Is a Board of Directors Right for Your Private Company?

Understanding the types of boards, directors’ roles, and how to choose and compensate members are all important considerations no matter the size or age of your company.

Privately held companies, including family-owned businesses, are major contributors to the region’s diverse economy. The 2017 Inc. 5000 list of the nation’s fastest-growing private companies includes 107 headquartered in Chicago – that’s the second highest number of any U.S. city. The success of many private companies can be partially traced to the influence of an industry-savvy board of directors. This can be true no matter the size or age of the company. Understanding the types of boards, the role directors play, and how to choose and compensate board members are all important considerations. Taken together, they can help private companies and families decide if and when to establish a board, and how to leverage its assets.

How to Know When Your Company Needs a Board of Directors

Bruce Taylor was Vice Chairman of the Board of MB Financial Bank, and for many years he headed his family-owned business, Cole Taylor Bank. Taylor says, “At some point every family business owner says to him or herself, ‘we can do better.’ That can mean better decisions, better profitability, better planning.”

Inc. magazine contributor Omar Romman agrees. He tells business owners to think about what their company “is missing out on by not having a board.” He points to pivotal points in a company’s growth—articularly, big events such as a merger or acquisition, or the departure of a CEO—that can bring the need for a board into sharp focus.

Which Type of Board Could be Right for Your Organization?

Unlike publicly held companies, private businesses are not required to have a board of directors. For companies considering forming a board, it’s important to understand the two options: advisory and fiduciary. Forbes Magazine explains that the two types of boards have different roles and requirements: “Fiduciary boards have a responsibility to protect shareholders—all shareholders, not just the majority owners. They are required for public companies, but not for privately held ones. Advisory boards, on the other hand, are informal bodies that provide non-binding advice for management.”

Because an advisory board is less formal, with no official role overseeing finances, acting on their advice is up to management. Taken from a different perspective, unlike fiduciary boards, they cannot hire or fire the CEO, nor hold him or her accountable for achieving goals set by the board. For these reasons, advisory boards are often the choice of startups—or those waiting for outside investors.

There are areas where the roles of both types of boards intersect: they have a say in setting strategy, but are not involved in day-to-day operations. Both help management prioritize initiatives as they eliminate distractions and encourage the company to move in profitable directions.

What If Yours is a Family-Owned Business?

The value of an outside board, whether advisory or fiduciary, can be particularly key to the success and sustainability of a family-owned business. According to Anne Smart, director of the Family Business Center at Chicago’s Loyola University, “Members of a board can help leaders of a family-owned business to see and think differently.” Smart says that, when considering whether to form a board, there is often a hurdle: many members of the executive team in family-owned businesses fear losing control. But she adds that understanding the contributions a board can make, whether through perspectives gained on other boards or in their own companies, should put those fears to rest.

Smart also offers a tip to family-owned companies forming their first board: “Choosing your first independent director is critical. Look for someone with a deep understanding of the culture in a family-owned business. He or she can then serve as the chair of a nominating committee that identifies board candidates as you choose remaining directors.”

Contributors at a Harvard Law School Forum on Corporate Governance and Financial Regulation also answer the fear of losing control; they point out that controlling shareholders have the final say in decision-making. Other business leaders—particularly in family-owned businesses—are often reluctant to share confidential information with outsiders. This could be easily solved with nondisclosure agreements.

Outside boards can also play a key role in an almost universal challenge faced by family-owned businesses: keeping a business in the family and succession planning. According to a Deloitte survey, data show that just over one-third of family-owned businesses survive more than one generation beyond the founder. The study’s authors say, “At many public companies, succession is a near-constant focus, and the best companies often are looking two or three cycles ahead to prepare future leaders. At family-owned businesses…that is not always the case. In our view, succession should be an operational imperative because the strength of leadership can be part of what drives a company’s success, whether it be for generational transfer or to increase a company’s attractiveness to potential investors.”

ROI: Do Boards Pay for Themselves?

Budget, an important consideration for any company, is another factor to consider when deciding whether to establish a board. According to consulting firm Lodestone Global in their 2016 Private Company Board Compensation Survey, median total compensation per board member was $36,000. The study showed that the “average company held four meetings a year and had two formal teleconferences. In addition, the size of a typical board was six members, three of whom were independent and one of whom was female.” Also, many companies reimburse board members for travel expenses.

But what is the return on that investment of board compensation? The survey also showed that 87% of privately held companies with boards saw increased revenues, and 82% saw increased EBITDA after implementing a board. In the case of family-owned businesses, consultants at McKinsey & Company posed the question: “So, what is it about family-run firms and the boards that oversee them that often place them ahead of their competitors?” Among their conclusions, “They simply do a better job of keeping their expenses under control.”

Board Benefits Beyond Dollars

Bruce Taylor sees value in an outside board from many perspectives. Chief among them, he says, is “the impartial view they bring to a family business. Decision-making becomes more focused when you can remove the family emotion that’s often involved.”

Contributors to Forbes agree with that assessment. They add that boards expand networks to people and places that can benefit your business. Another benefit is enhanced credibility among customers, lenders and employees who look at factors that will propel a company’s growth.

What to Look for in Board Members

Beyond cultural understanding, other areas of board candidates’ experience and accumulated knowledge should be considered:

  • Industry expertise – a board candidate with operational knowledge of your industry can help with business strategies and offer advice on tactics to achieve goals.
  • Marketing and sales know-how – experience across channels and industries can help avoid expensive mistakes.
  • Public perception – a highly regarded community or industry leader can help boost company stature.
  • Technical prowess – both industry-specific, in areas such as automated process control for manufacturers, as well as management tools including information systems, can provide guidance on making sound investments.
  • Legal expertise – particularly for industry-specific regulatory issues, along with experience in broader topics such as labor law, can provide the advice that keeps operations moving smoothly.
  • HR credentials – in recruiting and training can help provide competitive advantage.
  • Regulatory background – an especially important asset in many of the region’s highly regulated sectors such as food processing and pharmaceutical manufacturing.

Conclusion 

Creating and working with a board of directors is a step taken by many private and family-owned companies, but one that requires consideration of many factors. Choosing the type of board and timing of implementation are decisions guided by each organization’s unique needs for today and vision for the future. There are networking forums, consulting organizations, recruiting firms, university programs and business associations that specialize in providing guidance and education for owners and leaders of private and family-owned businesses. Tapping into these resources can help you make solid decisions.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.