Is your board really looking after shareholders interests: the common error is confusing business wealth creation with shareholder wealth 'realization.' they are not the same; at times, not even close.

• Author: Isaac, George
• Position: SHAREHOLDER VALUE

Surprisingly, many private company boards pay little attention to perhaps their most important function, maximizing realized shareholder value. Despite their legal and fiduciary responsibility to exercise this function, boards often fail to give it much attention. My experience from serving on 14 different boards is that this issue is seldom even on the agenda!

Private company boards typically review

Too often, the board looks at the business solely as the "operating entity" versus the shareholders' "investment." As a result, boards do not apply traditional investment management principles in their oversight role and miss the important board responsibility of protecting the interests of the shareholders. The common error is confusing business wealth creation with shareholder wealth "realization." They are not the same; at times, not even close.

We have witnessed too many businesses lose a lifetime of wealth creation, often due to no fault of their own. The Great Recession of 2008 is one recent example. Many businesses and, correspondingly, shareholders, will never get their values back to pre-2008 levels. Even if they do, when considering the time value of money, these shareholders have lost considerable wealth.

Inevitable consequence

When I was the CEO of my family's businesses, we focused on the "company" return on equity (ROE). Under that metric, we were very successful, posting double-digit returns for several consecutive years, much to the satisfaction of our board and shareholders. However, we failed to recognize the significance between "realized" and "unrealized" shareholder ROE. So do most business boards. Shareholder ROE is not realized until cash is in the shareholders' pocket. Prior to that, it is an "unrealized stock gain" with all of the associated risks.

Many boards, by "failing to act" (another prime board responsibility), have their shareholders exposed to unrecognized "tail" risks, lower ROEs, and less liquidity than alternatives discussed below. The inevitable consequence is the silent and unseen evaporation of shareholder wealth, often over a single generation.

To address this issue, boards need to evaluate how to realize business wealth--prior to the sale of the business or other future liquidity event. When they do, they will serve their shareholders by:

* Improving overall shareholder investment performance by increasing realized internal rates of return and decreasing exposures to tail risks.

* Providing liquidity to...