Private Company Corporate Governance Summit

Private Company Corporate Governance Summit

BHF TALKING POINTS

Private Company Corporate Governance Summit

Westin City Center, Washington, DC May 12, 2016

QUESTION:Diversity of perspective. This is a common theme you hear about in the recruitment of new directors for publicly traded boards. Is that applicable when it comes to the recruitment of directors for private company boards?

First remind ourselves what the attributes are of a good director, whether independent or family

  • Accomplishment
  • Integrity
  • Support for family interest
  • “Fit” with the group
  • Willing to learn the business
  • Willing to commit the time to this
  • Has no other agenda than the success of the enterprise

Diversity…broadly defined: skill set, experience, perspective, ethnicity, gender. I’m a believer in diversity of perspective because I have seen the power of it. How, different perspectives can clarify, sharpen, and enrich a process surrounding a decision, be it strategy of any decision. In other words, the culture of the board should reflect: there’s no such thing as a dumb question.

Leader of the board. It’s also good to have a board leader who appreciates differing views, who makes sure all the voices are heard, and then who can find the common ground for consensus – or find the areas which need more work or deliberation to arrive at consensus. Some otherwise wonderful people arenot good at this…it’s a skill.

Another reason to push for diversity. You have employees, customers, community relations – people notice who is on the board. It sends a message about what kind of company you are.

QUESTION: What are some of the best practices that private company boards can employ when recruiting new directors? What is a common mistake that is made?

Best practices, particularly for independent directors, but some of the same things apply to family board members.

1. Know what you want…that ties back to your skill set analysis – what would we like to have?

  • Strategy: what business or businesses is your company in? What is your strategic vision – what is your strategy? Where do you want the company to be over time and how will you get there?
  • It’s helpful to do a skill set analysis. What expertise/experience do we have now around the board table? What ideally would you like to have? What would be useful, given our strategic direction that we don’t have now? The answer could help to indicate the sort of individual you are looking for.
  • Sometimes arriving at the definition of what is desired can be difficult. Example: Aetna looking for a digital (or something) director and having difficulty articulating what we wanted.

2. Initiate the search…know who is in charge. Could be chairman or CEO or Nom/Gov. committee. Reach out to sources – who would know, board members and their networks, trade associations, NACD, Women Corp. Directors, other networks that you have or hire search firms. If you use a firm and the firm doesn’t give you what you want, go get another firm. This has happened where diversity was also asked for along with skill set.Give the firm another chance and then if they don’t deliver, go get another firm which will.

3.Come up with a candidate list. Decide-- the Committee or the full board -- which one or ones you want to pursue. Vet for conflicts up front. You don’t want to pursue someone who is the board of a competitor.

4. Interview the candidates. Independent board members and family. I like more informal -- do over lunch or dinner and you’ll learn more and begin to build relationships. And after a few glasses of wine, you’ll learn quite a bit more than you might have expected.

5. Decide on next steps such as inviting one to join the board. Or, if you aren’t satisfied, go back to beating the bushes for better candidates.

6. Invite the candidate. Be clear about your expectations for the board member. Candidate should be clear about his/her expectations as a member, e.g. why that person wants to join, what that person brings to the table. If affirmativeresponse to the invite, then finish the vetting. Outside firms, exec search firms will do this.

7. Integrate the new director into the group. Have an orientation program...Learn the business. Meet the auditors, other key people in management. “Integration plan”. Board leader should ensure that it happens and bring along the new director in a mentoring capacity.

Mistakes:(1) not being clear about what you are looking for. (2) Not being candid and upfront about what you really want.

(Personal example…Pathway. I was recruited to bring experience, governance savvy (we want to go public) and international knowhow. When I got there, I found out that this wasn’t what he wanted – chair/CEO/founder. Wanted to shore up his control. Doesn’t want a board or governance. I decided this wasn’t where I wanted to be.)

Family directors – how to choose: Use BGI example.

QUESTION: One of the most common issues that I see raised from private company CEO’s is the appropriate amount of compensation for directors. How can they arrive at that? Is it meant to be a collaborative approach?

ANSWER: Here again, take a lesson from the approach of public companies.

Look at comparables as a start. Other companies in your sector, company’s size; complexity. Looks at various surveys that are done – NACD does one. Executive search firms also. Review proxy statements. After all, you in competing with public companies for directors and they have other instruments, e.g. equity (stock, options) that can be used.

  • Questions: total amount per year. Also whether cash vs. equity. Depends on where you going and whether you intend to go public. Startups give a lot equity instruments, e.g. options. BHF QUESTION: do private companies pay in equity? Yes, the do. They key there is how directors when they leave the board cash out. There is a value on the company’s stock. In some cases they must sell back to the company.
  • Use your judgment. Have a compensation committee. Or if you don’t, have a process to review comp annually. You may not change anything, but review it.
  • Tax advice

QUESTION: Is there a difference in terms of process for the recruiting of a candidate for private company board of directors and a private company professional advisory board?

ANSWER: depends on the purpose – if is to be a feeder for the board, then the same things apply. But if it is to fill in knowledge gaps, then go looking for those who fit the gaps you are trying to fill. Pay them something. Difference in liability. Example LafargeHolcim IAD.

OTHER COMMENTS:

Stable shareholder group. Work to keep them engaged. Family council. Communicate with them. Answer their questions, etc. Family members…lots of ways to do this, e.g. family reunions, meetings around the annual meetings, emails, etc. throughout the year.

BHF

5-12-16

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