6 Ways Adding Independent BOD Members Leads to Better Performance

Whether your company is privately held or PE-backed, you need independent director(s). Why? Two of the primary advantages of a BOD are enhanced governance and strategic guidance. An effective board offers valuable insights and expertise that contribute to informed decision-making, long-term planning, and customer-centricity which are essential for sustained growth and competitiveness. Plus, a board can provide a structured framework for accountability and transparency, helping to build trust with stakeholders such as investors, partners, and employees. According to a report by the National Association of Corporate Directors (NACD), boards play a critical role in establishing a company's culture, managing risks, and ensuring ethical practices, all of which are essential for a privately held company's success in a dynamic business landscape.

The inclusion of independent directors within the board composition holds particular significance. Independent directors bring an impartial perspective and a diverse skill set that can challenge the status quo and foster constructive debate. These directors are free from the influence of management or ownership interests, allowing them to provide objective insights and minimize potential conflicts of interest. Harvard Business Review’s "What Makes Great Boards Great” highlights that independent directors are more likely to facilitate critical discussions, improve strategic decision-making, and act as a crucial bridge between management and shareholders. This independence can enhance the board's credibility and credibility within the wider business community, which can be especially valuable for privately held companies looking to attract investors or partnerships.

How Independent Board Members Help Overcome 6 Business Challenges

Privately held and PE-backed companies face a range of complex challenges that can impact their growth, sustainability, and long-term success. A well-structured Board of Directors can play a crucial role in helping these companies navigate these six challenges and drive positive outcomes.

Strategic Planning and Innovation: Privately held companies often struggle with developing and executing effective long-term strategies while staying innovative in a rapidly changing market. A BOD, particularly one that includes independent members, can provide diverse perspectives and strategic insights. Independent directors, not influenced by internal biases, can challenge existing assumptions, and offer fresh ideas to steer the company toward new growth opportunities. They can help in setting clear strategic goals, evaluating potential risks and opportunities, and ensuring that the company remains agile and innovative.

1. Access to Capital and Financing: Raising capital can be a significant challenge for privately held companies, particularly when compared to their publicly traded counterparts. A BOD with financial expertise and industry connections can assist in identifying various financing options, evaluating their feasibility, and even providing introductions to potential investors, lenders, or strategic partners. Additionally, the presence of independent directors can enhance the company's credibility, making it more attractive to external investors and lenders.
2. Talent Management and Leadership Succession: Attracting, retaining, and developing skilled talent is a constant concern for privately held companies. A BOD can help create effective talent management strategies, ensuring that the company has the right people in key positions. Independent directors can offer insights into best practices for leadership development and succession planning, ensuring a smooth transition of leadership when needed.
3. Governance and Compliance: Maintaining strong governance and compliance practices is essential for privately held companies, as they often deal with regulatory complexities just like public companies. A BOD can help establish and oversee robust governance frameworks, including policies, controls, and ethical standards. Independent directors, in particular, can provide an objective review of compliance measures and ensure that the company adheres to industry regulations and legal requirements.
4. Risk Management: Managing risks effectively is critical for any business. A BOD can bring a diverse set of experiences to the table, which can be invaluable in identifying and mitigating potential risks. Independent directors can offer an unbiased assessment of risk factors and propose strategies to mitigate them. They can guide the company in creating risk management protocols, crisis response plans, and business continuity strategies.
5. Market Expansion and Globalization: Expanding into new markets or going global presents challenges in terms of cultural differences, regulatory environments, and market dynamics. A BOD with international experience can offer guidance on market entry strategies, potential partnerships, and navigating cultural nuances. Their insights can help the company avoid pitfalls and capitalize on growth opportunities in new regions.

Many of these challenges are faced by companies of all structures.? How well is your BOD helping you address these? We reviewed the KPMG 2023 Private Company Board Survey Insights report as to where there are opportunities for Independent Directors to be of greater service.

Do You Effectively Use Your Independent Directors? Find Out Now

The KPMG Board Leadership Center surveyed nearly 600 private company directors, investment firm partners, employees, operation advisors, family members, and ESOP trustees. The study revealed two key takeaways:

• The need for effective utilization of independent directors
• The areas where independent directors can improve results, namely strategy, talent, and governance.

Here are some of our recommendations to enhance enable your independent directors to help you navigate growth.

Key Takeaway 1: Effective Utilization of Independent Directors

According to the study, 75% of respondents agreed that independent directors can provide the most value to businesses by serving as a sounding board for the CEO and other executives, offering strategic advice, and balancing the perspectives of management and owners. However, the study also highlighted that few business owners understand how to effectively leverage independent directors. To address this gap, we recommend business leaders consider the following recommendations:

• Define clear expectations: Establish clear guidelines and expectations for the roles and responsibilities of independent directors. This includes their involvement in strategic decision-making, oversight of management, and fostering an open and constructive dialogue within the boardroom.
• Diverse expertise: Select independent directors with diverse backgrounds and expertise relevant to the company's industry, markets, and challenges. This will enhance the board's ability to provide valuable insights and guidance. One area of expertise that many companies can benefit from is adding an independent director with expertise in customer-centricity and upstream Marketing.
• Orientation and onboarding: Provide a comprehensive orientation and onboarding process for new independent directors, including detailed briefings on the company's strategy, operations, and culture. This will help them quickly become familiar with the organization and enable them to effectively contribute sooner.
• Communication and engagement: Encourage open communication and engagement between independent directors and key stakeholders, including management, shareholders, and employees. Regular board evaluations and individual director feedback sessions can also promote transparency and continuous improvement.

Key Takeaway 2: Areas Independent Board of Directors Can Improve

While private company boards have increasingly focused on strategy and improved their ability to oversee strategy and performance, the study identified three areas that require further enhancement: strategy, talent, and governance. Below are some thoughts on how you and your boards can address these:

Strategy

a. Long-term focus: Boards should prioritize long-term strategic planning and emphasize sustainable growth rather than short-term gains. Encourage your board to engage in robust discussions about market trends, competitive dynamics, and innovation opportunities to ensure the company's strategy remains relevant and adaptable. While all of these topics are Marketing-centric, too few BODS include directors with Marketing expertise. Does yours? If not, consider adding a Marketing experienced independent board director to maximize opportunities and reduce risk. ?

b. External perspectives: Seek external insights and perspectives by engaging independent experts or industry consultants. Leverage the network of your independent directors to help identify blind spots, challenge conventional thinking, and make informed strategic decisions.

Talent

a. Succession planning: Develop comprehensive succession plans for key executive roles, ensuring a pipeline of diverse talent and adequate leadership development programs. This will enable smooth transitions and continuity in times of change.

b. Board diversity: Diverse perspectives foster better decision-making and enhance the board's ability to navigate complex challenges. Emphasize board diversity in terms of gender, ethnicity, age, and areas of expertise when selecting your independent directors.

Governance

a. Board composition and independence: Review and evaluate the composition of your board to ensure a balance of independent directors, executives, and family members (if applicable). Independent directors should possess the necessary qualifications, independence, and area of expertise knowledge.

b. Effective committee structures: Establish specialized board committees, such as audit, compensation, and nominating committees, to enhance governance oversight and ensure the appropriate expertise and independence in key areas.

Bottom Line: Better Boards Include Independent Directors

Boards comprised of independent directors play a crucial role in guiding privately held and PE-backed businesses toward long-term success. The KPMG Board Leadership Center's study underscores the importance of effectively utilizing independent directors and identifies areas where boards can improve their oversight, particularly in strategy, talent, and governance. Adding independent BOD members will help strengthen your board’s effectiveness, enhance decision-making processes, improve your customer-centric growth strategies, and ultimately drive sustainable growth in today's dynamic business environment.

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