Article originally published in the Philadelphia Business Journal on December 14, 2015
On Dec. 7, I spoke about the path to becoming an independent director of a private or public company at a National Association of Corporate Directors conference. An independent director is one who meets the definition of independence, which means that the individual is not an employee of the company and has no familial ties to management, among other criteria.
I have been a trustee or director on the boards of nonprofit organizations, private companies, private equity companies and public companies. I have also held the position of CEO of a private company, and the chairman of the board of a nonprofit. I would like to share my perspectives on serving on these types of 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. 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, which is the responsibility of the CEO.
Serving on a nonprofit board also provides an opportunity to learn about how to be an effective 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 as well as private investors. Public company boards have a formal board process, with significant time spent on satisfying the complex regulatory requirements of a public company. These requirements include the review and approval of quarterly (10Q) and annual (10K) financial reports, as well as annual proxy statements that disclose to investors the details of operations, financial results and executive 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 places 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 (for example, investor advisory services prefer that the role of chairman and CEO not be held by the same individual), 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 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 in 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 mainly focused on strategies to increase shareholder value. Their time horizon is much shorter than that of a private company or public company. As in the case of private companies, the time not spent on compliance required by public companies can be spent 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). 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 nature of scrutiny and risks associated with public companies. For example, directors of a public company who decide to sell it 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.
Board service is a rewarding experience and provides an opportunity to develop valuable skills. It expands your network. It provides an opportunity to be an effective leader on certain issues, and be a follower on others. 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 the founder and CEO of Silverman Leadership. He is a writer and speaker, advising c-suite executives about leadership issues and on cultivating a leadership culture within their organizations. Stan is Vice Chairman of the Board of Drexel University and a director of Ben Franklin Technology Partners, Friends Select School and Faith in the Future. He is the former President and CEO of PQ Corporation. Follow: @StanSilverman. Connect: Stan@SilvermanLeadership.com. Website: www.SilvermanLeadership.com
