This article originally appeared in Directors & Boards. It is reprinted with permission from MLR Media.

By Erin Essenmacher

A complex business environment is driving private companies to adapt public company board structures and bring on the insight of independent directors.

Private and public company governance have long felt like two different kinds of jobs. The old axiom has been that private company governance is a kind of public company governance light — some of the same responsibilities but without the responsibility and added pressure of answering to institutional investors, Wall Street analysts or the SEC. 

Mary Lee Schneider has served across a diversity of boards from mutual fund complexes to PE-backed and family-owned companies, and currently serves on the boards of The Larry H. Miller Company, SGS & Co. and PGIM. Over time, she has seen an evolution in the private company approach to governance over the past twenty years.

“Back in the early 2000’s, there was the specter of accounting frauds given what happened at Enron, Tyco, WorldCom and several other public companies. With that came a sense of urgency for putting good governance practices into place,” says Schneider. “In particular, companies wanted to make sure they had strong financial controls and oversight, particularly with respect to the audit function. Many private companies experimented with adopting some but not all of the best practices of public company boards by adding one, two or maybe three independent directors. Today, that’s evolved into private company boards that have robust board selection criteria, skills matrices, term limits, annual board and individual director assessment processes, and, yes, a majority of independent directors.”  

The data bears this out. According to the most recent private company governance survey from the National Association of Corporate Directors (NACD), the majority of private boards have both adopted a key committee structure similar to their public company counterparts and brought on independent directors. Nearly 71% of the companies surveyed say they added those board members “as a source of new ideas.”

This shift also dovetails with the emergence of a more complex business environment. The last fifteen years have ushered in a host of increasingly fraught and converging forces — cybersecurity, geopolitical and supply chain risk; business model disruption and heightened risk around talent. They each can have significant implications for both enterprise risk management (ERM) and strategic growth and put increased pressure on an already-squeezed board agenda.  They are also, in many ways, an equalizer when it comes to public and private board work.

Meghan Juday, chair of IDEAL Industries and director of Kingsbury Inc., is seeing this shift play out on many fronts, but they all point to the core truth that the need for good governance through a strong and engaged board has become critical for all companies — regardless of type.  

“I look at the boards of family businesses, which in the past could be easier gigs — especially because oftentimes it’s slightly slower growing and you’re not using debt to grow, so you don’t have a lot of the headaches,” says Juday. The current risk environment has changed that.  When it comes to cybersecurity, everybody’s a potential target. Pretty much every company now is a technology company, whether or not that’s their core product. Are boards talking about technology enough? Are they adding innovation committees? Are they thinking about how to use technology to continue to grow and adapt their businesses? The business and landscape complexity is such that the demands for board excellence are just much, much higher.”

The heightened level of risk also challenges the long-held notion that federal regulations governing public companies don’t impact their private counterparts. While private companies may not be subject to the same letter of the law, as a practical matter, the risks those laws are meant to protect against can impact all companies. Investors of all stripes are starting to sit up and take notice.

“There is a quiet but steady evolution going on in privately held company boards,” says Stuart R. Levine, a long-time board director and advisor to both private and public boards. “There is heightened interest among shareholders that their capital is being protected and that their capital is being exercised and deployed in a productive manner. In a highly disruptive environment, we’re seeing more concerns being expressed. Remember: The shareholders of private companies are also reading The Wall Street Journal and they are asking focused questions that perhaps they hadn’t in the past around whether the company is being managed in an appropriate way. Are we exercising fiduciary responsibility so that we don’t expose ourselves to unnecessary risk?”

That risk can show up in ways that were once considered unique to public companies. For example, while private companies themselves may not be held legally responsible for laws that govern their public counterparts, they may have to answer to customers or other key stakeholders who are. Levine, a current director and member of the Quality Committee of Northwell Health Systems, recalls a conversation he had about the Foreign Corrupt Practices Act while serving as chair of a privately held manufacturing company.

“I was explaining to [a senior leader] how, if you are doing business with a publicly traded company, you effectively are going to be held accountable to the same standard, meaning they are going to look to you as a vendor for protection around ethics and compliance, so we need to understand how the law works.” 

While private companies themselves may not be held legally responsible for laws that govern their public counterparts, they may have to answer to customers or other key stakeholders who are. It brings to mind the widely publicized cyber breach that Target suffered in 2014, which originated with an incursion into the system of a regional HVAC vendor. Using Levine’s logic, it is easy to see how newly released SEC rules around cyber disclosures, for example, might put pressure on even private companies to shore up their own cyber risk profile.

Another factor that is leveling the playing field across board work is succession planning.  According to a study from the outplacement firm Challenger, Gray and Christmas Inc., public company CEO turnover hit a record high in 2023. The study cited CEO burnout as one key factor to watch out for. This is a special consideration for PE-backed boards, says Liz Tinkham, a board member of Particle Industries Inc., HeadSpin Inc. and Atos. 

According to Tinkham, “You just look at the state of the private markets and the pittance of IPOs, and the question becomes how do you retain and motivate management given the uncertainty of when they’re going to be able to cash out or take some money out? They took the risk when things were a little frothier and now they’ve been at it for five or seven years and they’re getting tired. There are few levers to keep the management engaged.”

Family-owned companies are also grappling with leadership challenges as more of the younger generation opt out of running the business. Juday and her board at IDEAL Industries are governing through this shift in real time. 

“When you go from a third-generation CEO chairman to no family members in management, you move from looking to the senior family leader for direction to now the board having to stand on its own two feet,” says Juday. “You really need actual independent directors who are looking at both how to be the best fiduciaries for the shareholders and the company and how to bring the maximum strategic value.”

Levine has seen this shift as well and it has changed not only how the board approaches succession planning, and how that impacts on the future well-being and stability of the company.

“In family-owned businesses, the shareholders are now becoming more aware that leadership is even more important, making sure that there is requisite accountability in an organization. So, succession planning in a privately held company is important, particularly in family businesses. Even though the family may not be directly involved in the day-to-day operations, there are still stakeholders that are keenly interested in building a longer-term creation of value.” 

One of the advantages of private board service has been less pressure from outside investors, but even trends toward greater proxy access are starting to manifest in their own way at the private company level.

“We’re starting to see more questions from private boards about conducting independent assessments so that the shareholders of those privately held companies can make their own judgments about what’s going on,” says Levine. “They are at least raising the question at their annual shareholder meetings and there is more conversation about how effective the board is. There is more scrutiny around whether our directors have the requisite skills and commitment to learning to participate in the strategic deployment of capital.”

Despite increased investor scrutiny, the ability to consider a longer-term horizon and to take a broader lens on value creation is still a unique benefit of private company governance, says Schneider. 

“There’s a richness and a depth of conversation and an analysis and discussion that you don’t get to have in public companies,” says Schneider. “We are having generational conversations versus just quarterly conversations. Family businesses are very much focused on impacting the communities in which they operate. There’s more of a social responsibility component, an impact component to it that’s really rewarding.”

And Juday points out that while the risks of private company board service have become challenging and complex, the rewards are sweeter.

“It’s one of the most exciting places to be in a business because you really can shape the trajectory for the future of the company in a substantial way.”

Erin Essenmacher is a board director and strategic advisor, currently serving as chief experience and strategy officer of The Athena Alliance. She spent nearly 10 years in executive leadership at the National Association of Corporate Directors, most recently as president and chief strategy officer.