Independent Directors:
Private Companies Need Them, Too


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By Edward D. Hess,
Distinguished Executive in Residence and
Adjunct Professor of Management, Goizueta Graduate School of Business

Emory University
Atlanta, Georgia

edward_hess@bus.emory.edu


Much has been written post-Enron about the need for truly independent directors to represent the best interests of public shareholders and not the interests of management. We have seen the NYSE, NASDAQ, Congress, GE, Disney, and others put forth proposals, laws, and responses dealing with the definition, number, and responsibilities of independent directors.

I have written about some of the serious issues which created the 90's bubble. (See "The Aftermath of Enron: Earnings Management Transparency Rules"; "The 90s Bubble: 4 Unresolved Issues"; "Non-Executive Chairman"; and "Audit Committees: The Hard Questions".) What about private growth companies? In most such companies, management is the shareholders. So, do private growth companies need independent directors? Yes!

Private growth companies need independent directors either formally as part of the Board or informally as an Advisory Board as much or even more than public companies. The private company reasons, however, differ in most cases from public company needs. Entrepreneurs need independent objective advice from seasoned wise business builders. Entrepreneurs need reality checks; entrepreneurs need a check and balance mechanism; entrepreneurs need critical intellectual debate; entrepreneurs need someone to tell them what they need to hear, not necessarily what they want to hear; and entrepreneurs need advice on what does not work as much as what does work. That is the role of private company independent directors.

  1. It is Lonely at the Top

    Many leaders or business builders will tell you it is lonely at the top. How do you lead people and be their friend? How can you expect your employees and managers to be totally open, honest and direct with you when you control their paycheck? To whom do you turn to for straight talk, for a reality check, for dissent? With whom do you debate personnel issues? With whom do you debate ideas? With whom can you let your guard down in confidence and be totally open and honest?

    That is why independent directors are so important. Business builders have strong personalities and they need reality checks frequently. They need sounding boards; they need to test their assumptions; they need a fresh pair of eyes and ears. Business builders need someone with whom they can let their guard down in confidence, be totally open and honest, and say, "I need some help here." Independent directors can meet those needs.


  2. Been There, Done That is Valuable Experience

    In working with successful entrepreneurs, it is interesting how many have told me "I wish I had had a few successful business builders as mentors - people I could run ideas past - people who have dealt with the common issues: for example, when should I hire a real CFO; when do I put in formal HR policies and reviews; what has worked and not worked regarding team building; how do you keep employees motivated?

    Most businesses as they grow face similar issues at different stages of the life cycle regardless of their product or service. Whether they be marketing, finance, HR, internal controls, or employee morale, certain issues appear at different stages of everyone's growth cycle and those issues are generally related to the need for more organizational structure, more policies, and more controls as you grow. The balance between controls, systemic processes, and informality and flexibility is a constant tension.

    Most entrepreneurs and business builders regardless of the stage of their company ($1 million in sales; $5 million; $25 million; or $100 million) are facing commonly occurring issues for the first time. Building a business is hard but it is not research microbiology or aeronautical engineering. You can save a lot of time, money, and trouble by learning from those who have been through what you are going through.

    Business builders do not need the latest consulting fad or to be laboratories for the next strategy idea of the month. Business builders need wisdom and judgment from successful people who can listen, who have no underlying agenda, and who have "been there and done that." And for that wisdom and judgment to be valuable, the advice giver needs to be educated about your business, your people, and your industry so that he or she can respond quickly. That is why having these people serve on your board is wise - because it institutionalizes an education process so they are up to speed on you, your company, your results, and your issues. It prepares them to give you reasoned advice quickly. Find people who you can learn from.


  3. Who and How Often?

    Who? Clearly the ideal candidates are people who are knowledgeable about your industry, have a proven track record of business success, impeccable integrity, and the willingness to be an advisor, mentor, and straight shooter. It helps to have people who have experience in larger companies because they have dealt with some of the issues you will face as you grow. Find people with skills which you lack.

    Look for diversity of experiences, in both business and life. Look for people who have overcome personal and business adversity which builds character. Look for people who have mentored others successfully. Look for "horses who have won different kinds of races."

    How often? Growth companies need frequent Board meetings to review progress and as a check and balance against the daily chaos. Entrepreneurs get very emotionally involved in building their business and their emotional involvement can impact decision making negatively if bias, rigidity of thinking, or arrogance sets in. Most people do not know what they do not know. Most people cannot step out of their own shoes and test reality and their underlying assumptions.

    That is the purpose of monthly one-half day Board meetings with independent, objective directors. Monthly meetings can institutionalize a rigorously applied reporting, critiquing, and intellectual debate process which entrepreneurs need.




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