There are key differences between public and private boards. Once you understand those differences, you can decide where you might be most effective. It is important to consider that getting off of a board can be more challenging than getting on because of the questions a resignation raises.
Here are six points to consider before you commit.
Regulation. The SEC regulates public companies to protect investors by dictating rules of behavior, governance, and reporting. The process is burdensome and expensive and the risks of non-compliance onerous. That is why public boards often become overly cautious which makes the companies they lead less competitive over time. Young, private companies are choosing not to go public to avoid the regulatory burden and conservative mindset that plagues public companies
Institutional investor expectations and interactions. A major challenge to public companies and their boards are the high expectations of institutional investors demanding consistent growth. This pressure can lead companies to over-promise and under-deliver. Private companies generally avoid the short-term focus. They understand the importance of quarterly results, but don’t worry about whether that revenue falls in this quarter or the next. Public companies are always reacting to the short-term expectations of shareholders, analysts, and the press so focus more on compliance matters, rather than on strategy and innovation.
Scrutiny by Wall Street analysts, proxy firms and activists. Public companies are impacted by outside analysts and proxy firms that scrutinize, report, and publicly announce buy-sell recommendations and voting suggestions. These firms are having growing influence and can consume management’s attention. Directors should never dismiss proxy firms like ISS and Glass Lewis since if their reports are critical, they can impact Wall Street’s view of the company. Activists are another powerful force that directors must manage. They often take their criticism to the streets to try to coerce board members to accept their point of view. This can be a major, time-consuming distraction from the real needs of the business.
Board composition. Smaller private boards are often less formal and are generally comprised of founders, executives, family members, and outsiders. Director recruiting decisions are made based on familiarity and convenience rather than diversity or independence. Public companies are different. Independent directors must ensure representation of minority investors who aren’t in the boardroom. Large companies recruit on an ongoing basis and spend a great deal of time evaluating board candidates to determine an appropriate mix of skills, experience, and fit. Public boards are generally viewed as more professional but transforming a private board to a public board can be challenging and rewarding.
Compensation. Private boards typically offer modest annual compensation of about $50,000, but directors derive benefits beyond cash and stock, such as the satisfaction of helping build or guide a young business, and the opportunity to associate with entrepreneurs and venture capitalists who may bring new concepts and technologies. On the other hand, private capital-backed boards often provide cash and/or equity compensation nearly comparable to public companies. Large public companies offer significant compensation of approximately $250,000 per year, but you will earn it! Expect to devote about 240 hours annually preparing and serving on a public board.
Risk exposure and director liability. Public companies are targets for all kinds of litigation which makes board service a little risky. It is common for public company directors to be sued multiple times during their tenure. Although the majority of these suits can be managed by the company, there are situations where judgments awarded that require insurers and directors to pay penalties.
Becoming a board member is an honorable endeavor and important work that often facilitates a company’s success or failure. Knowing which kind of board to join requires balancing realities of the work against personal preferences. The more honest you are with yourself, the better board member you will be.
