In the wake of the financial scandals of the early 2000s, a push was made to increase the number of independent directors on public company boards. Most public companies are required to have a majority of independent directors on their boards to be listed on the NYSE or NASDAQ. Even public companies controlled by a majority shareholder are required to have independent directors on their audit committees. While private family-owned corporations would not be subject to these requirements, each family-owned corporation should consider whether adding independent directors to its board would be worthwhile.
Before considering whether adding independent directors would make sense to a private family-owned corporation’s board, it is important to understand what makes a potential director independent. The rules defining director independence for public companies can be complex. To keep it simple, the general rule is that a director is independent if the person is not an officer or employee of the corporation and does not have a relationship, either business or personal, that would potentially interfere with his or her ability to exercise independent business judgment in serving on the board. The nature of the relationship will vary and can range from being related to an officer of the corporation to being an officer of another company that has a material business arrangement with the corporation.
While each situation can be unique, independent directors can add value in a number of ways. Independent directors can bring fresh viewpoints to a board that can enhance the board’s ability to make strategic and operational business decisions that maximize value. It is not unusual for companies with static boards to grow stale over time, so the addition of new members with fresh ideas can be of benefit. Independent directors can also act as mentors for the other directors and/or officers of the corporation. People serving as independent directors typically have extensive experience serving as board members or senior executives at other companies that, often, are in the same or similar industry. By adding this experience to the board, a corporation can take advantage of lessons learned at other companies and/or best practices that may have been developed elsewhere. Perhaps most importantly, independent directors may also improve the board’s ability to provide proper oversight of management. Oversight is one of the key functions of any corporate board and, by definition, inside directors are subject to potential conflicts that may call into question the sufficiency of such oversight.
If a board concludes that adding independent directors would be valuable, the challenge is finding the right person to serve as an independent director. During the search process, it is important for candidates to be carefully vetted. While extensive experience or relevant knowledge is key, it is also important to make sure that a candidate would work well with the other members of the board and management. A board would also want to look for candidates that demonstrate an understanding of the corporation’s business, its industry and the challenges it faces and share the corporation’s goals.
Broady Hodder is a seasoned corporate attorney at Davis Wright Tremaine, LLP with over 16 years’ experience advising publicly traded and privately held companies on corporate governance and regulatory compliance. He also counsels companies on financing transactions, including public and private equity offerings and debt financings, and has structured and negotiated numerous key mergers, acquisitions, and divestitures throughout his career.