In 2012, initial public offerings (IPOs) did not quite make the rebound analysts had predicted. In the year of the botched Facebook offering, just 128 IPOs were made. Although quadruple that of 2008, this marks a decrease from 154 IPOs in 2011. Last May, the Economist observed that this decline was part of a larger trend: the decline in popularity of the public company.
Since 1997, the number of U.S. public companies has fallen by 38 percent. Additionally, the average number of IPOs has declined from 311 per year between 1980 and 2000, to 99 per year between 2001 and 2011. In addition to companies actively not going public, in the last year several well-known businesses “went private,” such as Quest Software, CKE Restaurants, Burger King, and J. Crew.
In addition to the obvious distinctions of private companies—a lack of shareholders and adherence to regulation—NACD’s recently released 2012—2013 Private Company Governance Surveyfound many lesser-known differences. This survey features responses from over 550 individuals who serve private company boards. Some of the contrasts include:
Private company boards are smaller. On average, private company boards have 7.3 members—a decrease from 8.9 members in 2011. For the past several years, public company boards have consistently maintained an average of 8.8 members.
Public company directors are more likely to receive continuing boardroom education. In 2012, 82 percent of public company directors received continuing education in the last 12 months, compared to 57 percent of private company directors. This may be connected to company policy, however: 83.1 percent of public directors were reimbursed for education expenses, while only 54.5 percent of private company peers were.
Trend in the private company boardroom: D&O Insurance. Additional directors and officers liability insurance was obtained by just 15 percent of private company directors in 2008. In 2012, this figure jumped to 50.4 percent. In comparison, 42.8 percent of public company directors purchased additional D&O insurance in 2012.
Nominating and governance committees are much less prevalent at private companies. Similar to public company counterparts, audit and compensation committees are nearly ubiquitous at private companies. However, just 49.2 percent of private company survey respondents indicated that their board had a committee dedicated to nominating and governance.
Private companies employ different mechanisms to ensure director turnover. The most commonly used method of director turnover at private companies is director evaluation. Age limits and term limits are both used by nearly one-fifth of respondents. At public companies, the most prevalent mechanism to renew and replace directors is age limits, closely followed by evaluations. Term limits are used by just 6.5 percent.
Generally, private company boards maintain less diverse composition. Compared to 27.4 percent of public companies, 38.5 percent of private companies do not have any female directors. With respect to minority directors—based on race and ethnicity—70.3 percent of private companies have no such representation, compared to 51.8 percent of public boards.
Over the past two decades, I’ve worked with an array of boards in multiple capacities—serving as general counsel, secretary, board advisor and board member.
In my current role as general counsel and head of NACD’s Board Advisory Services, I’ve had the opportunity to counsel and facilitate board evaluations for companies ranging from large family-run businesses to the top of the Fortune 500. Over the years, I’ve concluded: no board evaluation is truly holistic without some form of feedback from senior management.
The management team’s participation in the evaluation process creates a critical 360° view that often brings to light factors that are limiting the board’s ability to operate at peak performance. This approach can naturally raise some very sensitive issues between executives and directors. Yet my belief that anonymous, candid input from the management team is essential to a complete and credible evaluation remains constant.
The insights and information that the c-suite and beyond provide are invaluable. Not only does the input enhance the quality and validity of the evaluation, it typically uncovers information that will directly lead to concrete action steps to improve alignment between the board and senior management.
There are a couple of important dynamics that the evaluation process commonly uncovers:
Talent vs. Engagement
In more cases than not, management teams believe they have strong assets on the board. Yet they often find that some very qualified directors are not as engaged as they could be. The company is not fully benefiting from the wisdom and unique experience these talented advisors bring to the table.
Often, management sees—and reports to my team—that one or two strong personalities on the board dominate meetings, limiting the opportunity for others to contribute.
Tactics vs. Strategy
Many directors tend to drill down into tactical issues, moving away from the real responsibility of the board to provide strategic direction. The board may not realize how serious the issue is until the management team reveals the extent to which that misplaced focus hinders their ability to get things done.
Conversely, boards often find that it’s the management team that spends too much of the meeting focused on operational minutiae, trapping them in “PowerPoint hell.” With limited time for the full board to meet, the agenda should be devoted to the most critical strategic opportunities and risks facing the company. Operational and tactical issues should be reserved for the committees.
Interestingly, we’ve often found that the reason for this is that management tends to drive meeting agendas, which naturally results in a focus on operational issues. In most cases, management would welcome collaboration with the board on defining the agenda to ensure the board’s time is devoted to strategic discussion and risk oversight.
We recognize that giving management a voice in a board evaluation process can be extremely sensitive for both the board and management. To facilitate the most valuable and practicable outcomes from board evaluations, NACD’s approach ensures that feedback is completely anonymous with no risk of attribution. Our approach of weaving the results into strategic education lowers defensive barriers, enabling the “ah-ha moments” that focus the entire process on solutions rather than criticism.
Unless c-suite-boardroom disconnects are brought to light, they can fester and potentially jeopardize the organizational mission. Done right, the management team’s involvement in board evaluation clarifies expectations and fosters a healthier collaborative environment.
My experience has led me to conclude that senior management has a sincere desire to capitalize on the wisdom, leadership and unique business experience of each and every board member. By involving the management team in the evaluation process, boards capitalize on management’s expertise in the same way. Result: the organization’s full intellectual capital is leveraged for the collective benefit.
In past blog posts, I’ve discussed the need to take an honest assessment of your board and the key questions boards must ask themselves. Regardless of your company’s industry or size, evaluations provide critical insights into how the board can become stronger and support the organization’s strategic objectives.
That said, such assessments are merely superficial if they are not acted upon, if the strengths revealed are not leveraged, or if the weaknesses identified are not remediated. In our experience with boards that range from family-run firms to companies ranked in the Fortune 10, we find that boards are looking to evaluations for useful feedback, which can be used to develop specific action plans. Below are the three actions a board should follow to ensure it does not just “check the box” in an evaluation, but instead uses the resulting data for improvement.
1. Sanitize and Summarize
Sanitizing the results of the evaluation is critical to ensuring comments cannot be attributed back to specific directors, which can create mistrust and reluctance to be candid in future evaluations. The goal of an evaluation is to be constructive, not destructive. Directors must feel they can provide honest feedback, without retribution.
The amount of data that results from an evaluation can be overwhelming even to experienced directors. While the nominating/governance committee should review the report, for the full board, results should be synthesized into the key themes emerging from the evaluation. Highlighting the critical areas allows the board to focus on identifying specific actions to build on its strengths, address its weaknesses and define the next steps.
2. Take the Sting Out
Let’s be honest. No one likes to hear about their weaknesses. However, we’ve found that weaving the results of an evaluation into an interactive full-board learning session can be very successful in taking some of the sting out of the results. The directors hear the findings in a way that enables them to connect to the issues without pointing fingers. This approach also allows the board to benchmark against other boards of their size and in their industry.
3. Delegate and Follow Through
Even the most thorough evaluation will flop without an agreed-upon roadmap for improvement. Members of the board and senior management should be assigned tasks that address each gap identified in the evaluation. These initiatives should be included in the agendas for future board meetings to track progress, ensure accountability and ultimately optimize the board’s role as a strategic asset to the company.