Article published in the Philadelphia Business Journal on November 12, 2023.
I am frequently asked about the path to becoming a corporate director. This is an update of a column I wrote on this subject in August 2020.
I have been an independent director on the boards of public, private, private equity and nonprofit organizations. This is my perspective of 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.
Directors must practice the duty of care and duty of loyalty, which are basic obligations. The job of a director is governance and oversight. The CEO has responsibility for operations. The board hires the CEO. In instances when a change in the CEO is necessary, the board makes that change.
Be sure to perform due diligence on any board you are thinking about joining. Understand the boardroom culture. Do some directors have an agenda that might steer decisions in a direction against the best interests of the company? Do directors have sufficient experience to ensure good governance? Is the CEO open and transparent with the board on issues impacting the company? Are the directors people you would enjoy working with?
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. There are less regulatory requirements than with a public company, but the fiduciary and oversight responsibilities are the same.
Serving on a nonprofit board 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. This 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 their mission. Board members are expected to provide financial support to the nonprofit.
Private company boards
Private companies are owned by 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.
Private equity company boards
On private equity company boards, usually the directors are also significant investors. 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 from what it was before they acquired the firm. This is so it can be sold for an EBITDA multiple higher than the multiple they paid for it.
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, as well as 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.
Whether you serve on a nonprofit, public, private or private equity company board, all directors need to be concerned about liability exposure. 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. Directors who decide to sell a public company invariably will be sued, regardless of the merits of the deal, either 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 company’s directors.
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 new businesses and business issues, which is an enriching experience.
Stan Silverman is founder of Silverman Leadership and author of “Be Different! The Key to Business and Career Success.” He is also a speaker, advisor and widely read nationally syndicated columnist on leadership. He can be reached at stan@silvermanleadership.com.
