Mar 12, 2024

152: Top Reasons Why Your Company Needs a Board, Ralph Ward

Ralph Ward is the editor of the Corporate Board Magazine and an expert in corporate governance. He’s the author of six books on corporate governance and board issues. I asked him to join me on the show to talk about best practices for private company boards.

It’s about governance and strategic guidance. Boards aren’t just for large public companies. Even newer, privately held firms can benefit from having a board. Boards also get involved in CEO succession planning. We address challenges faced by family businesses and how boards can help navigate these complexities.


Enjoy this Succession Stories episode about why your company might need a board with Ralph Ward.

  • Corporate governance and board formation in private companies.

  • Board formation in private companies often delayed until crisis strikes

  • Private companies can bring in outside directors with experience in succession planning to help founders navigate family dynamics and ensure a smooth transition.

  • Advisory boards can help with succession planning and governance in family businesses.

  • Advisory boards can provide outside perspectives and help with growth-stage challenges in companies.

  • Tips and tools for dealing with drama in the boardroom and improving corporate governance.

  • Advisory boards can provide valuable networking opportunities for companies, connecting them with important people in their industry.

Find Ralph Here: 

www.corporateboard.com

www.boardroominsider.com

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SHOW TRANSCRIPT:

Laurie Barkman
Ralph Ward, welcome to Succession Stories!

Ralph Ward
Thank you! Been looking forward to it, Laurie.

Laurie Barkman
This is gonna be a great conversation. I haven’t covered the topic of corporate boardrooms for a while on the show. You are clearly an expert on this topic of corporate governance. We’re going to talk high level and I think we’re going to help our audience understand why this is important for them. Why don’t we start with you tell me about you and how you got started in what you’re doing?

Ralph Ward
I started as editor of the corporate board magazine here in the US a little over 30 years ago now here. It was an interesting time to be getting into research and best practice on governance because people were just starting to shake up “Wait a minute, why isn’t this working for governing our corporation?” So it was a lot of reform, a lot of discussion. Very much enjoyed it.

I’m still editing the corporate board, though. It looks like I might be retiring soon, after life, writing about corporate governance can get to be a bit much doing that. In the late 90s, I launched my own side gig publication, Boardroom Insider, which was a little more closer to what I call boardsmenship. The Corporate Board was the 30,000-feet level issue, great themes of corporate governance, and global issues. Boardroom Insider’s more on the nitty-gritty: How do we run a board of directors? How do we make it work? Because it’s such an impossible task. It’s gotten more impossible every year for directors on that. That took off well.

Over the past 25 years, I’ve written six books on corporate governance and board issues, I have a seventh in the works here. I do quite a bit of training and speaking in the US and overseas on boardroom best practices, making boards practical, helping them achieve their best selves.

Laurie Barkman
Clearly, you’re an expert. When we talk about boards, are we only talking about publicly traded companies or are we also talking about privately held companies?

Ralph Ward
That’s the amazing part of this because it is sort of a Lego construct for running a business and the same rules. Most of the same legal structures apply whether you are talking about Apple Corporation or a major European or Asian corporation. Whether you’re talking about Joe’s Tool and Die down the corner in the US somewhere, where the board consists of Joe, Mrs. Joe, and his accountant. They have many of the same legal structures.

Generally, when you’re talking about younger growth companies, they’re dealing with board issues. That’s one of my main topics here is trying to steal good ideas for putting a board to work making it effective at the very basic level for younger corporations, because it makes a huge difference in their future prospects.

Laurie Barkman
Our listeners are primarily in the private market so we’re going to focus on that today because I think that’ll resonate. Also, most of our listeners are with mature, established companies, there may be listeners who are part of startups, and younger companies, as you said a moment ago. In thinking about the age or size of the company in the private market, what are some of the characteristics as to when a board starts to be formed, and what type of board?

Ralph Ward
The market you’re talking about here is one that benefits from this. Too often, though, they don’t really see how it can benefit them until some sort of a crisis strikes here. Succession planning and implementation is one of the biggest ones. I see this a lot with family businesses, founders who have trouble letting go, founders who are dealing with multiple generations of a family business, trying to make that coherent, make it well thought through, and you have doubtless seen as something that’s bottled an awful lot here. Founders who have built this don’t want to let go. Founders who don’t want to let go but give the impression they are but are actually pulling the strings from behind. In some cases even undercutting successors here so they can keep power going here; it’s something that’s going to happen. It’s inevitable–Memento Mori. I’m sorry, Mr. Founder, you’re going to die one of these days, or better yet, you want to get away and go off on your yacht and do some golfing and like that, so make it worthwhile, make it work for you. A board of directors can be hugely helpful in that.

What often happens with the private sector and younger companies like this, as the board will be old, two or three members of the family, three or four members of the family may be the company accountant crony of the founder or something like that. It’s valuable. It’s certainly better than nothing but it’s really not delivering the governance that you can get if you add even one or two, outside independent members that don’t owe anything to anybody here. It’s valuable because then you can custom-tune those outside directors to exactly what the enterprise needs. Maybe they have grown a company to the next level.

With private firms, family firms, I always tell them, if you’re operating at this level of growth, get an outside director who has savvy at this level of growth, they can help you grow into that. They’ve been there and done that if you’ve got someone who has dealt with succession issues, and their own companies and their own background, that’s gold to have the company board in this situation for the private company. They’ve been there, they’ve heard the excuses, they know where the roadblocks are, and they can help you as a founder out because this is obviously someone who you have to respect.

You’ve probably seen this when families get together, they can squabble, and they can have all of their family politics and drama. When they have an outsider like a new enlarge something, they tend to be a little more formal and a little more proper, let’s not air dirty laundry in front of the outsiders here, and that’s actually a pretty good thing in a boardroom because it forces the people who are insiders who work with each other, who straightened up their act a little bit when they get someone from the outside who’s objective. They can also then gain an outside broker who’s objective, someone who can sit down with the founder and say, It’s time someone who can sit down with the family and say, you don’t have a succession plan that’s going to work. So it isn’t, they have to be listened to in those cases.

Laurie Barkman
Are these fiduciary roles that you’re primarily talking about, and this type of advisement on the board? And maybe let’s explain what does fiduciary means.

Ralph Ward
That’s where it gets into the big difference between public and private and all of the other sphere, corporate companies here. However, the ownership of incorporation, even if it’s an LLC is structured, someone is a fiduciary for monitoring that they have to represent the owners, is that the owner who’s representing the owner? Cool, that’s great. That’s a good way of doing it. But when you start getting minority ownership, multiple generations, levels of investment from various funds, then you’re going to have to have people representing different interests as fiduciaries. They’re there to look out not just for the interest of their own ownership block, but also for the long-term interest of the enterprise itself. They have to be able to come into the room, shut the doors from the outside, and focus on what is in the best interest of the long-term organization. Sometimes that goes against what the short-term interests can be, that is the fiduciary duty of public companies. It’s much more spelled out as duty of care and duty of loyalty with all sorts of legal whips and clubs to enforce it, their private companies, not so much that the same basic rules still apply.

Laurie Barkman
An advisory board in comparison to a fiduciary board; what is an advisory board?

Ralph Ward
An advisory board is essentially a kitchen cabinet and it can be a valuable growth stage for young companies here. Getting a formal group, usually of outsiders with some inside input here, get them together a few times a year, get them around a table, take them out for dinner, get a review of what’s going on they have no fiduciary duty to the organization. They report solely to the founder or owner of the organization, but they can be a good reality check chorus on the outside for doing that and they allow you to go through various stages of growth. If you’re in an acquisition stage, put together a short-term group of people who have experience in M&A and get them together and formulate “What do I do?”, bounce ideas off them, “What are your advice”, “Here’s where I’m planning on going.”

When you move beyond that stage into a different growth sector, you can reconstitute it. It’s sort of like Lego blocks, you can assemble an advisory board for whatever you need. But again, they don’t have legal fiduciary duties, and they have no real power in the organization, they can tell the owners and the founders X, Y, and Z is a good policy, and founders and owners are free to ignore that if they want.

Laurie Barkman
I think that’s a really important distinction, especially your point earlier about succession. A fiduciary board is looking out for the best interests of the company and the owners. Correct me if I’m wrong, they are also responsible for CEO decisions. So if the owner is the CEO, I guess that could be a sticky situation. Certainly, succession would be something to discuss in the board room and bring it to a vote whereas an advisory board may be able to weigh in, but they do not have a final say. Is that a decent explanation?

Ralph Ward
Yeah. Succession is something as you mentioned here, you can come up with a very nice advisory succession plan, and owners are free to ignore it if they want to. Family businesses, especially having a formal board operating this way are important because the younger generations have a real interest, what’s going to happen here, dad isn’t going to be around forever, maybe dad doesn’t want to be around forever, do we have a plan on who’s taking over, do we have a talent development schedule for that is everyone agreed on it? In those cases, you want to have an advisor or a succession plan that actually has some teeth in it.

Laurie Barkman
A company might consider having an advisory board, when it’s in the growth stage, I think is what you said it also might be ready to bring on outside advisors at a certain lock point in its lifecycle. That’s my experience, where it’s a 50-plus-year-old company, the second generation is running the business, the first generation has passed away, and they’re siblings. There’s complex relationships there. They brought in outside advisors to assist in as we’ve been talking about. That’s some of my experience and seeing that up close. Of course, talking to different clients and trying to understand what level of governance do they have and what might they need.

Let’s switch gears a little bit and talk about the benefits of having some governance. If they are a startup or a newer company, this might seem like overkill, right? Why would they bother? Why do they have to go through this rigmarole? What are the benefits from your perspective?

Ralph Ward
You put your finger on the issue here. If you’re a younger growth company, if you’re a more informal private family or family company, here’s what a board meeting and if it’s constituted as a corporation, there needs to be some sort of a board there. Here’s what it looks like the people who know each other and work together, day by day might get together for a few minutes, the founder-owner jot some things down on the back of an envelope that we got to cover and get board approvals on today. Run it through real quick, we talked about this over coffee last week, we already know about that. Then write down an absolute minimum of paperwork to show that you legally did it. Then you go on to switch hats and go back to what you were doing. It works for a lot of companies. Stealing a cruise ship with no lifeboats works as long as you don’t hit an iceberg or something. That’s what governance does, it backs you up and it makes you raise your game a little bit. It’s sort of like the broken windows syndrome here.

If you attend to some little things, and a board of directors if you put together a formal agenda for your board meeting, if you carve out several hours for it, even if these are people who are working together day in and day out. If you take proper minutes of it, if you put together a good information package before the board meeting, then that’s the broken windows effect sets in everyone starts taking the governance role a little more seriously. They tighten up their tie, they follow better procedures, and they start focusing. Because if you think of it, if you have all the day-to-day managers getting together just for a few minutes as a board meeting, what are they doing, they’re handling this or that legality that they’ve got to get approval on or whatever, and then they go back to whatever they’re doing. No one is thinking long-term. They’re fighting day-to-day battles. They’re bringing them into the boardroom with them and they go out with them the same way, getting them apart into us focused boards situation with all of these little paperwork, backup things, get some thinking long-term. They start wondering what were we going to go six months a year down the road, not how are we going to meet payroll next week sort of thing. It prizes them out of that.

Thinking outside the envelope for everyone’s favorite cliche here. As I said, down the road to because think about it, maybe you’re selling the company, maybe the successors, the kids in the family really want to sell out. Maybe it’s a younger venture company that’s looking at a liquidity event down the road, what is going to bring a better price, if you have this wonderful paper trail of board meeting minutes, all of this paperwork, formal approvals, charters, and bylaws. These people have their act together and that’s going to increase the value down the road. I tell younger startup people here it’s like carving out some of your first paycheck and putting it into a retirement fund. You don’t want to do that but you do it anyway because it’s smart and it pays compound interest. Same with good governments.

Laurie Barkman
Absolutely. It’s a foundational theme for this show; how to create value over time. Investing in good governance is one of those ways to do that. It makes your company more well-run, a more well-run company leads to higher valuations, and so on. It’s like you said, there’s a compounding effect so it’s really important and we do recommend it.

You’ve mentioned that you’re thinking about retiring and doing something different and you’ve got so many things that you do author and speaker. What are the things that you want to do in retirement, Ralph? Have you given that some thought?

Ralph Ward
The seventh book; came up with the idea and started working on it two years ago, which is pretty shameful. I should already have it out there by now but pulling away and doing that, doing more training. Speaking on corporate governance is another thing that I personally enjoy. This is something that you mentioned here a good telling, quote, I hope I’m not giving it away too early. But a fellow named Mark Nadler, he was with Spencer Stewart, he has his own business consulting firm, wrote an article for the Corporate Board magazine a couple years ago, with one of my favorite quotes about boards of directors is that boards were never intended to do real work. As a result, they share none of the current characteristics of high-performing teams. Boards were never intended to actually do things but now they have compliance disclosure legalities at the public sector companies. Yes, but in private companies, too. They have a lot more oversight duties, and if they fail on them, the compliance issues are massive.

The SEC just came up with their new cybersecurity disclosure rules. You have to disclose a major incident within four days of it happening. That’s a pretty strict timeline. You got to get the board involved and monitoring something like that and approve it. They have to do a lot more, they have to do it faster, and they don’t have the tools and the knowledge to do it. Corporate boards are still a cottage industry around the world. They have very similar duties, whether you’re in the US or China or the UAE or Britain. But how you actually do it, the nuts and bolts aspect, everyone’s been left to invent, reinvent the wheel themselves. Too often they reinvent square wheels at it.

What I like doing is going around, talking, and sharing all of these little tips and tools on making your board work better dealing with drama in the boardroom, all of the nuts and bolts things as I said and I everywhere I speak someone comes up with a “We had that problem and here’s how we fixed it” and everyone goes “Oh, that’s brilliant. Why didn’t we think of that and I steal the idea and share it with the next group here?” but it’s a little bit corporate board evangelism. I go around, sweeping up, and sharing information around the world. I enjoy that it benefits school-corporate governance and look forward to doing more of it.

Laurie Barkman
That sounds awesome. Let’s start to wind down here, I want to summarize a little bit. Some of the themes that you mentioned about why a company may want to have a board, the types of things that they would assist in. One is succession, growth, and crisis management. The fourth one that we did not talk about is innovation. I want to throw it out there, are you seeing that corporate boards or advisory boards are making an impact when it comes to innovation, particularly around the role of artificial intelligence or AI in companies?

Ralph Ward
A hot topic, and it’s a matter of getting people who know that in your advisory board, and your advisory circle here, AI has become such a land rush item over the last year here. Suddenly, AI experts are “I use ChatGTP on an article here. I’m an AI expert now. So put me on your board.” And I’m not that impressed with it yet but it’s important. One thing you mentioned here is innovation but one thing that you left off the list in this crucial is networking opportunities.

If you think about the people you have as advisors or board members, especially when they’ve made their bones in the field for decades, they have huge networks of very, very important people. When you have them on your advisory board or on your regular board. Suddenly, they’re part of your network. Who did you know someone who’s dealt with this issue, who is maybe a new regulatory item reached out to this new market or this new country for product? We did that a few years ago, here are the lessons I learned from that. Directors love to assume that they know everything. You’re just open them up, and they’ll share all of their knowledge with you but that’s a valuable thing. They can make connections, they can spread knowledge around from what they’ve gained. If your why is a chief executive, particularly you make full use of it.

Laurie Barkman
Here’s the Mic drop. Last question. One or two things that you would give as advice for companies thinking about starting up a board.

Ralph Ward
Reach out of your comfort zone and reach for the stars here. As I said, you’re starting a board, venture companies especially you’ve got the investors here, you got the founder, and that’s about it. They’re talking with each other all day long. Someone knows someone or has a connection with someone who is way up there who has accomplished what you want to be is at the level of company, you’d like your company to be in 5 or 10 years, ask them to be on the board, especially if they’re retiring and winding down their careers.

Aim for the stars, get them on your advisory board. They have good knowledge, they’re going to have everyone’s respect, they can be an honest broker because they know this is someone who’s been there and done that. Make that part of what you do. As I said, get the stupid little paperwork things done. Once you make that muscle memory in the boardroom, you’re going to keep on doing it and you go from “Why do I need an agenda for this board meeting?” to “Why don’t we have a proper agenda for the board meeting?” build that in.

Laurie Barkman
Great process. If people want to learn more, get in touch, what’s a good way to do that?

Ralph Ward
Stop by the boardroominsider.com website. and in the process of redoing another one of my retirement projects. I’ve got information there and the books, consulting I do, writing that I do here, and I’d love to reach out. Some people just send me an email and say “how do I deal with this problem?” and on the board or getting myself on a board of directors. I’d love to help them out. It’s fun.

Laurie Barkman
That’s fantastic. Ralph, thank you so much for coming on Succession Stories and having this conversation with me about corporate boards.

Ralph Ward
Thank you. I’ve been looking forward to it. Have a good day. Laurie!

Laurie Barkman
Thank you and to our listeners, thanks for tuning into Succession Stories. If you enjoy this episode, hit subscribe and your favorite podcast player. And be sure to also check us out on YouTube. You can find all the notes and links from the show on successionstories.com. Tune in next time for more insights from transition to transaction.

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