It might seem as if privately-held companies, whether multigenerational family businesses or start-ups, can operate in any way they choose. But they will run more effectively if they have structured governance like a board of directors, says Bryce Tingle, professor of business law at the University of Calgary and author of Hard Lessons in Corporate Governance. In a recent conversation, he highlights the crucial benefits of establishing a board of directors and discusses how to select appropriate members.
Expertise For Strategy And Decision-Making
Boards can offer targeted, relatively inexpensive expertise, says Tingle: “It’s the one sort of part-time borrowing of expertise where the expert has real skin in the game, where it’s not just cheap advice that they’re giving you at the golf club or because they’re a nice person. They’ve got legal liabilities and legal responsibilities. They’ve got a particular kind of status—they just take it seriously, and they dig way deeper in giving you the assistance than you’d otherwise get.”
This combination of commitment and expertise can provide scaffolding for guiding management through strategic and potentially existential issues. “The fact you’ve got people with a lot of experience and expertise who can ask penetrating questions helps you maybe see the company in a way you didn’t before,” Tingle notes. This allows operating management to shift perspective from the stresses of daily operations to the larger questions of strategy, finance and risk mitigation.
For example, a board with appropriate expertise can help management frame and evaluate risks, from cybersecurity to supply chain vulnerabilities, and also consider opportunities like acquisitions and external partnerships. “The decisions groups make tend to be higher quality than decisions an individual makes,” Tingle says, “maybe because it’s the necessity of talking it out, of convincing one another, of bringing multiple perspectives to the problem.”
The Authority To Resolve Conflict
Politics and infighting often arise in privately-held companies led by multiple founders, siblings or partners. But having a board of directors, says Tingle, means that whenever there’s a conflict, all parties generally “accept the ruling of the board and move on, and that’s really valuable.” The authority explicit in a board’s “adjudicative function,” he notes, prevents conflicts from escalating, which would cause shareholders to lose confidence in management.
Independent directors who aren’t beholden to any of the parties in a conflict can serve as intermediaries and explain what course of action is in the company’s best interest. Often, says Tingle, they can stabilize a challenging situation simply by providing reassurances like “‘I’ve seen this sort of thing done before and it’s the most reasonable outcome.’ Someone with authority who could make those representations really helps in getting the problem past the feuding parties.”
Ensuring Both Accountability and Encouragement
Another benefit a board provides is the possibility of a “sober second look,” says Tingle, because “they’re incentivized not to make mistakes.” Although board members have only limited exposure to financial upside, “they have massive exposure to the downside.” Board directors can “provide some sort of check on the worst impulse of senior managers,” he adds, by stepping in to provide a corrective voice and holding people accountable for both behavior and performance results.
Nonetheless, “their job is not to second-guess everything management does or to micromanage the business,” Tingle explains. “Their job is to be a cheerleader for the CEO, up until the moment that the CEO demonstrates that they are unable to do the job.” If that happens, he says, you need a director with guts and savvy to help replace that CEO. “But up until that moment, the director’s job is to be the one person a CEO can confide in. You need CEOs to confide in you for a couple of reasons. One of them is you can’t really do a good job as a director unless you know what’s going on in the company.”
In addition, Tingle says, “A lot of the value that you produce as a director is being the one person the CEO can be candid with. They can’t be candid with juniors—you’ve got to always be optimistic. You’ve got to appear certain. But your board is your peers, and you don’t need to manage their emotions. You can talk about your frustrations and your worries and your failures and get good advice and a sympathetic hearing. There’s no one besides a board that can do that for a CEO.”
Characteristics Of A Good Board Member
Choosing effective directors depends on the nature of the business and its ownership. Board composition should reflect company ownership, Tingle suggests, by seating a couple of major shareholders in a family business or a few investors or founders in a startup. Beyond that, he says, “I think you want a couple of independent directors who, between them, hold the balance of power.” When company factions—whether siblings, investors or founders—“are at loggerheads,” he explains, “the independent directors are going to break the tie. They serve as the one group that you need to convince to side with you in the event of one of these fights.”
An organization should give certain characteristics priority when selecting independent directors, Tingle notes: “Maybe 50 or 60% of the time, what you really want is someone with operational experience, who’s been there, done that. Who’s managed employees, who’s built factories, who’s moved product out, who’s cut deals—because they’re in the best position to advise the CEO.”
But to be credible, these independent directors need to have been successful in their own right and “not depend on this board for their status or income,” he says. Temperament and communication skills are also crucial; because boards work mostly by consensus, “you need someone who works well in groups, is really pro social, who’s friendly and generous.”
“Really scratchy personalities don’t, frankly, help,” he says. “No, they really make everything more difficult.” It’s valuable to have individuals who can see other perspectives and are willing to align with the group consensus even when it’s not completely their view. At the same time, directors need to be candid about problems and ready to exercise their authority. “You do need to have some guts—sometimes the willingness to be unpopular,” Tingle observes. “That’s the way conflict gets resolved.”
In privately-held companies, an effective board of directors can provide guidance, accountability and conflict resolution. And when independent directors have the necessary expertise, temperament and communication skills, they can help the management reduce risk, make more strategic decisions and foster the kind of culture that ensures both successful results and future adaptability.