Navigating Governance Options in a Private Company
What do Julius Caesar, Steve Jobs (during his first try as Apple CEO), and Paula Deen have in common? Each leader saw nothing negative in themselves or in their organizations, yet each had their empire crumble due to crises they helped build.
This overconfident pride and self certainty, or hubris, is present in all of us. When it affects private company executives, the complacency it causes can kill a business. This is the purpose of a good private company board to remove complacency and blind spots of the leadership team.
Benefits of Private Company Directors
A private company board, through discipline and accountability, helps the management team grow to the next level. Board meetings are designed to make the CEO perform better in his job by giving him support, oversight, and accountability, which elevates results and builds the CEO’s confidence.
In addition, the company can hold board meetings at company facilities in locations away from the corporate offices. This allows board members to meet key local people, see how operations work at ground level, and get direct input from managers at satellite locations while avoiding the bureaucratic haze that often envelopes headquarters. With this input, directors can add value to the company by understanding the business at a granular level.
Private Board Composition
More effective private company boards have a higher number of outside directors who shepherd the firm with their “heads in and their hands off” operations. Outside directors have propelled some of the world’s largest family firms, such as the Swedish Wallenberg family, to expand their business empire through multiple generations and several world wars. Wallenberg’s conglomerate usually has one family member on the board, yet interestingly retains majority voting power on large dollar decisions.
Golden State Foods is another good example of this governance gold standard. The company, which services 25,000 restaurants with 4,000 employees, has nine board members including four outside directors and five family members (who are/were senior executives with the firm).
Try to avoid placing service providers, such as the company’s accountant, lawyer, or banker on the board for two reasons. First, this violates the governance practice that outside directors be independent. Second, these service providers usually do not have an operating background with big company management experience, and middle market or small business turnaround expertise.
Align Contradictory ROI Needs
In privately held companies, the owner may be elderly and need cash to fund retirement now, the CEO may have a growing family and needs cash in the next two years, or a very young family member in the company may want to buy an expensive car. A private equity director may want to let his money grow in the business for three more years.
Trouble arises when this elephant in the room is not resolved. Full disclosure begins with each board member putting their return on investment (“ROI”) and time horizon needs on the table for the group to address. This is so important to building trust among directors that lack of full disclosure is grounds for dismissal from the board. Blending these different time horizons for the common good sets the right tone at the top.
Going From Smaller to Larger
For resolution of long term needs, a formal board of directors is an excellent choice.
However, if the private company faces a short-term emergency that requires an immediate solution, conducting a deep dive is a good alternative. This is usually done by a former Corporate Co-Founder/President on the board, or for a business without a board the Co-Founder/President can be recruited from outside the company.
The deep dive is a carefully orchestrated exploration of the internal company functions department by department – but is also a thorough exploration of how your company relates to and is viewed by customers, suppliers, industry thought leaders, and trade association heads. When done carefully, it will show the company in detail the exact steps needed to create higher sales and profits.
The deep dive will illuminate how to create products and processes that jump the curve, doing things 10 times better not just 10% better. Most companies stay on their curve with minor improvements. True innovators jump to the next curve of innovation to delight customers, while being the only game in town.
With the information gathered from the deep dive, the President creates a Weekly Scorecard the CEO can use to profitably expand the whole company. The project also unearths hidden industry trends ranging two to four years into the future, which your industry rivals never see, because it reveals what trend setters like the largest universities, the biggest companies, and the most cutting edge start-ups are already planning as the next big market moving products.
To sum this article up:
Hubris is commonplace and far more destructive than people realize because it creates unintentional complacency in many companies. The antidote to hubris consists of two choices.
First, recruit a formal corporate board made up of outside directors who have track records as operating managers in large companies and have turned turnaround middle market and small businesses.
- Ask yourself honestly, “What is the purpose of this business?” If the purpose of the business is to expand to a much higher level of wealth to serve the interests of the owner, employees, and outside investors – then an effective private company board is like an insurance policy that keeps the risk of failure low.
- To set the right tone at the top, the directors need to openly blend their naturally different time horizons for return on investment.
Second, and equally good, particularly if the urgency of the problem is high, find a good fireman, who is a former Corporate Co-Founder/President, to put the fire out. This operating veteran, who may or may not sit on the company’s board, conducts the deep dive with the blessing and support of the company CEO.
A private company board, through discipline and accountability, helps the CEO turbo-charge sales, gross margin, and after-tax profits – while increasing his confidence.