Article originally published in the Philadelphia Business Journal on August 10, 2020.
I am frequently asked about the path to become a corporate director. In December 2015, I wrote an article on this subject. This is an update of that article.
I have been an independent director on the boards of public, private, private equity and nonprofit organizations. I have also held the position of CEO of a private company, and the chairman of the board of a medical school and of a trade association, as well as lead director on the board of a private company. I would like to share my perspective on serving on these types of boards.
An independent director is one who meets the definition of independence, which means that the individual is not an employee of the organization and has no familial ties to management, among other criteria.
The job of a director is governance and oversight, not operations, which is the responsibility of the CEO. The primary role of a board is to hire the CEO and in instances where a change in the CEO is necessary, the board makes that change.
Nonprofit boards
For those who desire to become an independent corporate director of a private or public company, a common first step is to join the board of a nonprofit organization. Usually, the experience requirements for this role are less than those serving on the board of a for-profit organization.
There are less regulatory requirements than with a public company, but the fiduciary and oversight responsibilities are the same.
This is an opportunity to learn about the board governance process, the fiduciary responsibilities of a director, and the areas under the purview of the board. Serving on a nonprofit board also provides an opportunity to learn about how to be an effective director, how to have your opinions effectively heard and how to make influential arguments on issues.
A major focus of nonprofit organizations is raising funds to support its mission. Board members are expected to provide financial support to the organization.
Public company boards
Public company directors are voted on by the company’s shareholders. Significant board time is spent on satisfying complex regulatory requirements. These requirements include the review and approval of quarterly (10-Q) and annual (10-K) financial reports, as well as annual proxy statements that disclose to investors the details of operations and financial results, and executive and director compensation.
Public companies are under the scrutiny of the SEC as well as investor advisory services, which advise institutional investors on the quality of the board governance process. The reports of investor advisory services and their recommendations can impact how shareholders vote for a company’s directors.
Private company boards
These companies are owned by private individuals or family members who have an interest in building long-term shareholder value for eventual sale of the company or to pass ownership to the next generation of family members.
Private company stock is not traded on public markets and therefore these companies do not face the scrutiny that public companies face from the SEC, investment analysts and investor advisory services. The time that public company directors spend on dealing with this scrutiny can be spent by private company directors on discussion, approval and oversight of the company’s objectives and strategies that are developed and implemented by management.
Private equity company boards
On private equity company boards, the directors usually are also significant investors. My experience on these boards is that the directors and the CEO are financial partners, and as in the case of private companies, the time not spent on compliance required by public companies can be spent on increasing shareholder value.
Unlike public company firms whose operating metric is earnings, the primary operating metric of a private equity firm is cash flow, which is measured by EBITDA (earnings before interest, taxes, depreciation and amortization). Their focus is to increase the EBITDA and increase the company’s growth potential from what it was before they acquired the firm, so that it can be sold for an EBITDA multiple higher than the multiple they paid for it.
Whether you serve on a nonprofit, public, private or private equity company board, all directors need to be concerned about liability exposure. Directors must practice the duty of care and duty of loyalty, which are basic obligations. Don’t join a board unless adequate D&O (directors and officers) insurance is in place.
Directors serving on public company boards face relatively larger liability exposure due to the scrutiny and risks associated with public companies. For example, directors who decide to sell a public company invariably will be sued, regardless of the merits of the case for allegedly not following a proper and thoughtful decision-making process, or for not negotiating a sufficiently high premium over the market price of the shares before the sale was announced. These suits are usually settled but do require the time and attention of the directors of the company.
I am often asked, “What should I do to obtain a position on a board?” My response is network, network, network. This is how you will learn about board opportunities and how companies will learn about you. Build your brand as someone who will provide value and expertise to a company through board membership.
Board service provides an opportunity to develop valuable skills. It also provides an opportunity to be exposed to businesses and business issues you normally would not be exposed to, which is an enriching experience.
For those of you who are serving in a senior leadership position at your company, serving on a board will help you be more effective in your job.
Stan Silverman is founder and CEO of Silverman Leadership and author of “Be Different! The Key to Business and Career Success.” He is also a speaker, advisorand widely read nationally syndicated columnist on leadership, entrepreneurship and corporate governance. He can be reached at Stan@SilvermanLeadership.com.
