Joining the board of a PE-backed company: what to expect when a private equity firm taps you to provide oversight to one of its portfolio companies? Here are several important differences in such service and in the contributions you will be expected to make.

• Author: Monti, Todd
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

FOR INDEPENDENT DIRECTORS, service on the board of a company backed by a private equity (PE) firm offers exposure to unique professional, and potentially financially rewarding, opportunities. The attractions of such service cited by current and former directors include:

* The excitement and intrinsic interest of new business challenges coupled with experience in a realm of intensive value creation.

* The prospect that independent directors who serve successfully on one board may be tapped to serve on the boards or as the CEO of other portfolio companies in the future, eventually becoming part of the PE firm's informal stable of talent.

* The greater potential for significant personal wealth creation over time.

Beyond the allure of such service, prospective board members who have served only on the boards of publicly traded companies, either as an executive or nonexecutive director, should be aware of the differences they can expect to find at companies where a controlling stake is held by a PE firm. The differences in a number of key areas--as well as the type of contribution independent directors can make there--are examined below.

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Board Composition

Pre-acquisition PE firms look closely at the existing board of the target company and consider which board members they would like to retain. Although it may retain one or two existing directors, the PE firm attempts to populate the board of a new acquisition with the firm's investment professionals. The specific formula for composition differs, of course, from company to company and PE firm to PE firm, but generally speaking there are often eight to 10 total board members, very few of whom may be independent. Of those, some may already be part of the PE firm's network.

Over time, as some of the investment professionals rotate off the board to other assignments, the proportion of independent directors may increase. It may also increase as the PE firm prepares to take the company public and needs more independent directors in order to increase its attractiveness to investors and to meet the independence requirements mandated for a public company. Nevertheless, the composition of the board is likely to remain overwhelmingly in favor of the PE firm's employees, and many of the other differences in board service flow from this fundamental fact.

Board Dynamics

Board composition affects board dynamics. On the boards of publicly traded companies, board dynamics are rooted in the distinction between two groups--executive and nonexecutive directors. Much of the energy on those boards, through such roles as a lead director or a nonexecutive chair and such practices as nonexecutive sessions, is devoted to...