Director Attributes and Recruitment

One of the significant challenges for many private companies is to identify and recruit highly qualified directors who will be dedicated to committing the necessary time to fulfill their duties as duly elected board members.

      Attributes

Key attributes of an effective private company director include:

• Diversity of talents, experiences, and perspectives. The board's role is to debate issues, challenge management, and oversee performance. Boards with varied skills and backgrounds are the most effective.

• Seek free thinkers. Ideal candidate directors should be willing to objectively challenge management. Though not mandatory, it is advisable to avoid close friends or individuals who might be reluctant to speak directly, especially when dealing with senior management.

• Seek experienced candidates with practical judgment. The best directors have experience and a proven record of business success and can assess issues with a practical approach.

• Seek candidates with integrity and respect for alternate viewpoints. High-quality directors should represent the company positively, and their commitment to the highest standards of ethics and integrity should be unquestionable.
• Seek candidates comfortable with and knowledgeable of financial matters. At least one outside director should be financially literate. Other directors will expect and rely on such expertise within the board.

• Seek candidates with prior board experience. While prior board experience is highly desirable, it is not essential. Particularly in private companies, finding a highly qualified board candidate with previous board service may be challenging.

• Seek input from key constituents. A board should not be composed exclusively of representatives from each of the company's significant constituents, as they may focus more on their own interests rather than the best interests of the company. However, including one or more directors who have perspectives consistent with the company's key constituents can be beneficial.

• Seek candidates that have the interest and time to serve. A good director must commit time to the role, showing genuine interest. Beyond attending meetings, it involves preparation, committee participation, CEO discussions, and acting as a company ambassador.

For private companies, an effective recruiting tool can be simple networking with company advisors, including lawyers, accountants, and consultants, in addition to other businesspeople who are known and respected by the CEO and other corporate leaders.

Make sure the company has identified and required skills and experience. Once developed the list can drive networking efforts. The CEO should recruit for specific “positions” on the board much like recruiting for a sports or athletic team.

Advisory Boards

Certain private companies employ a two-tier board structure. This includes a formal board composed of duly elected "friendly" directors and an informal advisory board consisting of qualified, independent unelected individual de facto directors. The company's goals in adopting this practice frequently are to: (I) create the best of both worlds by protecting the owners against the risk they will not be able to control the decisions of the true board, but gaining the benefit of the advisory directors' insights, and (II) insulate the advisory directors from the liability exposures of a director.

The De facto Director

A person who is not technically a duly elected director, but who performs similar functions or otherwise fulfills a comparable role with the company may be a de facto director and potentially held to the same liability standards and exposures as a duly elected director. This means that, if a person is an active participant in board discussions or serves on an advisory board that effectively acts the same as a duly elected board, U.S. courts will treat that person as a director for liability purposes. This is especially true if the company publicizes the advisory director's involvement with the company, thereby encouraging company constituents to take comfort from and to rely on the contributions of the advisory director.

Advisory Directors

In addition, advisory directors may not have adequate financial protection in the event of a claim against them. Since advisory directors often claim they are not directors for liability purposes, they may lack indemnification and insurance protections unless special arrangements are in place. The company's Board of Directors may consider adopting a resolution to provide indemnification protection for relevant individuals. Additionally, the D&O insurance policy could specify that advisory directors are Insured Persons under the policy.

Because of these issues, companies should be thoughtful, careful, and transparent when considering the use of advisory boards or advisory directors. Both the company and these individuals should uphold a relationship and performance expectations aligned with a director's legal responsibilities. On the other hand, if the parties prefer a much more limited role for the advisor, then the person's involvement should be extremely limited, not formalized, and not publicized.

Conclusion

To establish an effective and objective small private company board:

• Identify needs: Assess the company's current state, strategic priorities, and areas needing external expertise.
• Select candidates: Look for individuals with relevant industry experience, strong judgment, and commitment to the company's values.
• Establish a board charter: Define the board's responsibilities, director roles, meeting frequency, and decision-making procedures.
• Develop bylaws: Create guidelines for board operations, including quorum requirements and voting procedures.
• Regular meetings: Hold scheduled board meetings to discuss key issues, review performance, and make decisions.
• Effective communication: Foster open communication between the board and management team.
• Conflict interest management: Set clear policies to address potential conflicts of interest.

A high-quality, engaged, and independent board is as important for private companies as it is for public ones. Owners who prefer a controllable but less effective board may face compromised governance structures.