Board rules: Examining the differences in serving on large and small private boards

By Kathryn Swintek, Managing Partner of Golden Seeds Fund 2

August 25, 2020


Editor’s note: Kathryn Swintek, Golden Seeds Managing Director and Managing Partner of Golden Seeds Fund 2, recently received the prestigious honor of being named private company director of the year for 2020 by The National Association of Corporate Directors (NACD). A longtime Golden Seeds investor and fund partner, she serves as board chair at ABI Bank and as a director on the boards of Open Road Integrated Media, Oculogica, and Turtle & Hughes.

For the past 20 years, I’ve served on several boards – large and small private company boards, a public board and nonprofit boards – and I have learned each board experience is unique, which presents myriad learning opportunities. While there are several differences in responsibilities for the various types of boards, there are three pillars of a director’s fiduciary duty that exist regardless of the board: risk oversight, talent oversight and strategy oversight.

These three pillars are relevant to all types of companies and organizations, but their complexity — often greater with the size of the entity — will dictate differences in how fiduciary duties are carried out. The structure of the board, its committees and processes will vary with the type of company.

Let’s examine these differences in private early stage and private mature companies.

Early stage

Kathryn Swintek

First, we’ll explore early stage companies, specifically those that have completed one or two rounds of institutional capital raising.

The board of an early stage company is generally comprised of a mix of what are called investor directors and one or more independent directors. Investor directors are elected by the shareholders of a specific class of shares while independent director(s) are elected by all shareholders and will generally be selected for her or his relevant industry knowledge.

I have experience on four early stage company boards as both an investor director and as an independent director. The size of an early stage company board generally ranges between three and five people, with five representing best practice in my view. These boards operate either with no committees or with one or two, generally finance and compensation.

Early stage companies are unique in that they have limited time in business and generally a small customer base. Mistakes at this stage, however, tend to be more costly than for other companies, as they have limited capital resources with which to course correct. Directors of early stage companies assist with guidance and by bridging the experience gap, through their prior and current business and board experience. The work of a director is a mix of fiduciary and advisory with numerous impactful decisions required as milestones are achieved or missed.

Risk oversight will tend to be dominated by close supervision of financial performance against plan and ensuring adequate liquid resources to execute the strategic plan. Talent oversight will generally focus on participating in the selection of C-suite executives to round out the team. At times, these duties include replacing C-suite executives as the company moves from early stage to growth stage, and always include determining equity grants such as the recipients, structure, quantity and terms.

At this stage, a director’s personal networks are more important than for more mature companies, such as referrals to potential clients, talent and supplier introductions. Directors will generally play dual roles: fiduciary and advisory, with the additional time commitments required, compared to other companies, in fulfilling them.

As early stage companies meet their milestones and move to the growth stage to support execution of their strategy, board composition changes with new investor and independent directors often replacing earlier-stage directors with new skill sets, notably those related to achieving an exit. The experience sought in new independent directors will generally include mergers and acquisitions as well as IPO transaction experience.

Mature private companies

Expect to find greater process and structure on boards of mature private companies. The size of the board is generally a minimum of five people and the board works with standing committees: audit, compensation, and nominating and governance. These companies can also create a separate risk committee to oversee cyber risk, regulatory risk, environmental risk and more recently also reputation risk.

While early stage companies generally embrace and benefit from the lower cost of market entry and business process functionality provided by advances in IT, more mature private companies can be challenged to disrupt themselves and their legacy systems and processes. Directors play an important role in assisting mature private companies to make the leap to onboarding new systems and procedures. This can include participating in the selection of new executives to bring new capabilities and designing new compensation plans that align with an evolving strategy to seize new opportunities as well as assisting with designing a framework through which to assure ongoing focus on innovation.

Boards of mature privately held companies will also periodically bring in third-party experts for various consultancy assignments, including to assess the control environment, cyber risk exposure, and the company’s compensation plan. Findings can prove most helpful to boards in ensuring any needed improvements are made, preserving stakeholder value.

The value of bringing best practices together

I have found that experience as a director at a variety of organizations — early stage, large mature private, public and nonprofit — is valuable in bringing best practices to all. Innovation that takes center stage at early stage companies can assist a director in ensuring that more established companies have appropriate tools in place to drive innovation and have access to knowledge about newer business models that may disrupt their industry or be onboarded to support their company. The emphasis on structure and process at public companies to ensure compliance with SEC rules and exchange rules, and to optimize value assist a director in exposing their benefit and getting adoption by private companies on whose board(s) they also sit.

A director improves her effectiveness in three principal ways:

  • Participating in continued education — there are many opportunities offered by organizations such as the National Association of Corporate Directors (NACD), Directors and Boards, consulting firms and law firms. Certifications on specific areas such as cyber-risk as well as deep dives on specific topics for an audit committee, compensation committee, nomination and governance committee are all on offer.
  • Staying informed on industry evolution – this can be done through targeted reading, participating in the industry or an adjacent industry as well as taking advantage of general learning opportunities. Directors need to ensure management is seeing 10 and 15 years into the future and laying the groundwork today to compete successfully in that changed environment.
  • Sharing her network – this includes serving as an ambassador for the company, making warm introductions to potential clients, suppliers and talent.

Ultimately, the degree of effectiveness of a director depends on the effectiveness of the board as a whole. Companies that are intentional about diversity in experience and expertise on the board, chairs or lead directors who foster collaboration, and directors who are respectful and open to different viewpoints are well positioned to face challenges and capitalize on short- and long-term value-enhancing opportunities.