How do boards of directors function in larger, privately-held companies? The answer is: pretty much like boards of directors in publicly-held companies, according to a panel of directors convened February 9th in Boston by the National Association of Corporate Directors-New England Chapter.
Panelist came from a broad variety of companies: Mike Jeans sits on the board of the large Rhode Island insurer AMICA; Ralph Crowley is on the board (and is CEO) of Polar Beverages in Worcester; Ken Dreyer sits on the board of 225 year old King Arthur Flour in Vermont, a company owned by all its employees through an employee stock ownership plan (ESOP) and also organized as a “benefits corporation” with charter obligations to assist the community; Debra Jackson, President of Cambridge College, chairs the governance committee of 198 year old Eastern Bank.
Some commonalities: each company has a robust board of directors a majority of which are “from the outside;” each has a disciplined methodology for adding new directors, and each in a different way attempts to fill particular needs (rather than just hiring “cronies”); each emphasizes formal board procedures including robust “board books” in advance of meetings and reasonably formalized structure for the conduct of meetings; each has a relatively sophisticated system of committees in support of the board.
Notwithstanding somewhat differing fiduciary obligations (King Arthur Flour has strong fiduciary duties to its ESOP as well as to the community, Eastern Bank dedicates 10% of earnings to its foundation, AMICA is responsible as a mutual company to its policyholders, Polar Beverages is still a family owned enterprise), everyone identified their primary obligation in the first instance as flowing to “the company.” If a company is strong, then the rest of the mission can follow.
Other interesting takeaways:
Private boards, as public boards, see a primary function in fixing strategy (management presents strategy and “management comes to the board to have their answers questioned”); for full board meetings, no one goes on the telephone, some companies simply do not allow it (occasionally practice at the committee level may vary); boards are built not only to provide independent input and not only to provide diversity of race, geography, age and the like, but also with a strategic view toward retirements and ongoing need for continuity.
One over-riding theme: public company best practices have substantially infiltrated the operations of all these companies, including with respect to director independence, committee structure, often a designation of a lead director to provide guidance to the board and liaison to management, and in one instance the guidance of counsel to conform governance to listing standards of the New York Stock Exchange.
Clearly, larger private companies are being managed to a high level of professionalism, and directors in these companies attribute robust economic results to that practice.