Good Governance in Private Corporate Ownership

Good Governance in Private Corporate Ownership

NACD Private Company Directorship

Good Governance in Private Corporate Ownership

November 8, 2020

By R. John Fletcher

Private company directors must achieve a balance between considering what is best for the business while respecting what is preferred by the owner.

Public companies ask the board to serve in a governance role with authority over management of the business and strategic decisions. It is expected that public company directors will use their authority to focus on increasing the value of the business.

Private companies typically want a board composed of individuals with relevant expertise and experience who represent a sounding board for the owner. Those advisors, as with public company directors, are expected to help increase the value of the business. The fundamental difference between public and private companies is that private company advisors do not have the authority vested in public company directors. Instead, private company ownership, rather than the board, is vested with the power to make decisions.

The difference between being a public company director and a private company advisor can be immaterial or unnoticed until there is a major difference of opinion on a sensitive or important issue. Every private company advisor has the responsibility to provide sound guidance while acknowledging the owner, with ultimate authority, can accept or ignore that advice.

It is natural that owners value the autonomy which enables them to work in their preferred manner, including who manages the company, how it is run, goal setting, investment decisions, acceptable risk levels, etc. The board of advisors fulfill their obligation by providing the best advice possible. The owner’s “privilege” is to choose to ignore that advice. Public company boards find ways to work through differences of opinion when decisions must be made. Private company directors learn to acknowledge that a consensus may not be achievable.

Once the private company owner understands the board’s recommendation, the private company board can conclude its obligation. For clarity and mutual respect, the advisory board can ensure clarity with statements like “This is our recommendation and, while we do not agree with, or condone your recommendation, we acknowledge that this decision is yours to make.”

Private company advisory board members can anticipate high owner sensitivity around the following business issues:

Private and public directors require the same business expertise. Private company directors also need to be capable of identifying and incorporating the owner’s preferences to reach effective consensus.

 

R. John Fletcher is the managing partner of Fletcher Spaght, a strategy consulting organization,which he founded in 1983, and managing director of Fletcher Spaght Ventures, a venture capital fund. Prior to FSI, Fletcher was a senior manager at The Boston Consulting Group. Fletcher currently serves on the boards of Axcelis Corp., Clearpoint Neuro, and is chair of Metabolon. He previously served as chair of Spectranetics during its turnaround and subsequent sale to Philips NV; for this work, he was selected in 2018 as the NACD Directorship 100 Director of the Year.