We were inspired by this issue's focus on the 50 fastest growing companies in our region. So ROI on Talent asked the question "Why would a privately owned, fast growing company need a Board of Directors?" And, if so, should a Board contain independent business people with different experiences and diverse opinions than a Founder/CEO? Do they get in the way of progress? Or, can they add real value to an expanding enterprise?
ROI on Talent took that question to over 175 global executives in a recent online LinkedIn Poll and the results were unexpected: The largest group, or 36% of respondents, said that private companies need "Corporate Governance and Accountability" - something that most entrepreneurs would quickly run, not walk away from!
Yet one-quarter of survey participants felt that outside directors "Enhance Shareholder and Enterprise Value" and almost 20% said they were needed for their "Technical Expertise and Business Development Contacts." When adding those together with the 15% of executives who viewed outside directors as adding value through - Business and Succession Planning, well over half of respondents saw the benefits of outside board members outweigh the disadvantages.
So why do so few privately held companies have boards, let alone with outside directors, and why don't Founder/CEOs want them? Unfortunately, most private company CEOs have the opinion "If we had a board with outside directors they would have told us not to do the outrageously risky things we did to become successful." This just reaffirms the notion that CEOs of privately held businesses are accountable to no one.
We know of one local Founder/CEO who had a brilliant business idea and grew that venture for nearly a decade - yet ultimately failed spectacularly because he took very little, if any, outside counsel from his board, investors or advisers. He always knew what was "best" for "his" company and if it wasn't his idea, he wouldn't do it - much to the financial detriment of his shareholders and customers. As brilliant as any CEO is, if he surrounds himself with employees and advisers who are afraid to criticize him, or if his ego ignores experienced and successful outside guidance - the business is on a crash course for disaster and a loss of shareholder value.
The Founder/CEO has to have her nose in the day-to-day, short-term firefighting trenches and, by definition, can easily miss the big picture forces that make or break her venture. And having only "outsiders" being friends or family members usually does not make the situation any better because too easily it can give her a false sense of "everything is going well". As one venture capitalist we know says "If you are a hard charging young CEO with blinders on, you need to have outside advisers to see the big picture - or you will fail."
For all of these reasons and more, ROI on Talent believes private companies should have a board with outside directors to:
1) Raise the business owner's aspirations and confidence and help transition an entrepreneur and owner from a doer to a manager and, ultimately, a leader;
2) Shape and inspire vision for the enterprise and subsequently a solid business strategy;
3) Open communications and stimulate action on sensitive business issues;
4) Signal a commitment by the owners to "doing the right thing" to all stakeholders;
5) Provide business guidance, connectivity, technical expertise and insight;
6) Hold top management and owners accountable;
7) Provide good corporate governance and a decision-making structure for succession planning; and
8) Provide a structure of accountability (particularly for family-owned businesses) that will transcend generations.
Does your privately owned company have a board with outside directors? We would like to know why or why not?
And if this article isn't enough to convince you, check out NCMM's latest Middle Market Company of the Month. Vitamix's President & CEO, Jodi Berg, explains why she thinks having a board is a must!