Adding independent directors to private company boards

4 key questions to consider when adding to your board

Grant Thornton recently participated in a panel with several corporate directors during the 2021 NACD Summit on the topic of “Adding Independent Directors to Private Company Boards.” Below are highlights of the panelists viewpoints on key issues addressed during the discussion.

What kind of experience should private companies look for in an independent director?

Panelists

Arla Lach, Partner, Audit Services, Grant Thornton LLP
William Lucia, Former Chairman, President and CEO, HMS Holdings Corp.
Rafael Pastor, Director, KinderCare Education, RosettaBooks, Ensight, Experience Investment Corp., NACD Pacific Southwest Chapter
Christa Steele, Director, BALCO Holdings, Bay Alarm, Tanimura and Antle, NACD Northern California Chapter

The experience needed by the company depends on various factors — the company’s status, size and ownership, and exit strategy. Panelists’ experience was that financial oversight compliance and risk oversight in private companies is not as rigorous as public companies so an independent director can be a significant asset in helping the company elevate its standard.

For a family-owned business with no defined exit strategy, strategic planning and risk dialog may be very driven by family members who hold a great deal of information very privately; in such cases, a director without public experience may be a better fit.

If their exit strategy is an IPO or a move into the private equity (PE) space, the leadership of an independent director becomes critical — it ensures that the governance structure is properly aligned from a regulatory, compliance and transparency perspective as they mature through an exit-oriented life cycle. It’s critical in these situations to have a director with prior public company experience.

A PE independent director expects the business to uphold the same set of standards and requirements that public companies must uphold. They must manage succession planning, executive compensation and competitor challenges.

What are the qualities and attributes of the right candidate?

Many factors drive the right fit, and it depends on the company. In family-owned businesses, it’s important to have someone who appreciates the complexity that a legacy family dynamic can represent, and the politics of family relationships — including the distributions that may cloud judgment.

Moderator

Adela Cepeda, Director, BMO Financial Corp., Mercer Funds, Pathway Funds and UBS Funds

A director will need to appreciate the history of individuals who built the business and their knowledge, passion and often biases that exist and can affect the fiduciary role of the director. Industry experience may also carry greater importance in this scenario compared to a company needing independent governance expertise of a public company experienced director. These factors, coupled with the long-term goals of the business, will help prioritize the traits of the director who will best fit the scenario.

Adding a director who provides a new depth of sophistication to strategy, risk, transparency and compliance perspectives can significantly benefit a company where the chair and/or CEO don’t have a proper governance background. It’s a delicate balance to find an independent director who can provide sophistication but not overstep their welcome with legacy family members.

What’s the best way for a private company to source its next independent director?

Beyond executive search firms, service providers, including auditors and lawyers, are often asked and willing to provide referrals if they know someone with the right skill set, especially in areas of financial expertise or strategic shifts that require a greater focus on regulatory compliance. Some private companies are acknowledging the focus on DE&I by public and private equity and seeking more diverse candidates. There are a variety of professional organizations that can help — the NACD, Private Directors Association and many other corporate director organizations provide opportunities to build a network with potential director candidates who possess the specific experience needed.

What unique challenges might family dynamics bring to the board?

It is not uncommon to find companies where the founder is still very involved in the day-to-day operations of the business and is actively involved on the board, where nothing gets approved at the company without the founder’s approval, regardless of the board’s recommendation.

At times, founders move on, or control shifts to the second-generation leadership via other scenarios, and it can significantly change the company dynamics and willingness to change. Such a scenario creates interesting dynamics with the board and is when many companies will bring in outside advisors for an independent viewpoint to help grow the business and take it to the next cycle in its operating life.

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Finding qualified board members can also be challenging. When directors have significant commitments to other boards, it can reduce the amount of time they may be able to spend at your private company. This can create audit risk due to limited time available on effective governance and oversight to the organization. Specific experience correlating with a company’s life cycle position is helpful. If the company is starting to plan for CEO succession, the ideal director would be someone who can learn about the company and then assume the role.

Last, having good financial knowledge of the regulatory and compliance rules is always seen as a positive. It seems that some boards struggle with getting the right skill set intact. It’s not always a focus, especially in private company boards, because the regulatory environment is different.

The different leadership scenarios represented by private companies seeking independent directors can create a challenge in finding the right fit, and it may take time and trial and error to find the right fit both for the director and the business.