Topics:   Corporate Governance,Leadership,Risk Management,Strategy

Topics:   Corporate Governance,Leadership,Risk Management,Strategy

August 23, 2018

Survey Demonstrates Room for Change at Private Companies

August 23, 2018

No doubt private company directors have felt the ache of overburden for some time. Much like their public company peers, private company directors’ roles have become increasingly difficult for years. The pace at which the business environment is evolving shows no sign of pause, with cybersecurity and other critical risks becoming more complex and forcing the board agenda to expand. It is not surprising that in these conditions private company directors and executives have dedicated themselves to learning more about the state of private company governance.

NACD recently published the 2017–2018 NACD Private Company Governance Survey. We asked directors and senior executives at nearly 400 private company to share their perspective on a wide variety of governance issues. While the results of our survey showed no upheaval in private company governance, there are several important findings to share.

This year we took a careful look at what boards should do to remain fit for purpose. This built off guidance in the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board, which urged boards to ensure that resources are dedicated to continuous improvement. Unfortunately, the results are largely disappointing. Notably, board agendas continue to grow to oversee the impact and opportunity presented by fast-moving and disruptive forces. Unfortunately, this is often at the expense of activities such a board education and board succession that are critical for long-term board performance. Though many boards recognize opportunities for improvement, relatively few have acted to make those changes.

1. Little has changed since last year. More than one-third of responding boards have no tenure-limiting mechanism, and slightly more than one fifth have term limits—about the same proportion as those that report age limits for board service. This showed little change from last year and is below what public company boards report. Similar to last year, 71 percent of boards say that their strategy oversight is not or just slightly compromised by short-term pressures. Sixty-three percent of boards discuss customers’ changing needs, and 61 percent have assessed the organization’s competitive environment. This is indicative of a broad stasis across many of the questions asked in our survey.

2. Disruptive forces are top of mind. Given the rapid pace at which technology changes, the speed at with competitors are able to deploy new products to market, and the skills employees need to do both, director perspectives on the key trends impacting their business are not a Change, disruption, and cyber risk top the list. We asked participants to list the five trends that they expect to have the most impact on their business. As you can see in the figure below, the facets of overseeing the management of operations in a complex business environment dominate the concerns among private company boards.

3. Boards are focusing on strategic considerations. To meet the demands of a quickly changing operating environment, private company directors are turning their energies to better understanding the risks and possible rewards that are immediately impacting the company’s performance. Further, these directors are seeking to play a more active role in developing the organization’s strategy. Private company directors clearly see themselves, and their boards, as a strategic asset to the organization. They aim to be more active, more involved, and know more about the ways in which management intends to lead the company.

4. Other improvements are being deferred. While improving strategic oversight by adding to the board agenda may feel necessary, it leaves little room for other important agenda items. Now, some boards have been able to find room for board education, evaluations, and other critical activities. One indication of this that we observed is a slight increase in the average number of director education hours, from 18.7 in 2016 to 21.0 in 2017. However, 58 percent of boards told us that they do not believe they allocate enough there. Further, half of boards are not satisfied with the time they spend on the board’s own succession planning or director evaluations. Each is an activity critical to ensuring that the board has the right composition—the mix of skills and diversity of background—to make its time spend on risk oversight as effective as possible.

Private companies operate in an exciting, dynamic environment full of risks and opportunity. Boards are right to focus their energies on activities to improve oversight in these areas, but should take care to reserve time to ensure that the board itself is fit for this purpose.

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