging talent market.
The culture in most privately held companies is a reflection of the founders' and owners' strengths and weaknesses. Decisions around priority areas of focus reflect their passions.
Initially, that contributes to success, but later, it can inhibit growth.
The point at which that occurs depends on many factors. It may be in Gen 1 or delayed until Gen 3 or 4. But at some point, market conditions evolve to create a mismatch with the internal mindsets.
This is well understood. And yet, it still afflicts most businesses. Why?
Perspective.
The perspective of the ownership team is both a strength and a weakness. And management is often a reflection of the owners. They operate in an echo chamber. That's not criticism. After all in many cases these are thriving, vibrant, growing businesses.
However........what could they be? Growing how much faster? Or, if owners explicitly decide against rapid growth (a rational and understandable choice) how much smoother could they run, or more predictably, or higher margin, etc.?
Given that question, what's the answer?
Pros and Cons of Private Company Boards of Directors
Increasingly, as I watch companies, I believe the answer is robust governance.
Often private company boards check the box to meet state registration and regulatory requirements for corporations. There's a nice dinner and annual meeting documented in the requisite minutes. And that's it.
That is entirely the owners' prerogative.
There are cons that concern owners. They worry about losing control. They have a clear vision for what they want to do and don't welcome alternative perspectives - especially ones that they might be forced by an independent board to consider.
And they worry about cost. Strong independent directors expect compensation. Robust governance requires meetings and engagement - which in turn often require executive and management time, travel expense, etc.
The pros, though, can be incredibly compelling.
An effective board with appropriate independent, executive, and family directors can be a strategic asset. Business is moving so quickly, and there are countless competing priorities for executive attention. Strategy (carefully choosing countless things to ignore) is critical but hard to formalize amidst massive trends like cybersecurity, ESG, AI, and digital transformation.
Strong governance, including deliberate identification of important attributes that independent directors can contribute, should help CEOs more confidently navigate the complexities of business.
Is Loss of Control Realistic?
Let's address this head-on.
Worried about losing control? Stop.
First, you can certainly establish an advisory board that has no fiduciary authority.
Second, in most privately held companies, the CEO is the sole or majority owner. So guess what? The board's fiduciary obligations are to the owner—that's you. They might conclude that you underperform as CEO and should be replaced. But you, as the owner, decide. You don't want to relinquish operating control to someone else? You don't.
In both cases, you can simply ignore the board.
Of course that obviates the value. And if that's your inclination it's probably better to simply skip it.
But if your ego is secondary to a genuine desire to optimize the business, then despite the discomfort of challenge and change, you'll welcome an effective board.
What About the Cost of Governance and Private Company Board Directors?
MLR Media (publisher of Family Business, Directors and Boards, and Private Company Director magazines) conduct an annual director compensation survey in conjunction with Compensation Advisory Partners.
Access to the full data requires registration and participation in their survey. Recently, during the Private Company Governance Summit, they shared some preliminary highlights.
Here's the one that I found most impactful.
For companies with $50-$250MM in annual revenue, the total cost of governance (director compensation, incentives, committee pay, meetings, travel, etc.) was approximately one tenth of one percent of revenue.
What's a reasonable return to expect on that proportionally minuscule investment?
Obviously it differs with every company, owners' goals, management's ability, quality and diversity of thought and perspectives among the independent directors, etc. But here are some reasonable, hypothetical examples.
- M&A expertise that helps identify a strategic target and complete a transaction adding adjacent market reach and 5% in accretive earnings
- Introduction to a strategic finance source who helps develop the case for creative debt financing for execution on a compelling opportunity
- Marketing and sales insights that reduce existing customer concentration risk, and grow margin by 1% and customer lifetime value by 27%
- Strategic partnership introductions
- Transaction experience to help the family take some money off the table while still maintaining ownership and operational control
- Process and efficiency process improvements
- Talent management best practices from much larger companies that help select and develop 2nd and 3rd standard deviation talent
- Risk management oversight that prevents expensive mistakes and mitigates exposure
Will these benefits materialize immediately?
Probably not. Governance will take time to implement and mature. Owners, executives, and directors will require time to develop rapport and clarify the strategy that governance will support.
Here's the bottom line - the asymmetry is amazing. A relatively small investment in superb governance can pay enormous dividends.
Maturing Governance and Private Company Director Expertise
My big takeaway from the Private Company Governance Summit is that there is an incredibly rich body of experience readily available for private company owners who are genuine about improving governance to unlock the value of their business.
There was a palpable feeling of collaboration and support among folks at different stages of the governance journey, and I didn't encounter a single owner or CEO who regretted implementing and investing in governance and substantive director expertise.
It's not easy, though. There are countless decisions to make, not least how to find, vet, and select independent directors, which will influence the speed with which enhanced governance delivers value and the ultimate return.
A Bit About My Background
Why do I care about this, and what can I contribute?
I see too many companies doing well but underperforming. Founders, owners, and executives are incredible in certain ways and completely naive in others. They often think too small. Proper governance and capable independent board directors can help unlock enormous potential.
Particularly in the industrial manufacturing space, the natural focus on what companies make often comes at the cost of understanding buyers, markets, and how to market and sell more effectively. That's the topic of an article I wrote recently for Private Company Director magazine; The Importance of Operator Excellence in Effective Oversight. That's also the subject of a couple of case studies I've written and led for groups of directors.
I take board governance seriously and am an active member in both the Private Directors Association and the National Association of Corporate Directors. I hold certificates in Private Company Governance and Private Equity Portfolio Company Governance from the PDA and am Directorship® Certified by the NACD.
My board document is available here.
