Private Boards’ “Inflection” Moment
By Abby Adlerman
The scenario: A health diagnostic company’s product strategy is to “fake it till you make it,” its employees are expressing concerns over leadership and a multimillion-dollar distribution deal puts bad data in the hands of patients. Any one of these offenses should have had people crying foul and asking, “Where is the board?” But three such transgressions? Almost inconceivable. 
Yet, that is the generally accepted story of Theranos. Was the technology too complex? Was the CEO’s force of personality simply overwhelming? Or was it the company’s privately held status that blinded the board’s perception of risk? In reality, all three, and likely other factors, contributed to the collapseof Theranos in 2016 and the aftermath that continues today. 
There are many lessons to be learned or relearned, and this cautionary tale is especially relevant for private company boards: Being closely held does not let you off the hook for good governance. 
Private company boards have long flown under the radar, paying limited attention to governance until an egregious offense blows up. That is changing, and fast. Private companies are increasingly answering to a broader range of constituents, many of whom demand greater transparency and accountability around a host of issues, such as environmental responsibility, employee welfare and customer responsiveness. 
While governance issues have become significantly more complex, it is mostly in the public realm where companies are being tested. But private boards are also being held to higher account, and now is the time to step up vigilance and learn from their shared commonality. 
Where to take your cue
Both public and private companies increasingly care about assembling teams that reflect their constituencies; having constructive review processes given their reliance on talent; keeping aware of and prepared for risks; acknowledging customer and investor sentiment; and being community focused. 
ESG issues are consuming stakeholders and posing difficult questions for companies: How transparent are your supply chains? Do you have a net-zero policy in place? How are you mitigating for climate risk? Are you looking after your employees? A host of other topics, often specific to the business and industry, can be added to this list.
Public boards are becoming familiar with these issues because they serve a multitude of stakeholders. Round-the-clock examination from shareholders, employees and other watchdogs is also imprinting risk management and compliance into their governance DNA. It has made them alert to shifting consumer behavior, social media perils and the importance of cultivating a workforce that is listened to and appreciated. 
But private companies, now facing the same obligations, may not have developed their governance reserves to meet these rising expectations. One emerging clue to where private ownership is starting to resemble public governance practices can be found in how private equity-backed companies are being managed. 
YSC Consulting has published one of the more detailed accounts of the PE sector, suggesting it has reached a tipping point where stakeholders are expecting privately held companies to take “cultural, ethical, legal and moral” responsibility for their actions, as well as for their financial and social impact. Asked to prioritize best practices, PE partners put disciplined execution of board processes at the top of their list (52%); followed by optimizing board composition (43%); ensuring the board is aligned with creating value (38%); performing regular board evaluations (33%); and using subcommittees (29%), according to YSC.
Govern well, or face the consequences 
The fate of companies like Theranos, WeWork and Ozy Media underscores the vulnerability of private companies of a certain size and aspiration to unravel under closer scrutiny, inviting questions of where the board oversight was in spotting early warning signs. 
WeWork raced toward a dazzling IPO with mushrooming valuations, inconceivable insider deals and highly questionable oversight. The failings showed a board seemingly overlooking the self-serving activities of the CEO until an outlandish proposed governance restructure sparked such intense interest that the rest of the transgressions came to light. While WeWork did eventually go public in a SPAC offering last month, it was only after a botched journey that cost investors billions in returns.
Ozy’s COO impersonating a YouTube executive provided a brash warning of how the company was being managed. Leadership’s response fell short. When most of the board and funders pulled out quickly, things unraveled at an unprecedented pace.
Given the mismanaged journeys of Theranos, WeWork and Ozy, it is easy to understand why stakeholders have been pushing boards to step up their governance and become better aligned around shared priorities and values. As one commentator said at the time of WeWork’s failings, CEOs may soon gain an appreciation of the “fearless board,” one that isn't afraid to ask the hard questions and point out potentially costly mistakes. 
Riding the waves to good governance
Private companies have a golden opportunity to pre-empt these misfortunes. Their journey to strengthening good governance entails paying attention to board composition and independence; strengthening and broadening expertise; maintaining alignment and empathy around all constituents; and embracing diversity.
Additionally, progressive private boards are evaluating performance on key governance areas and are becoming more methodical about monitoring risks at the board level. They are devoting more attention to company culture, DEI, talent and workforce needs, as well as increasing their awareness of environmental impact. Additionally, they are embracing data tools, benchmarking and metrics that are increasingly coming online to monitor overall governance effectiveness to ensure the journey continues.
Whether companies are on the path to go public, intend to sell their business at some point or are happy to remain private, it is essential to get on a path to good governance early on.  
Abby Adlerman is CEO and Founder of Boardspan

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