This post is written with the specific goal of reaching out to the owners of privately owned companies and their advisors. It’s even more important that owners read this if:
- those owners are not closely involved with their companies, as in many family office settings or when there are non-owners running the company, or
- when the company is contemplating a transition of management from a founding generation to a younger generation who may not yet have the depth of experience needed for that transition.
Every corporation is required by law to have a Board of Directors, the purpose of which is to oversee and advise management in the effective operation of the company, and to truly help the company attain the goals and realize the vision of the owners. Despite the proven soundness of this structural model, the Boards of many privately owned companies often consist of inactive family members or company officers that function on the Board pretty much to support whatever the CEO decides. The key obligations of oversight and advice are relegated to the annual minutes created by the company’s law firm to maintain the corporation’s good standing, without actually getting the value that a Board can and should provide.
Why don’t all privately owned companies have Boards in place? Several reasons come to mind:
- They don’t believe anyone can look out for their interests better than they themselves can.
- They don’t trust any outsiders to make decisions that will benefit the owners.
- They don’t want to surrender any significant authority to people they can’t control.
And the problem with that thinking, while it’s easy to understand and even appreciate, it misses the point that is the foundation for Board existence, that experienced business leaders can often be more effective at getting to the right decision than the management team, at least in part because – when chosen carefully –
- they bring expertise honed over many years of often highly specialized experience, such as finance, risk management, marketing, R&D, etc., that are beyond the expertise the company itself can attract, utilize or afford full time;
- they’ve been there and done that, and seen how to best do it without making painful and costly mistakes; and
- they can often see the forest despite the presence of trees, helping drive the creation and implementation of strategy that is key to reaching those long-term goals the owners yearn for.
“Noses in, fingers out.” The value of a Board is NOT to tell the CEO what to do, or to interfere with the way it’s being done, or to tell the CEO’s employees what they should do. It is to advise the CEO based on their experience, to oversee and monitor how well the CEO does the job in accordance with the approved strategies, policies and processes that are in place, and to evaluate the CEO’s performance over time, all in accordance with the intended vision and goals of the owners.
All of that falls into the broad heading of Corporate Governance. To make the company the best it can be.
We are Your CFO for Rent.