An inside peek at PE-backed boards: a survey of directors reveals the distinctive makeup and challenges of these boards.

• Author: Adams, Dorothy D.
• Position: PRIVATE COMPANY BOARDS

I RECENTLY COMPLETED one of the first detailed surveys of boards companies backed by venture capital and private equity (PE). Nearly 300 PE participants (both U.S. and European) responded to the survey--200 investors, 60 managers, and 30 independent directors from 11 different industry categories. The average nonexecutive director respondent served on 10 boards over his or her career. Drawing on the survey results plus my experiences serving on a number of these boards, I will detail just how different the composition of these boards are as well as the pressures they face.

Generally, when private equity firms are involved--whether venture capitalists or PE firms doing larger buyout deals--one or more investors take board seats for the period that they are owners (some number of years, but usually fewer than 10 years). This period is a turbulent one, marked by rapid growth, additional financings, recapitalizations, quickly changing market conditions, and unforeseen technical problems that can capsize the enterprise. At the end of the wild ride is the exit--an IPO (in a minority of cases), a sale to another company, a liquidation or bankruptcy, or, still some-what unusual, a sale to another set of private investors.

A board snapshot

Survey respondents were asked to profile a board they had served on. The boards they described were smaller and more compact; almost three-quarters had between five and seven directors. Some boards were as small as two individuals--usually a start-up situation--and one was as large as 13. (A corporate investor was involved.) Nearly 90% of the companies whose boards were profiled had revenues less than $100 million. Management-share-holders included founders of new start-ups, those who had purchased a company out of a corporation in a management buyout, and those who invested privately and took a management role in the company. These were all considered executive directors. Nonexecutive directors included private investors and fund representatives who did not take a formal management role, and independent directors who also did not buy any class of shares and therefore could represent all shareholders.

Not surprisingly, the survey showed that most directors are from the private equity funds (PE and VC representatives). As part of the negotiation for the investment, the nomination process for board seats is specified. The more investors who are directly involved in the deal, the more seats are allocated to them. Forty percent of the boards had 50% or more investor representatives, and only 3% of boards lacked them, in which cases private investors--or "angels"--were strongly represented. Overall, angel directors were present on only a third of the boards and mostly for the much smaller companies--those up to $30 million in revenue.

The lone independent

Forty percent of the respondents said that their board had only one independent director. More than a quarter of the boards had no independent directors. Independent directors were in the majority in only three of the nearly 200 boards profiled.

Executive directors are more common than independent directors, but not by much. Nearly 70% of the boards had only one or two executive directors, and only 3% of the boards had a majority of them. Some 12% of the boards--a mix of U.S.-and non-U.S.-based--had no executive director serving on them. It seems that keeping the boards a manageable size while also allowing major investors their required oversight leaves little room for the CEO. Such a situation facilitates holding management accountable and more readily removing the CEO if necessary. Some 60% of the boards profiled had removed the first CEO, and many had removed a second one as...