Article originally published in the Philadelphia Business Journal on September 23, 2019
Serving as an independent director on the board of a company furthers your
professional development and provides insight into how other organizations
conduct business. I would like to share my perspectives on board service. This is
an update of an article I wrote on this subject in December 2015.
I have served as an independent director on the boards of public companies,
private companies, private equity companies and nonprofit organizations including
educational institutions. I have held the position of CEO of the then-private
company PQ Corporation, and chairman of the board of the Drexel University
College of Medicine and the Soap and Detergent Association. My board service
has been a rewarding experience.
An independent director is one who meets the definition of independence, which
generally means that the individual is not an employee, doesn’t do business with
the company and has no familial ties to management, among other criteria. One of
the primary responsibilities of a board is to hire the CEO and to fire them if they
don’t perform. A director needs to be capable of this, regardless of any business
relationship or friendship between the director and CEO that has developed.
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. This is an opportunity to learn about the board governance process,
the fiduciary responsibilities of a director, the areas under the purview of the board
and that the job of a director is governance and not operations, as that is the
responsibility of the CEO.
Serving on a nonprofit board also provides an opportunity to learn about how to be
a director or trustee, how to have your opinions effectively heard and how to make
influential arguments on issues. It is also an opportunity to network with
individuals who could support your candidacy as a director for a private or public
company board.
There are a number of differences between public, private and private equity
company boards:
Public company boards
Public companies are owned by institutional and private investors. Public
company boards have a formal board process, with significant time spent on
satisfying the complex Securities and Exchange Commission regulatory
requirements of a public company. These requirements include the review and
approval of quarterly 10-Q and annual 10-K financial reports, 8-K public
disclosures of material events and annual proxy statements that disclose to
investors the details of operations, financial results and executive and director
compensation.
Analysts who follow a public company opine on its prospects as an investment
and make buy/sell recommendations to investors. They also issue estimates on
quarterly earnings. If a company does not achieve these quarterly earnings
estimates, it can have an adverse impact on the company’s stock price. This can
place an emphasis on quarterly earnings versus earnings growth over the long-
term.
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 and issue a report card regarding the governance practices of
the company. 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, often 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 private
companies do not face the scrutiny that public companies face by 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 significant investors.
My experience on these boards is that the directors and the CEO are financial
partners focused on strategies to increase shareholder value. Their time horizon is
much shorter than that of a private or public company. As in the case of private
companies, the time not spent on compliance required by public companies can be
spent focusing on the company’s objectives and strategies.
Private equity companies acquire firms with the goal of using their resources and
specific expertise to increase the firm’s value. Unlike public company firms whose
operating metric is earnings, the primary operating metric of a private equity
acquired firm is cash flow which is measured by EBITDA (earnings before
interest taxes depreciation and amortization).
Private equity companies focus on increasing the revenues and EBITDA above the
levels when they acquired the firm. The higher the growth rate in revenues and
EBITDA, the higher the EBITDA multiple they can sell the firm for compared to
when they purchased it. Private equity acquired companies carry significantly
more debt to maximize the return on their equity investment.
Whether you serve on a nonprofit, public, private or private equity company
board, all directors need to be concerned about liability exposure. Directors have a
fiduciary responsibility and must practice the duty of care and duty of loyalty.
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 nature of scrutiny and risks associated with public companies.
Board service is a rewarding experience and provides an opportunity to develop
valuable skills. It expands your network. 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, helping you to be more effective in your job.
Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker,
advisor and nationally syndicated columnist on leadership, entrepreneurship and
corporate governance. Silverman earned a Bachelor of Science degree in
chemical engineering and an MBA degree from Drexel University. He is also an
alumnus of the Advanced Management Program at the Harvard Business School.
He can be reached at Stan@SilvermanLeadership.com.
