Strategy, corporate performance, and corporate growth or restructuring were the most commonly cited governance priorities overall for respondents of the 2015–2016 NACD private company governance survey. But a closer look at the results by the type of business reveals distinct differences in director concerns.
This year, NACD for the first time published its survey report in three separate volumes organized around major ownership structures—family, investor, and employee-owned—to provide more customized analyses that address challenges specific to each company type.
Survey findings are drawn from some 712 responses to a questionnaire e-mailed to NACD members serving on private company boards representing each of the three ownership structures. The questionnaire was in the field between March and May 2015.
Family Business Boards
NACD’s survey results indicate that the boards of family businesses are likely to view long-term strategy and value creation as their top priorities. When considering executive performance horizons, a large portion of respondents from family business boards (49%) define “long-term” as more than three years. Twenty-four percent of respondents identified leadership development as one of the three most time-consuming tasks for their board, alongside strategic planning and corporate performance.
The results also indicate that despite their attention to long-term strategy and leadership development, 24 percent of family business boards do not have a formally written CEO succession plan. The lack of such a plan can complicate the effective transfer of leadership, whether between generations of family executives or from the family to outside management.
Boards of investor-owned companies or those that are supported by venture capital or private equity firms may comprise a mix of founders, management, and investors, depending on the company’s stage of development.
Venture capitalists and private equity firms, by the very nature of their work, are especially focused on results: they want the valuation of the company to increase, oftentimes at a quick clip. Not surprisingly, investor-owned company boards rigorously scrutinize the performance of the company and its executives. The majority of directors at investor-owned companies (61%), closely monitor profits, while 37 percent monitor sales to gauge the company’s performance and determine executive pay.
A significant 33 percent of respondents use cash flows, which offer insight into where and how the company generates income and how its cash is being deployed. The focus is not solely on financial metrics; 44 percent of investor-owned companies also use customer satisfaction as a gauge of the company’s strength.
Employee-Owned Company Boards
Executive talent management ranks as a high priority for the boards of employee-owned companies, which are owned at least partially by their employees, either directly or indirectly through a trust. The vehicles for employee ownership can take several forms, including employee stock ownership, stock options, and profit-sharing plans.
While profits and sales remain important metrics, a large number of respondents from employee-owned companies use metrics related to employee morale (52%) and employee turnover (32%). The prevalence of these metrics was particularly notable among employee-owned companies.
For further coverage of the private company surveys, please see the forthcoming September/October 2016 edition of NACD Directorship magazine.
To download NACD’s surveys of private companies or view guidance and tools for private companies, please visit the Resource Center for Private Company Governance at www.NACDonline.org/privatecocenter.
“We can’t afford the cost of harmony!” declared Bruce Dayton, former CEO of the Dayton Company. He was referring to the way Dayton’s family-only board made decisions through a time-consuming process to achieve consensus. He sensed that the accelerating pace of the retail business required a change in the company’s governance model. The year was 1950, and the five Dayton brothers had not yet grown the single department store—inherited from their father—into what would eventually grow to become Dayton Hudson Corporation and later the retail giant Target Corp. “There is a new phenomenon coming called the mall. At present we don’t have the distribution, financing, and real estate know-how to go there. But the longer we wait the harder it will be to get in. And if we don’t go, we will become five brothers owning a smaller and smaller business together.”
The Dayton brothers’ way out of that dilemma, which was courageous at the time, was to compensate for their lack of know-how and clear strategy by bringing in outside expertise onto their board, while making a personal commitment to become students and proponents of excellent corporate governance. They recruited independent directors who could help the company select real estate, raise capital, and set up a multi-store distribution system. They saw reshaping the board as a key first step in developing the strategy and capability needed to pursue an opportunity for exponential growth.
Bruce Dayton provided these insights in an interview with me a few years ago, and his story is included in the newest addition to the NACD Director’s Handbook Series, TheFamily Business Board, Volume 2: Governance for Agility and Growth, published this month (March 2016). Dayton was ahead of his time. His strategic use of the board is becoming more common among family-owned companies today, as evidenced in the 2015–2016 NACD Private Company Governance Survey: Family Business Boards. The survey showed many points of comparison between the boards of family businesses and public companies, and also revealed that family business boards have their own governance style oriented to the long term. The proliferation of family-business education programs and peer networks for directors of large family-controlled companies, including NACD’s upcoming Advanced Director Professionalism, is empowering more owners to create sophisticated, tailored governance structures that include independent director expertise while also cultivating the family’s continuing contribution to the value of the business.
Family business board development requires a champion and a plan.
The Dayton brothers’ story illustrates important steps on a path to more effective family business governance. Because there may be many obstacles (sometimes political and emotional) to be overcome in advancing the capability and composition of a family business board, the best leaders of board change are usually well-prepared insiders—who have both strong credibility within the company and high levels of trust among the owning family members. NACD’s new handbook is designed for these “board champions” who want to spark development and expand the capability of an existing board to help the business meet new challenges. The handbook suggests strategies for addressing common sources of resistance to board change in family business and describes the following fundamental steps of board-development planning:
Identify and communicate reasons to advance the board, such as new realities on the business horizon, that compel a strategic response.
Assess board capability and effectiveness gaps.
Bring on independent directors while building owner confidence.
Facilitate constructive contributions from both independent and family directors.
Because every family business is different, these basic steps should be customized and implemented in a manner that is acceptable to senior management and leading shareholders. These stakeholders must have confidence that the board changes are the best way to move the company forward. But before that confidence can be built, acts of courage are required. A “champion” has to raise the issue of board readiness and articulate compelling reasons for advancing the board, while charting a board development plan that brings others along.
The risks are higher when family relationships are at stake.
The Dayton brothers reshaped their board as a first step in achieving a series of advances: building the first indoor mall in the United States, becoming developers of mall anchor stores, and later, buying a competing public retail chain before selling their interest in that business to focus on a new quality discount store concept, Target.
For the Daytons, as for many family business owners, recruiting outside, independent directors required the support of informed and educated family members. In their case the speed of change in the business environment required action before an informed family consensus could be achieved. “We recognized that success might require that each of us would eventually have to give up our current management job to someone who could do it better, and even sacrifice our good salaries in the short term for the goal of higher profits and greater long-term returns,” said Dayton. “We knew that sacrifice might be hard for our [families] to understand, but board discussions boosted our confidence that profits would rise, and shared profit would eventually smooth any hard feelings.”
The brothers’ gutsy steps toward better governance not only produced a more powerful company, but also they established precedents that inspired generations of creative family contributions in entrepreneurial business, philanthropy, and public service. The potential to be a part of that kind of long-term generativity is a reason why many of the best independent directors want to work with great family business boards.
Allen Bettis is the author of NACD’s latest handbook for family business boards and is a leader of the NACD Minnesota Chapter. Allen will be facilitating a discussion with directors from the featured case study in the newly released handbook at Advanced Director Professionalism in June. If you are interested in attending, click here.
As NACD works with corporate directors of public, private, and nonprofit boards to oversee and ensure the long-term sustainability of the enterprise and bolster investor confidence, I am frequently asked: “What companies have the most significant challenges?” While unique challenges certainly exist across boards of all company types, many view the roles of small-cap public company boards to be quite challenging.
These unique challenges span time and effort (workload) requirements, compensation, talent, financing, regulation, risk, strategy, competition, and internal resources, just to name a few. Small-cap directors and governance professionals may identify and prioritize the unique challenges of these companies differently, however, but one thing remains constant and that is that small-cap companies represent the majority of companies listed on U.S. exchanges, and the long-term prosperity of these small-cap companies is essential to a growing, thriving economy.
So where can small-cap company directors turn to reinforce their strategic agility?
Second, I highly recommend that all directors read NACD’s Board Building white paper, another high-impact, quick read. Most important in this resource is the skill set matrix enclosed in the appendix. Many companies are now using the skill set matrix to both determine and articulate the experiences and talents required for their future strategies.
Lastly, I suggest that current and aspiring small-cap directors attend NACD’s Small-Cap Forum on April 10 in San Antonio or on July 17 in San Francisco. Both sessions will focus on current and emerging issues facing small-cap boards, and these interactive events will include a range of interactive, peer-to-peer networking opportunities for robust dialogue.
Contact me at hstoever@NACDonline.org if you have specific questions or suggestions on how NACD can assist you, your board, and other small-cap directors advance exemplary board leadership.