Is Your Board of Directors Obsolete?

Did you know the concept of a governing board of directors or trustees dates in America as far back as 1606, when King James I issued a charter for a company to colonize and establish trade in the first Virginia colonies? These early Board of Directors (BODs) back then were made up of “knights, gentlemen, merchants and other adventurers” of whom the King (Chairman of the Board at the time) chose and recognized most for various considerations. Money was one. Still, perhaps needless to say, that early company, known as The Virginia Company which founded the Jamestown Colony, ran into trouble. Unfortunately, this example of early-day BOD oversight of CEO Capt John Smith shows us the risks when a myopic corporate governance team misses a few “how to” details, such as how to survive starvation in deathly cold winters, and how to negotiate disputes with the locals.

As a result, the company and the colony itself ultimately collapsed and most settlers starved to death. Today, we might call that more politely, ‘a failed hostile takeover and subsequent insolvency.’ Still, that failure did bring forward the need for more independent and deeper skillset requirements of early-day BOD members who could add real value when things get tough, which is known to happen.

However, despite the benefit of time it still seems the conflict and friction between public company CEOs, BODs and shareholders has scarcely evolved. As business and management issues continue to change, so does the need for more useful and specific BOD counsel. In 1606, accountability was secondary to trust and allegiance. Back then BODs weren’t given much power, and were mostly comprised of “good ol’ boys” that likely respected each other more than the mission itself. That is changing, albeit far too slowly for my taste. According to Equilar Research over 50% of US corporations CEOs are still also Chairman of the Board.

Still, while the pace of change remains slow, there has been a lot of progress over the centuries, especially in the US, after enacting the Securities and Exchange Act of 1934, and shareholders are catching up. In the last 80 years legal challenges and investor advocacy have become much more engaged and widespread. In fact, the SEC itself continues to address these issues most recently (after Sabanes Oxley was signed into law by President Bush in 2002), with yet another new rule in 2009. This time the rule recognized the importance of having easier access and ability for shareholders to nominate outside independent BOD members at annual meetings. The law is an effort to diminish the “agency” problem associated with the lack of real independence from inside directors who work for both the company and the CEO.

In fact, given all the media coverage in recent weeks about a few high profile outside directors on public company BODs running afoul of the rules, is it not a wonder that with every step forward we seem to take another step back. This damages the credibility of all corporations doesn’t it? So why don’t adventurous CEOs lead the charge to update BOD concepts and define best practice rules themselves, ahead of the SEC?

Here we have to keep in mind that most if not all “Business” we see around us, at one time originated from a single or small group of entrepreneurs, not hundreds or thousands or millions, at least not yet. In other words, the very nature of a successful business or venture outcome is causally related to the close interaction, insight, experience and risk-taking decisions of these few individuals; Be they right or wrong. And if we all know that, why then should time alone change that successful formula? In fact, the more diluted a decision making process is the less dynamic the company, right? In other words, if BODs are too restrictive, and don’t give in to the quick draws of a talented CEO, don’t they risk failing to take advantage of fleeting opportunities that in a changing market could make the difference between success and failure? When Mark Zuckerberg, CEO and majority shareholder of Facebook (which had a BOD even before going public) decided unilaterally (without BOD approval) to acquire Pinterest for a cool $1 billion dollars, it makes me wonder how that risky decision is any different than King James’ in 1606.

So then what’s a growing private company CEO to make of all this? Most likely it’s why on Earth would I ever want to become a public company? It is a sensible question these days. But as we know, a public company BOD is not the same as a private company BOD. In fact, try a Google search and you will find countless discussions about why private companies should even have a BOD at all. And in many cases I would agree, but when a private company needs to ask the “public” for investment capital to grow, having the right mix on the board can make all the difference.

Some of those differences came out at the Association for Corporate Growth (ACG 101 Chapter’s) most recent conference on Corporate Governance at the Woodland Hills Marriott nearLos Angeleson June 7th.

The full day conference organizers and participants wasted no time digging into matters with moderated panel discussions focusing on: how to build a board from scratch, leadership at the board level, finding & vetting new board nominees, and the responsibilities of BOD members to the company, its shareholders, Wall Street, and the community. Like I said, it was a full day conference.

Still, the key distinctions between inside vs outside, and public vs private BODs could have been more sharply drawn in my view. Panel members on public company boards seemed to embrace the full spectrum of current mainstream media criticisms, and the growing need for more public awareness to the ‘dark room’ disconnect between public board actions and their individual and collective accountability to the constituencies they represent.

Meanwhile, private company board members and CEOs from what I heard had a different view. Since BODs and Advisors at private companies have no public shareholders, they account to the owners, many of whom are also the CEOs, executive officers, and board members themselves. When one keeps in mind that many private companies are bigger than public companies, the need for experience and guidance, especially in family-owned companies is greater than ever, and begs the question: What’s a King supposed to do in a place like that?

It came as a surprise to many in the audience of more than 100 execs in the room that being an effective private BOD member still required quite a commitment for little money. According to Korn/ Ferry International Sr Client Partner Robert Wagner on average BOD commitments include about 16 hours per month plus 8 to 10 meetings per year, all for about $15,000 per year in compensation. Hardly a fortune, although larger public companies do pay over $200k to BOD members, which in itself can create a conflict of interest in my view.

Add to the mix CEOs of public companies that want to stay nimble and quick. A BOD packed with fellow adventures is not without serious risk, right? Think CEO Capt John Smith,Jamestown,Virginia, 1607 with his board of “knights and gentlemen” who sent 214 ill-equipped settlers in mind and body to tame a wild new frontier. Such was the risk that by winter’s end 1609, only 60 of the original 214 settlers survived. Oops!

So if improperly aligned CEO and BOD combinations can be a disaster, are public and private BODs by design or evolution no longer capable of functioning as a unit? In other words, are BODs obsolete in today’s global dynamic economy?

In my view, No. And here’s why. I believe that most BODs can serve in the shareholders best interest and not be a drag on CEO execution. But not by packing the BOD with friends and colleagues to ensure freedom, that’s more style than strategy. CEOs and shareholders of private companies that want to be public companies simply need to be more honest about building a BOD. They should be keenly in search of members who are not only from diverse cultural backgrounds, but also from deeply specific skillset backgrounds like investment banking, legal, technology, human resources, social and community awareness. What this means is that as the world of business evolves and customer awareness of the role business should have today increases, a company (public or private) needs to have specific experts that can dig deeper and move faster to help CEOs be more nimble and adventurous.

And if all goes right, as a society that allows for business to grow and flourish among us we must insist that all public companies have a best practice for creating and developing a BOD made of independent thinkers aligned in practice and experience with those of its leaders and stakeholders. So go forth and seek out ye new frontiers all ye CEO adventurers and know that building the right BOD before you start may be just the help you need to cover your back next winter.

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About the author: Rick Andrade is a Managing Director at Calabasas Capital, a Los Angeles based investment banking firm helping buy, sell & finance middle market companies. Rick has his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at rick@CalabasasCapital.com. This article should not be considered in anyway an offer to buy or sell a security.  This is for informational purposes only.  Buying or selling a security involves substantial risk.  Investments may be worth more or less than the original investment. Securities offered through Fallbrook Capital Securities Corp.  Member FINRA/SIPC.

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