Even private company boards of directors are changing.

• Author: Sinnett, William M.
• Position: Governance

The notion that it's easier being private--since private companies are not obligated to conform with the tons of U.S. regulations that public companies must adhere to--has also changed, along with much else, thanks to the Sarbanes-Oxley Act of 2002. Since the law's goal is to greatly increase regulation of public companies in the interest of their outside shareholders and privately held companies do not have outside shareholders, you might conclude they could safely ignore Sarbanes-Oxley. Not so.

What about future shareholders, whether or not a company ever plans to go public? Today's private companies are adding outside directors to their boards, and some are even establishing audit committees. These companies are closely reading the provisions of Sarbanes-Oxley, which requires, among other things, that audit committees of the boards of directors of public companies include a financial expert and approve all auditing and non-auditing services provided by the external auditor.

So, what should privately held companies do? First, there's general consensus that companies should have a board of directors with outside directors. Don Munchrath, CFO of Omaha-based Carlson Systems Corp., gives two primary reasons for having outside directors: 1) to gain business expertise and insight (an advisory role) and 2) to hold accountable the top management--who often are family members, major shareholders and employees.

"When you look for outside board members, be certain the shareholders are clear on which is the most important objective," Munchrath advises. "If it is the number two item just stated--holding management accountable--it is important to sign up board members who take that responsibility seriously, and are not such good friends with top management that they cannot be objective and ask the tough questions.

"What they know is important, but who they know may be more important, so check their connections," he adds. Deal-making attorneys, CPAs, investment bankers, executives from other non-competitive firms and even former public officials can be excellent choices--particularly if they have prior experience serving on a board. But, Munchrath advises, "shy away from existing advisors such as your corporate legal counsel or CPA."

Carlson Systems, a wholesale distribution company with manufacturing subsidiaries, has been family-owned for 56 years. Its board of directors is comprised of seven members: three family members who are also employees, one...