NACD’s Second Small-Cap Forum Helps Directors Understand the Risks and Responsibilities of a Growing Business

Published by

The majority of companies in the United States are small cap, defined as companies below $500 million in market capitalization. While they are rich in ingenuity, small-cap companies have unique challenges that can be daunting for any board to manage. With smaller staffs and fewer resources than their large-cap counterparts, the time and talents of company executives are spread thin in the face of pressure for fast growth in an uncertain economic environment. This July, NACD, in partnership with Epsen Fuller Group, Fenwick & West, and Latham & Watkins held its second Small-Cap Forum. Over the course of a day, a collective of experts helmed six sessions at San Francisco’s Four Seasons Hotel to dissect the directors’ role in helping to build their companies. The following are three themes that emerged from the presentations:

Plan ahead. Many small-cap companies make the mistake of placing too much emphasis on budgeting. Innovation rarely, if ever, emerges from evaluating figures. Shift gears to take a close, hard look at your company and think about creating a strategic plan. A plan should ideally map out the next five years of the company—no fewer than three—and determine what resources are needed to meet those goals. Allot plenty of time outside of regular meetings to discuss various game plans, setting milestones to review the strategy.

Work with the founder. When assessing and building out the company’s long-term goals, the board also needs to pay attention to management. Small-cap companies often have a culture centered on the founder/CEO, and while that person’s innovative and entrepreneurial drive may have been enough to give legs to a nascent business, those skills may not be aligned with the firm’s needs and goals in subsequent stages of growth. That said, the board shouldn’t write off the leadership already in place. Building support around the C-suite can help enable the CEO to succeed in an increasingly expanding role, or to step down with dignity if required. By extension, start looking within the company for talent that can take the reins in the next three to five years. Broaching this topic can be highly sensitive; however, the longer a leadership gap exists at the CEO level in a small-cap environment, the greater the risk of a succession crisis.

Mind the gaps. The purpose of board-level committees is to share the workload so that board members can effectively “divide and conquer”; however, small-cap boards are traditionally half the size of a large-cap company—so small that the same directors frequently serve on multiple committees. Stretching resources this thin means that there is zero room for non-contributing directors, or else the board runs the risk of being unable to carry out its responsibilities effectively. Small-cap boards should create a skills matrix that charts each director’s areas of expertise—and reveals where the board’s collective knowledge base may be lacking.

A small-cap board should also put forth the effort to bridge the gap between the company and its shareholders. Any opportunity to engage with and better understand your shareholder base is a good idea, and is a particular imperative in the small-company environment where ownership may be more concentrated. Also realize that many small-cap boards become targets of activist investors. Prepare for those interactions not only by doing due diligence on activists’ investment styles and track records, but also by being willing to listen to the activists’ points of view.

Look for a full recap of the Small-Cap Forum in the September/October 2014 issue of NACD Directorship magazine.

1 Comment

  • Eric Salzman says:

    I agree that small cap boards require a much more tailored, hands on approach to help support the CEO and management. The following position paper describes an alternative approach to public boards.

    An Operating Partner Approach to Public Boards
    By Eric Salzman

    In an environment of increasing global competition, constant technological innovation and greater shareholder activism, public company CEOs who partner with their board members can better drive equity value creation. Board members and board committees spend the majority of their time on governance and oversight – approving annual budgets, choosing auditors, reviewing operational and financial processes and controls, approving audited financial statements, determining executive compensation, developing CEO succession plans and ensuring proper disclosure in SEC filings, etc. While these tasks are critically important to the proper functioning of the corporation and the protection of shareholder interests, CEOs should seek to enlist their board members to assist more directly on strategic and tactical matters. By partnering with their board members to develop business strategies, create key performance indicators, explore M&A opportunities, optimize investor positioning, CEOs expand the intellectual and professional resources available to address critical corporate goals. In addition, for small and mid-cap companies, which generally have more limited management bench strength, board members can provide added analytical bandwidth to the CEO and work on long-term or bespoke strategic projects which, at times, are crowded out by nearer term priorities.

    Board members who are willing to devote the time and effort to more deeply understand the operational aspects of their businesses become more valuable assets to the CEO and the company. Board members who, for example, attend internal product training sessions, sit in on an occasional executive staff meeting, observe the customer sales process, attend trade shows and investor conferences become agents for synthesizing and reporting relevant information and insights back to the CEO, thereby improving decision making at the board level.

    Some may question whether this hands-on board member approach threatens board independence and crosses the bright line between board and management responsibilities. While independence and objectivity is critical for independent board members to fulfill their fiduciary duties, I would argue that the greater problem that exists at many public companies today is that public board members are too removed from the facts, details and context of important strategic decisions. For instance, it is not uncommon for board members to receive the final board materials a few days prior to the meeting, review the materials on the plane ride and be expected to offer value-added feedback and to approve key decisions at the meeting. Given that management has likely worked on the analysis for weeks or months, it would seem to be more beneficial for the board to be involved in the evaluation and analysis itself rather than just reviewing the finished product. When CEOs seek to partner with their board members throughout the strategy development process – be it technology, product or go to market strategies – both groups gain a deeper understanding of the risks and opportunities of the business and board members can contribute more constructively to the strategy development and its implementation. This deeper and more frequent level of involvement helps board members better assess the viability of such strategies and allows them to better support the CEO if modifications, mid-course corrections or wholesale changes are required.

    An example of this hands-on approach can be found in the private equity industry. As corporate owners, private equity firms staff boards with experienced professionals who are expected to work closely with management on a number of key projects which drive near- and long-term value creation. This type of board member is called an operating partner and he or she assists management on a range of operational, strategic and financial issues. But why is this approach less relevant for public companies? Shouldn’t public company CEOs be afforded the same support and assistance that private equity owned companies provide? My view is that this public operating partner approach to board membership can significantly improve company performance. Boards and Nominating Committees should seek out hands-on, strategic board members who can play the role of “public company operating partner”; shareholders should want their board members to play a more active role in shaping – not just reviewing and approving key decisions; and CEOs should expect more active board participation and leverage more directly their board members to help them drive equity value creation for shareholders.


    With over 15 years of experience as a senior investment professional in private equity, credit, special situations and restructuring, Eric Salzman brings an innovative approach to public board membership. As an independent board member, Eric specializes in partnering with management teams on strategy, M&A, capital markets and investor positioning. Further, through his extensive experience as a tech/telecom buy-side analyst, special situations portfolio manager and restructuring professional, Eric helps bridge the understanding gap that can sometimes exist between management and institutional investors, bringing an analytically driven investor perspective to the board room.

    Over the past six years, Eric has served as a board member, advisory board member and/or board observer to 12 public and private companies in a range of sectors including technology, telecommunications, healthcare, energy and industrials. In addition, from 2008 through 2011, Eric played a key role as the senior investment professional restructuring a multi-billion dollar portfolio of debt and equity investments in the Lehman Brothers bankruptcy, including Jazz Pharmaceuticals, Varel International, Firth Rixson Ltd. and Greenbrier Minerals LLC.

    Eric currently serves as an independent director at two public companies: 8×8, Inc., the leading hosted unified communications company, where is Chairman of the Compensation Committee and serves on the Audit and Nominating committees; and Rainmaker Systems, Inc., a learning management software company, where is Chairman of the Audit Committee and serves as a member of the Compensation and Nominating Committees.

    Eric earned a B.A. Honors from the University of Michigan in 1989 and an MBA from Harvard Business School in 1995. Eric also completed Kellogg School of Management’s Executive Education Program in Board Governance in 2010 and maintains his Series 7 and 79 (FINRA) certification through an active affiliation with Monarch Capital Group, LLC.

    For more information contact Eric at or (917) 859-9809.