Good boards don’t mistake process for purpose

February 15, 2012

Most research and literature about good governance is developed with public boards in mind, and although the context is a little different than in our business, many of the same lessons do still apply.  Since our long term reward depends heavily on whether or not the value of our portfolio company appreciates, we tend to have a more personal ownership mindset – over and above the legal and fiduciary responsibilities – than public company directors.

Here are two interesting reports on good governance which echo our own thoughts on how to ensure a strong board.  While processes and best practices may be important, great boards rely on ‘robust social systems’ among its members to ensure that they function properly.

First, from Spencer Stuart’s Point of View 2012.  When helping to assemble a board, consider executives who:

…combine integrity with the right mix of knowledge, experience and vision to perform the board’s defined roles with excellence.  Beyond even these considerations, qualities such as judgment, engagement and strong communication skills are critical attributes for every director.  And, just as it is a component in any high-functioning team, interpersonal chemistry also plays a role in every effective board.

And this, from Bridging Board Gaps, by the Study Group on Corporate Boards – a joint effort by Columbia Business School and the John L. Weinberg Center for corporate Governance at the University of Delaware:

Recent institutional failures, surrounded by general economic turmoil, once again sparked the familiar question:  Where were the boards?”  …  But the new rules (e.g. Dodd-Frank) for public company boards are focused on board process.  In addition, boards need a renewed focus on their aspirational purpose and guidance for achieving it… never mistake process for purpose.

That purpose (for public company boards) is stated as “creat(ing) sustainable long-term value for shareholders.”  One Study Group member summed up the report’s conclusions this way:  “Maybe we should rename directors ‘shareholder representatives’ – then they would pull up to the table in the right mindset.”

Naturally this mindset comes a bit more naturally in our field since we are literally a shareholder representative – alongside the entrepreneur and any fellow investors.  (There are also far fewer investors than in a publicly traded company so owners are more meaningfully engaged.)

Owners of private companies get to pick both their investors and their board members.  If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved high performance corporate governance that will contribute substantially to their eventual success.

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