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Private Equity, Industry Experts, Board Placement

Board Placement Best Practices: How to Build a Better PE-backed Board

Whether you’re hiring a permanent team member or recruiting a new board member, there’s one consistent truth — selecting the wrong person is painful and costly. According to the U.S. Department of Labor, the average cost of a bad hire equals 30 percent of their first-year salary.  With a board hire, a bad hire equals opportunity cost, a loss in productivity and a loss in desired vision, leadership and the strategic execution that can delay moving the company forward. A bad board appointment can delay the PE firm's ability to realize their growth and rate-of-return goals.

Knowing that experienced outside directors are crucial to growing a successful portfolio company, it’s important to bring on the right person in your initial attempt. After all, they’ll help your company avoid unnecessary risk and expand company vision. As key members of the team, they’ll provide strong operational expertise and accelerate value creation. 

For many private equity firms, the process of searching for high-level board members is daunting. In this article, we’ve gathered a series of best practices to help PE firms chart a course of action and streamline their search.  

Eight Steps to Help You Choose the Right Board Member

When and where to start your search

Begin your search in the early stages of the due diligence phase. Make sure you choose an experienced, high-level executive — what we like to call a River Guide — who can help evaluate the deal and bring it to a close. These experts have inside knowledge about the industry that will help you successfully navigate the investment process.

Next, develop a board position description. To attract a high-quality hire, you need to clearly define the required experience level and skill set. Determine whether the incoming board member will replace an existing board member or fill gaps in the current board.

If the new board member will fill a gap, identify the position’s specific role(s) and how they will enhance the existing board team. Do you need market experience or technology proficiency to navigate a niche process? Does the board need stronger leadership, e.g., someone who can persuade others to participate in the risk-taking process?

In defining the position, don’t confuse a CEO’s day-to-day job and required skill set with that of a board member’s — they aren’t the same. Amongst many other duties, CEO’s have the specific task of running the day-to-day, managing company vision and ensuring the collective team is efficiently reaching their goals. A board member should be a voice of strategic direction for the CEO and offer a niche skill set that compliments the experience of other board members. Think big picture about the desired role for your board member and tailor the requirements appropriately.

You’ll need to decide if you want to source a new board member from your existing network or find a firm that can help you perform an outside search. If you decide to tap into your network, beware of these pitfalls:

  • Exhausting your resources — if you overextend your network, you run the risk of wearing out your welcome.

  • Built-in bias — you might feel compelled to work with someone who you really like, but isn’t aligned with board needs.

  • Limits to your talent pool — you may have a large network but no access to a candidate who can best fill the position.

  • The rumor mill — once you start tapping your network, word will spread. You should proceed with caution, especially if you are replacing a current board member.

A search firm can easily connect you with outside resources and perform the legwork, ultimately saving you time.

What to look for in a candidate

So what criteria should you use as you start your search? These tips will help you find the right candidate:

  • Expand your search — avoid solely looking at executives you already know; try fishing in new ponds.

  • Find a debater — your candidate should be able to help push or accelerate people’s thinking.

  • Get someone who can wear multiple hats — search for an individual who can provide value in multiple areas within the company. The need will vary from one board to the next, but this person may have previous experience taking the product to a new end market or can help the company successfully navigate through the regulatory minefield.

  • Require experience with companies that are at higher revenue multiples — your candidate should know how to help companies reach growth projections. Find an individual who has directly managed the growth of their company and advanced their scope of responsibility over a number of years.

Be sure to engage your board candidates well before you acquire a portfolio company. This way they’re exposed to the learnings from the diligence process and familiar with the company’s growth trajectory — you won’t have to bring them up to speed. In addition, early engagement will help your board member feel more connected to the management team.

Identify potential red flags

Red flags come in all shapes and sizes, but a few stand out that should not be ignored. For example, your board candidate should not want a full-time company role. He or she should be interested in helping the industry grow and evolve. Watch out for “board mongers” — individuals who sit on multiple boards but are primarily interested in status or position.

Make sure your candidate has the necessary leadership skills to engage their peers and execute strategic plans. At Apex Leaders, we conduct unsolicited reference checks with executives who have worked closely with the candidate and can speak to their leadership style and experience level.

How to compensate your board member

Unless you’re running a non-profit, board members will expect compensation. While compensation comes in many forms, it generally boils down to equity, cash or sometimes co-investing opportunities.

We recommend defining board compensation before you begin your search. Start by considering the following:

  • Cash per diem pay-per-meeting — clearly outline the number of meetings expected per month or year.

  • Equity — will your board member receive a percentage when the company sells or has another successful exit?

Co-investing is a hotly debated topic. If offered, your candidate will likely invest more time and energy into the company. If required, this practice can deter potential board members who have inaccessible assets but would otherwise be valuable to the company’s management team.

Orchestrate board diversity

Board diversity is imperative, but is frequently a misunderstood boardroom strategy. A diverse board is composed of individuals with unique skills, backgrounds and experiences that translate into more capable governance and a means to position the company for success. A well-rounded board is a competitive advantage.

Portfolio managers will know within the company which diversity considerations need attention. As you search, press your stakeholders to examine your board’s diversity gaps from multiple points of view.

Let these kinds of questions steer you to the right candidates: Do you need representation from your employee base as categorized by gender, ethnicity or geography? Do your customers require better representation by industry or region? Does the board need a representative with the skills and experience to determine where the company is headed?

Identifying candidates who bring a diverse perspective demands a comprehensive evaluation to find talent whose strengths and experiences align with company culture.  

Persuade your candidate to accept

Once you’ve found the perfect candidate, you might need to promote the opportunity in certain circumstances. If this is the case, we recommend selling your private equity firm as a collaborative organization that prides itself on working with the management team. Use a variety of incentives to entice your candidate, including compensation, ability to influence and share knowledge, and the opportunity to network with PE and industry executives.

If the candidate is passionate about the industry, he or she should already want to be part of its growth. As a member of the board, they’ll have the chance to share their expertise and build teams in an industry in which they’ve spent their entire career.

Streamline the on-boarding process

Once your candidate is excited to join the team, help her/him carry that excitement into their first interactions with the board. Knowledge-based on-boarding should be easy since you’ve cultivated the necessary knowledge and insight about the target company and industry threats. If you found your board candidate during the diligence process, you’ve likely already leveraged their guidance through closing a deal with quick, strategic decisions.

Find the advisors and board members you need

At Apex Leaders, we are uniquely positioned to help PE firms identify tailored experts who compliment the strategic direction of the business and augment the portfolio company management team’s collective expertise. We use our proprietary search methodology and extensive referral network to identify and vet relevant board members. Quality is the singular most important measure of our success and we stand behind all of our board placements. Contact us to learn more.  

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