Becoming a Board Director: Advice from Active Board Directors

There is an increasing supply of qualified candidates looking for their first board seat with a private company. Experienced board directors understand how the process works and what to expect. First-time candidates, however, are thirsty to learn how the process works and how best to get into the game.

Knowing where to start is, in itself, a challenge. There are considerable resources for candidates to understand the preparation and selection processes:

• Trade Associations
• Executive Education Programs
• Consultants
• Conferences
• Books
• Webinars

Potential candidates seek advice in understanding the motivations and benefits of service, creating an individualized plan to prepare for the selection process, learning how the selection process works, and getting feedback from active directors on how compensation evolves over time.

Here is a snapshot of the average search for a board director by example:

1. The search began with 53 open director positions in companies ranging in size from $40 million to $300 million.¹ (Data provided by a board recruiter for privately held companies from 2017 to 2020.) Between 90 to 822 candidates applied for each available seat.
2. Candidates were divided into two tiers: Tier 1 (meets most of the criteria) and Tier 2 (meets some of the criteria).
3. Candidates were selected for phone screening (an average of 5-10 candidates per position).
4. Candidates were selected for an in-person interview (an average of 3 per position).
5. References were verified.
6. Directors were selected.

Aligning Your Motivations with a Company’s Needs

Before thinking about competing for a board seat, it is important to understand what the position is and isn’t; be sure your motivations and interests align with the company’s needs and expectations.

There are many reasons one may seek a board seat. The distilled wisdom of experienced board directors is consistent: don’t do it for the money. While compensation for most candidates usually respects the director’s time and contribution, the pay does not balance the risk and responsibilities. You need a more powerful motivating factor.

When asked why they serve, experienced directors consistently say:

1. To have an impact on the business
2. To stay engaged in the business community, typically as they move toward retirement
3. They have an affinity for the business.

Many directors seek seats as a means to network for other personal reasons. One director says that one of the greatest benefits of being on a board is the friendships that result from being involved. He cites several of his fellow directors who have become dear friends, even though their mutual board work ended years ago.

Compensation For Board Directors

Candidates always wonder about compensation, so it is important to know the market. Public, private equity, and venture capital companies are outside the data presented here. This applies to private and family-owned businesses, typically in the $10 million to $300 million revenue range in the U.S. There have been several credible board compensation studies performed over the years to get a better idea of wat compensation looks like for a director. Two well-known sources are Private Company Board Compensation and Governance studies and Lodestone Global² This source provides for the last nine years of data to reference when trying to gauge what compensation may look like.

The rule of thumb has long been that companies in that size range pay from $20,000 to $40,000 per year using retainers, meeting fees, and other forms of compensation. Some include equity, but less so with family-owned businesses. These figures trend higher as revenues exceed $300 million, but not significantly higher.

These figures are in the middle of the market, and there are many exceptions. One company sets director compensation by determining the CEO’s hourly rate and applying that to the number of hours per year expected from board members. The compensation should respect your time and commitment but should not be viewed as a primary means of financial security.

Experienced directors will tell you, once compensation is set, it does not change much over time. The data supports this observation. We found these comments to be instructive on why:

• “Supply significantly outstrips demand. For example, in a recent search for a family business, they were looking for three directors for a new board, and we received almost 800 applications.”
• “Inertia is a huge force to contend with, once compensation is set, owners don’t like to adjust it.”
• “Owners question the value the board produces. The benefits are difficult to measure, but the expenses and time commitment is material.”
• “They are not creating the value that we had hoped, so why should I pay them more?”
• “There are ten people in line for each slot, so why increase the pay?”
• “I know that they are using our board as a stepping stone to get on a public board, so why should I pay a lot?”

What tends to come as a surprise, but is consistent, is that the most overwhelmingly common value perceived by owners was that boards forced management teams to review their data every quarter and to give a presentation on it, resulting in increased accountability.

Education and Training to Be a Director

Success in the C-suite is not enough to guarantee success in the boardroom. Boardroom dynamics require a collegial style of intellectual engagement and rigor. Directors are bound by both a duty of care and a duty of loyalty. Directors have grave responsibilities but should not be making operating decisions or directing staff other than interacting with direct reports to the board. The common phrase is “noses in, fingers out, sensors on.”

Candidates with strong executive styles tend to be very directive in their behaviors — a command and control approach to interaction. Successful directors need to be highly collaborative and active listeners. Demonstrating this style shift is a critical part of the interview process, and candidates often fail to advance if they cannot quickly demonstrate their ability to behave as an effective director should.

There is a cottage industry of established firms, consultants, conferences, and academic programs to prepare people to become directors. They vary in quality, focus, geographic reach, delivery method, and cost. The good news is that candidates have options, but caveat emptor needs to be employed.

Candidates looking for help to prepare their written materials (board resume, bio, LinkedIn, etc.) can expect to pay $750 to $3,000, depending on who they choose to work with.

Academic programs vary from $1500 to $10,000, proportionate to their duration (one day to one week) and brand identification; conferences typically cost up to $2500 for a two- or three-day event. NACD (National Association of Corporate Directors) runs a number of programs, but these tend to target public companies and may not be the right fit for candidates only looking at private company seats.

The Private Directors Association’s keystone educational offering is a Certificate in Private Company Governance.

Individual consultants in this market typically charge $5,000 to $10,000 for a suite of services which is likely to include resume writing, interview preparation, coaching, and some degree of search support.

The online databases, where candidates pay a fee to receive opportunities, also tend to provide resume writing and coaching services to complement their primary offerings.

There are several firms in the UK and Europe which focus on those geographies, offering similar services to their U.S. counterparts.

Bottom Line from Experienced Board Directors

If a private company has positive cash flow, pays its taxes, and is servicing its debts, then there may be no external pressures forcing change. This is why good outside directors can have a substantial impact. It is often difficult for entrepreneurs and owners to hold themselves accountable, and they often need independent outsiders to enforce accountability.

Accountability is a baseline value of a board. Board directors should aim to understand the needs and wants of the shareholders and create additional value. Overwhelmingly, experienced directors say, “Don’t do it for the money, do it because you want to have an impact.”

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We think you’ll also like:

1. The Basics of the Board of Directors – Roles, Structures, and Duties
2. What is the ROI for a Private Company Board of Directors?
3. Strategic Planning for a Board Meeting Agenda

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. The Effective Board
2. Board of Directors Boot Camp
3. The Role of the Board in a Private Company

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.]

Article Footnotes:

• 1
  (Data provided by a board recruiter for privately held companies from 2017 to 2020.)
• 2
  This source provides for the last nine years of data