Recent trends in corporate governance best practices for privately held companies show a shift away from the previous view of Boards of Directors solely as a formality. Increasingly, private companies are realizing the value of boards as a powerful strategic tool to achieve a more cohesive, efficient, and valuable company. Drawing from governance and reporting requirements for public companies under the Sarbanes-Oxley Act of 2002, private companies are creating their own governance structures that mirror those of publicly traded companies, but which also allow them to specifically tailor a governance model to their individual industry, culture, and future growth goals. Below are two ways U.S. privately held companies can maximize board potential by leveraging a new type of diversity: generational diversity.
- Consider a Generationally Diverse Board of Directors
One pitfall of smaller closely held private companies is that board composition lacks diversity and overlaps too heavily with individuals involved in the day-to-day operations of the company. At a basic level, it is recommended to establish a board comprised of sufficiently experienced members from diverse backgrounds who can provide insights into the company’s primary industry, as well as into future opportunities and risks that may fall outside of the current purview of the company. Recently, global trends in company valuations are more frequently including assessments of cultural, gender, and generational diversity of board members. As the influence of younger generations such as millennials on workforce ethos grows, one way private companies can remain competitive is by including board members who provide variety in terms of perspectives, knowledge, and backgrounds.
- Focus on Human Capital Management to Increase Company Valuation
Since company valuations are increasingly considering intangibles such as overall corporate environment and employee retention and workplace satisfaction, boards that wish to play an active role in increasing the company’s value for M&A purposes should consider devoting resources to adding human capital management (HCM) policies and procedures. Today, specific generational and cultural priorities in the workforce are shifting, and companies therefore need to identify those shifting priorities and establish tools for addressing changing needs. Where once the primary focus of top-tier employees was financial compensation, current trends show a heightened focus on a wide variety of HCM intangibles across different industries. A sufficiently diverse board will generate strategic plans and policies regarding HCM trends and shifting priorities to not only be competitive in terms of attracting but also in retaining a highly qualified workforce, thus increasing the potential value of the company.
The above summary is not intended to be a comprehensive study of all board best practices and governance trends. Rather, it is intended to provide an overview of trends observed across a sampling of privately held companies. Ultimately, a private company should tailor its board structure and practices to address its specific goals and challenges and should endeavor to be mindful of changing markets and pressures that may require internal adjustments to adapt successfully.
For more information on matters relating to corporate governance, please contact the author of this blog, Laura Sims, or a member of PilieroMazza’s Corporate and Organizational Governance and Business & Transactions practice groups.