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Non-Executive Directors Provide Leadership When It is Needed Most

Agents of Change: The Advantages of Non-Executive Directors

Whether a company is public or private, the mission of its board of directors is to provide leadership in four key issues: strategy, capital structure, succession planning and risk management. While regulators will enforce matters at public companies, non-executive directors are often the only external force to drive change at private companies.

So long as the bank is happy and the taxes are paid, private and family business owners can drift off course for quite a while. Effective outside directors need to be the “adult in the room” to keep the business healthy and the insiders focused on the best interests of the business.

Effective Non-Executive Directors Start with Accountability

Aside from providing broader business experience and corporate governance duties, company and advisor firms cite “checks and balances” as one of the main advantages of non-executive directors, according to the QCA 2020 Non-Executive Director Survey.

Holding management accountable is one of a board’s highest obligations and one of the greatest advantages of non-executive directors. Here are three examples that will test the leadership within a business. In each scenario, you can see there is trouble ahead:

  • A family executive lacks the talent and passion needed to run the business.
  • A tenured, loyal employee has risen to a senior position well above his or her competency.
  • The industry has been disrupted by technology or foreign competition, and the company is unable to respond.

The solutions don’t come from spreadsheets or a new app. They come from determined individuals standing up to work through the issue. In these examples, the outsiders need to change agents.

The Dysfunction of Division

My observation is that dysfunctional firms tend to segregate into two types: battlegrounds and libraries. At the former, constant conflicts within management motivate non-combatants to duck and cover as much as possible. Other firms are like libraries: no one talks about the issues, preferring a quiet, false façade rather than addressing the conflict.

Neither is effective. Healthy companies detect trouble early and deal with it directly.

Characteristics of Effective Independent Directors

If you are a non-executive director at a private company, most likely you are there to make sure these situations get dealt with constructively.

To be successful at these matters, outside directors who bring positive results need to hold three convictions:

  1. Bad news does not get better with time.
  2. Work the business issue and avoid the personality flaws.
  3. You were elected to lead on the tough issues. Now is the time to perform.

In a recent situation, our board was dealing with a long-standing CEO who did not have the skills and personality to lead the business through a season of disruptive change. While a valued employee and close friend of the non-executive owner, this was the wrong person to take the business forward. Separating the CEO meant rupturing a 15-year friendship.

As the lead outside director, I was responsible for driving the process through evaluation, decision-making, separation and the eventual transition process. The trick was getting the owner to put aside his personal loyalties and focus on the needs of the business analysis.

After a tense board meeting, the decision was finally made to separate the CEO; there was no other option given the details of the situation. The CEO needed to hear this from the owner to know that there was no room for negotiation. The owner was a technologist, not a businessperson. After much introspection, the owner realized he didn’t know how to get through this without letting his emotions interfere.

External Directors Recognize When Third-Party Counsel is Needed

When the owner asked me, “How should I handle this?” I realized that to fulfill my duty as the lead external director, I needed to step into the situation even deeper. With counsel, we prepared the owner for each of the likely scenarios that might arise during the termination process. I told the owner to expect to feel uncomfortable; this is not supposed to be easy. Be respectful, direct, and stay focused on the business issues, not the personalities.

The CEO’s mismanagement also meant there was little cash available to fund a severance package. A reasonable offer was made, but the CEO pushed back, threatening multiple lawsuits for discrimination and nuisance claims. After turning down the rhetoric, and asking a few pointed questions, we understood what was important to him. So, we traded away a few restrictive covenants to avoid giving away cash and quickly achieved closure.

Outside directors are often the only force that can break a stalemate, and provide leadership to take a private company through a perilous situation. This is one of the key reasons why private companies should seek competent and effective non-executive directors—to provide strong leadership when companies need it most.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: The Effective Director and Roles & Responsibilities: a Primer. This is an updated version of an article originally published on January 15, 2018.]

©All Rights Reserved. June, 2020.  DailyDAC™, LLC d/b/a/ Financial Poise™

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About Bruce Werner

Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…

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