Private Company Governance: Why You Need a Strong Board of Directors

Bruce Werner has a blunt message for company owners. “Owners are leaving money on the table. They’re not getting full value from their boards,” he says. “We can improve the outcomes in your business, make your life a little better, and take risk out of the business by having a board do what it ought to. And it doesn’t take that much more effort. You just have to ask a few important questions.”

Werner came up in the family business, a $500 million company that made ladders until it was sold in a leveraged buyout in the mid-90s. After the sale, Werner started, grew, and sold four companies, was a partner in a private equity fund, and served on more than 10 boards, mostly for family-owned firms.

He’s distilled all of that experience into two books, Your Ownership Journey: 12 Secrets for Personal and Business Success, which published in 2022, and Navigating Private Company Governance: The Savvy Business Owner’s Guide to Developing an Effective Board, which published in 2023.

We interviewed him in the wake of the publication of Navigating Private Company Governance and asked him about his advice for business owners wondering whether they need a board of directors for better corporate governance.

Here’s the edited transcript.

Why Should a Business Owner Form a Board of Directors?

All my work and all my writing is aimed at getting better outcomes for owners. People know how to run their business. They know how to hire and fire and deal with a recession. But as they start to think about bigger issues and longer term, and how they want to end their career, there are bigger questions.

And I find that no matter how good you are at running your business, when you have a new issue where you don’t have experience, it’s good to get some help.

How Does an Owner Know When It’s the Right Time to Recruit a Board?

People form boards when they realize they don’t have the skill and experience to address a new issue. So my phone starts to ring when companies are at $25 or $30 million revenue and they have a new issue that no one in the management team has seen before.

You don’t form a board because you’ve got a problem this month. What are the handful of issues over the next three to five years that are really going to be tough to grapple with? And how can the board members help you solve those problems?

You’ve got to look down the road a little bit, because things are going to take time to have impact.

How Big Does a Company Have to Be to Need a Board?

Generally, this is an evolutionary process that changes as a company grows. A board is like a bespoke suit. It only needs to fit one company.

First, there is no board. Then there’s what I call a “consulting board.” Next is a junior advisory board, then a full advisory board until it’s finally a true fiduciary board. That’s the spectrum.

The consulting board is, “Hey, I’ve got a couple of problems. I don’t think I need a big board. I’m going to rent a few brains for one or two days a year.” It’s my golf buddies. It’s the banker. It’s a neighbor who’s really smart. And we talk about the issue.

And you do that until it’s, “Hey, I’ve got more things I’m wrestling with.” And you move to a junior advisory board, which has a little bit of structure. It meets quarterly. It typically addresses strategy and management issues but stays away from the third rail of executive compensation, oversight, and CEO performance.

As things get bigger and more complicated, you move towards a full advisory board, which is very similar to a fiduciary board, but the advisory board members don’t vote on anything. They’re not really talking about executive compensation but maybe they’re talking about succession planning. They offer advice, but decision-making is still firmly in the hands of the owner.

And then from there, depending upon need, you move to a true fiduciary board.

What is the Board’s Role in Company Governance?

Responsibilities of the board are:

• oversight
• corporate strategy
• capital structure
• management succession
• risk management.

That’s true regardless of whether you’re a public, private, or nonprofit organization.

The question is which of those are the priorities?

In a public company, corporate governance practices are all-encompassing. All of those areas need to be equally addressed — via board committees that oversee financial reporting, strategic planning, executive compensation, auditing, even the company code of conduct.

Private company board directors almost never ask about risk management, and they’re uncomfortable talking about succession planning. Oversight means they check the bank statement. In the nonprofit world, oversight is important.

How Can a Board Provide Good Corporate Governance When the Owner is also on the Board?

It’s always about the people. It’s about fit. You need to have the right fit to be in board meetings at all. And if you have an owner or chief executive officer who is an 800-pound gorilla, the board members need to know how to play with that gorilla. That trumps everything.

What if the Owner is, um, Difficult — Like Elon Musk?

You’re not going to get the best talent in the boardroom if senior management is undesirable to be with. And I don’t care how famous, how profitable, how smart you are, if it’s not a good environment, if there are no internal controls, the good talent is going to say, “I have better things to do. I’m not wasting time in your sandbox.”

If you’re a private company, if you’re Elon Musk and you’re making money, you can almost get away with murder. That’s great until the day you really need help and your reputation precedes you.

Independent directors who would actually have your long-term success and the best interests of the company at heart as a fiduciary, they’re going to know your history. It’s something to think about, because even when things are great, it can always change.

Does Effective Corporate Governance Require a Board of Directors?

If you get a 10-X return on the expense of a Board, that would be a meager outcome from my perspective. You should be getting 50-X or 100-X increase in value and mitigating risk.

You need to think of this in the sense of the word “strategic,” because this ought to be changing your whole future. It’s all about long-term value creation.

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