Should a private company have a board of directors?

When a company is not publicly traded, there is usually no legal reason for it to have a board of directors. Yet there are many private companies that have boards of directors. In fact, I happen to sit on the board of a private company.

So the question must be asked: when should a private company have a formal board of directors?

Dynamic that encourages a council

There are various reasons why a private company should have a board of directors. For example, if there is a family dispute, the family’s legal advisers may insist that a board of directors be independent.

Additionally, if the business in question has significant debt, its creditors may require a board of directors. Also, if there is venture capital or angel investors, the company could most likely be required to have an independent board.

Therefore, the reasons why a private company might have a board of directors are many. However, what about the situation where there is little or no outside funding and no outside investors. Are these companies likely to have a board of directors?

Independent companies with boards of directors

I have seen many cases where highly profitable private companies with no debt and no outside investors have a board of directors. In fact, I know of a very successful private company whose majority shareholder has assembled a competent and diverse board.

Why did he do this when there was no legal need for independent advice? He wanted objective input on the strategic direction of his business, as well as other corporate matters. The company in question continues to grow and prosper.

I also know of another private company that just filed for Chapter 11 bankruptcy. It had been around for over 10 years, and the founder and majority shareholder grew it from a small healthcare company to a powerhouse. regional with sales of more than 500 million US dollars per year.

Unfortunately, as brilliant as the founder is, he surrounds himself with employees who are afraid to criticize him and who make him feel that he is infallible. An outside board of directors would, in my opinion, have helped this company tremendously not only to not go into debt, but also to grow and prosper.

That said, there are plenty of small, private companies that do pretty well without a board of directors. It really depends on who is running the business and how complex the business is.

How to choose a board

Here are the categories that I think are essential if you want to build an effective board:

1. Legal representation. Now more than ever, I believe it will be incumbent upon you and your company to have legal representation on the board. Choose an ethical lawyer, preferably with experience in the industry in question.
2. Financial representation. By choosing someone with financial experience – preferably a certified public accountant – they can act as a financial watchdog, let the board know if anything inappropriate happens with the company’s books, and help you comply with the SOX (Sarbanes-Oxley Act) law, if you ever decide to list your company on the stock market.
3. Technical representation. It’s important to have someone on the board who knows the inner workings of your industry inside out. This person preferably has important contacts in the industry and can assist the board of directors and management in all technical and strategic decisions.
4. Marketing. I think it’s very important that you have a marketing person on your board who can help you grow. This person should know the industry from a marketing perspective and be able to strategically advise the board on new marketing directions, including new products and services.
5. Public relations. This person is usually a prominent person who connects with the community at large and thus brings solace to shareholders, customers and the general public. In addition to being a highly visible person – at least in your immediate corporate community – this person must have impeccable ethical standards. I’m sure you know prominent people who have retired from business or government service and been chosen to serve on a board of directors. A highly regarded board member really contributes to the public perception of your company.
6. Other. This position may be filled by a highly respected individual in one of the following areas:

• Environmental problems. This applies if your company’s products have an impact on the environment.
• Shareholder relations. This person has the necessary expertise to deal with sensitive questions from shareholders.
• Labor issues. This would apply if your company is unionized and needs an in-house lawyer who can help you deal with unions.
• Regulatory Matters. This applies if the company is in a highly regulated area, for example, nuclear energy.

Corporate governance

The list above, when you add the shareholder(s), will occupy approximately eight seats on your board. The number itself is not that important. What’s important is that you have a real board that can put the brakes on management if they see things going in the wrong direction.

Some boards are thinly veiled rubber stamps for management. Anyone who gives such a board more than a mere glance can quickly determine that the board is only there to take orders from management.

Maybe your company isn’t ready for a board meeting, or maybe it is. Either way, it’s good to know the key elements that go into forming a board. Good luck!

Theodore F. di Stefano is a founder and managing partner of Capital Source Partners, which provides a wide range of investment banking services to small and medium-sized businesses. He is also a frequent speaker before business groups on financial and corporate governance issues. He can be contacted at [email protected].