Why private company boards need outside directors
Good governance is not just for public companies. Private companies today are also looking for ways to improve their board’s effectiveness—in part, by changing their board composition. Where once private company boards were dominated by members of management and investors, independent directors now make up slightly over half (51%) of the average private company’s board (up from 43% in 2020) according to a recent survey.
Outside directors can bring knowledge and experience in areas that inside directors do not possess. They can also bring fresh perspectives and leverage their networks to benefit the business.
Highly-qualified outside directors will challenge assumptions and bring an outside perspective that can be extremely valuable to those who are immersed in the company’s day-to-day.
Having outside directors often means enhancing board practices and bringing discipline to governance processes. If board meetings and reporting about areas like strategy, projects, and financial results have become routine, having outside directors can improve the underlying processes and instill accountability.
Consumers, employees, investors, and other key stakeholders may perceive outside directors as a positive governance practice, bringing improved credibility to the company and its owners.
Outside directors may be leading or have led their own companies, in which case the CEO may value feedback from executives who have been in his or her shoes.
Outside directors can help the entire board navigate important strategic transactions, such as an IPO, minimizing disruption related to the withdrawal of an investor, or other ownership changes.
This may mean looking at sources that are outside of the personal networks of current directors and members of management. Being deliberate about pursuing diverse or specialized candidates often means broadening the search. Director search firms, governance associations or professional service firms can help.
Candidates will likely be interviewed by members of the nominating and governance committee (if there is one), the board chair, and certain executives to evaluate the candidate and determine whether they would be a good cultural fit.
It’s important to know if there are any issues that would affect the prospective board member’s candidacy, as well as any relationships they may have with the company, investors, or management.
This includes time preparing for, traveling to, and attending meetings. Some candidates simply won’t have the time to do the job effectively.
Candidates will be performing their own due diligence on the company, to determine whether the board is a good fit for them. They may ask to meet other directors, visit business locations, review financial statements, and/or understand the company’s directors and officers (D&O) liability insurance. Since much of this information is confidential, companies often ask candidates to sign a non-disclosure agreement.