Leadership & Talent

Board Governance in Privately Held Industrial Companies

A board that meets to approve what management has already decided is attending, not governing. Private companies can build the real thing before they are forced to.

May 2020·2 min read·Synergy Nexus Advisory

Why private companies go without

A listed company has a board because the law and its shareholders demand one, and a private-equity-owned business has one because the investor installs it. A privately held industrial company answers to its owners, who are often also its managers, so nobody outside is asking for quarterly reporting or an independent view on a large investment.

So the structure is not built, and many such companies have a board on paper that meets once a year to sign documents. That works until a crisis or a transaction arrives.

What a board is for

A board does what management cannot do for itself, because managers are close to their own plans. They have reasons, mostly honest ones, to underweight a succession gap, a dependence on one customer or the risk in a project they have championed.

An effective board raises those subjects without needing to be hostile. What it needs is members who know enough to ask and are independent enough to persist.

Exhibit 1: An attending board and a governing board compared.

Aspect	Attending board	Governing board
Membership	Family, managers, long-standing advisers	Includes people chosen for views management lacks
Agenda	Management's presentations	Standing items on risk, succession and capital
Papers	Tabled at the meeting	Circulated in advance
Typical outcome	Approval	Approval, amendment or a request for more work
Between meetings	No contact	Members available to the chief executive

Five questions for owners

When did the board last change a decision management had proposed?
Who on the board would tell the chief executive something unwelcome?
Does the board see customer concentration figures at every meeting?
Has it discussed who would run the business if the leader were unavailable tomorrow?
Did it review the last major capital commitment before or after the money was committed?

An advisory board, with no legal authority, can do most of this, and it is a reasonable first step for owners who are not ready for independent directors with a vote.

Build it before you must

Three events tend to force the issue. A buyer conducting diligence asks how decisions are made, a lender writes reporting requirements into a credit facility, or a family succession exposes that nobody outside the founder has seen the full picture.

Each comes with a deadline, so a board assembled to satisfy one of them is assembled in a hurry. Companies that established the rhythm earlier, on their own terms, go into those events with records, habits and people who already know the business.

From the field

In one composite engagement, a privately held group with four business units set up an annual portfolio review led by ownership, which surfaced a dispute over reinvestment that earlier cycles had deferred. Read the capital allocation case study.

A board is also the natural owner of the questions raised in what changes when a founder steps back.

Key takeaways

Review the last three board or owner meetings and count the decisions that were changed by discussion.
Add customer concentration, succession and major capital commitments as standing agenda items.
Identify one perspective your management team lacks and recruit an outside member who has it.
Send papers a week ahead so meetings are spent on questions, not presentations.

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