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Ramping up board effectiveness

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.

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Outside directors as a complement to the current board

Perspectives, experience, networks

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.

Objectivity and independence

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.

Governance and accountability

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.

Credibility

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.

Advising the CEO

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.

Planning/advising on exit strategies

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.

Recruiting outside directors: a how to

1. Identify candidates

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.

2. Conduct interviews

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.

3. Complete a background check

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.

4. Consider the candidate’s ability to commit

This includes time preparing for, traveling to, and attending meetings. Some candidates simply won’t have the time to do the job effectively.

5. Understand the candidate’s decision-making process

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.

What’s holding private companies back?

Outside directors may slow down decision-making

Having outside directors may slow down the process, but the value they bring often outweighs this concern. Companies can consider this when deciding who to recruit, by focusing on director candidates that come from environments where speed matters. They can also make sure that outside directors are well informed, which may mean holding ad hoc meetings to get directors up to speed when a quick decision is needed.

Outside directors may expect more formality

Outside directors may expect certain formalities—like meeting agendas and materials prepared in advance, and recording minutes. These activities take time. This investment typically pays off, and in some situations can come in handy. For example, if challenged, having copies of meeting materials and minutes can help demonstrate that there was appropriate board deliberation or oversight.

Shareholders may feel like they are giving up control

Controlling shareholders still get the final say. A written shareholder agreement is an effective way for shareholders to give themselves veto rights on certain decisions in the event the board votes in a matter that shareholders are not happy with.

Outsiders may have access to confidential information

Outside directors are expected to maintain confidentiality about the company’s operations and results. A common practice is to reinforce this expectation by having outside directors sign a non-disclosure agreement.

It may be expensive to have outside directors

Governance usually costs more as boards formalize processes and add outside directors. However, companies can consider different ways to compensate outside directors (e.g., equity-like vehicles) if cash flow is a problem.

Contact us

Maria Castañón Moats

Maria Castañón Moats

Governance Insights Center Leader, PwC US

John  Oleniczak

John Oleniczak

Partner, Governance Insights Center, PwC US

Carin  Robinson

Carin Robinson

Director, Governance Insights Center, PwC US

Shawn Panson

Shawn Panson

Private Leader, PwC US

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