Public, Private, and Nonprofit Boards: Understanding the Landscape
By Jocelyn Mangan, CEO of Him For Her and Kate Purmal, COO of illumyn
When working with board-qualified candidates to help them understand how boards approach their search for new directors, we find it helpful to clarify the distinctions between private and public companies, as well as the role of advisory boards and nonprofit board service in the board journey. Each type of board varies in the roles and responsibilities of those who serve in the boardroom.
Public Company Boards: Larger, Longer Lead Time to Openings, and Few Seats Available
Many of the women we work with are interested in public board service, but few realize that exclusively pursuing public board opportunities may limit their options. Publicly-traded companies constitute just 1% of all companies. Public board seats become available primarily through turnover, which means new opportunities are few and far between. In 2022, there were only 414 new placements in the Fortune 500 company boards. What’s more, public board opportunities are almost exclusively filled by seasoned C-suite executives. In 2002, 43% of new Fortune 500 directors had CEO experience, and 18% had CFO experience.
The most significant difference between public and private company boards is that public boards are subject to regulation by the Securities and Exchange Commission (SEC). As a result, the board of directors plays a critical role in ensuring that public companies comply with regulatory requirements to maintain the trust of their shareholders and the public.
Public company boards tend to be composed of formal committees, including compensation, nominating and governance, and audit. These committees play a pivotal role in overseeing various aspects of the company’s operations. In some cases, special committees are set up to address critical areas like cyber security and environmental, social, and governance (ESG).
Because of heightened scrutiny and regulation, the board interview process can be more involved, including due diligence, background checks, and longer timelines to seat a new director.
With an average of 10-12 directors, public boards are typically larger than private boards. Establishing your voice and making a significant impact may take time, especially while gaining experience and understanding the board dynamics and potential new world of regulation. Even individuals with extensive experience on private company boards need to adapt and learn the more formal structure and regulatory responsibilities inherent in the public company boardroom.
Private Company Boards: Our Future Public Companies, Heart of Innovation, and Bulk of New Board Openings
Private boards span industry and geography, and their makeup and role vary based on the stage of the company's development and the type of investment, whether backed by venture capital (VC) or private equity (PE). While there are no hard and fast rules, here are some of the similarities and differences.
Venture Capital Backed Corporate Boards
Boards of venture capital (VC)-backed companies are typically led by the company's CEO or founder. The first non-executive board seats (not held by the company's founders or executives) are usually occupied by one or more lead investors from VC firms. In the early stages of a startup, nearly all boards consist of the company's founders and early investors.
As the company secures additional funding for growth and expansion, the addition of independent directors becomes more common. These boards tend to be relatively small and hands-on, creating excellent opportunities for first-time board members to contribute their operational skills and experience. These boards seek independent board members with expertise in building and scaling a fast-growing business, industry-specific knowledge, specialized functional expertise, or experience in specific business models.
As a VC-backed company prepares for an initial public offering (IPO), the inclusion of independent board members becomes increasingly crucial. These members bring additional financial acumen, ensure compliance with regulatory requirements, and offer valuable insights based on their experiences in public company governance.
Private Equity-Backed Corporate Boards
PE firms invest in established companies with the objective of increasing their value over time and eventually selling them for a profit. Therefore, companies backed by private equity (PE) tend to have a specific financial goal to achieve within a defined timeframe. PE firms typically take a significant ownership stake in the company, allowing them to have more control and influence over board decisions.
PE boards are predominantly composed of investment partner board members, and independent directors are usually brought in for their operating skills and experience. Where a company faces significant financial or operational challenges, independent directors guide the management team in how to restructure the business to create growth, financial stability, and profitability.
As PE- and VC-backed private companies mature, they may implement a lead director position and form committees similar to those in public companies. Boards may also establish a compensation committee as equity becomes a significant component of total rewards for employees and executives. Like late-stage VC companies, many also add an audit chair and committee in preparation for an IPO.
Advisory Roles: Early Involvement and Potential for Board Seats
We are often asked about advisory board service. While advisory board service can be helpful, it's important to understand that it's not equivalent to serving on a corporate board. Serving on an advisory board can offer valuable experience and insights into a specific industry or company, as well as opportunities to build relationships with the CEO and senior executives. As such, these opportunities can provide a path to the boardroom as becoming an advisor to a PE firm can be an excellent way to gain exposure and visibility in the board ecosystem and to build trusted relationships.
Private company advisory roles are most commonly sought after during the early stages of a company's growth when the CEO seeks external expertise but isn't yet prepared to formalize a board. Advisory board members do not have fiduciary responsibilities or voting rights.
Advisory boards generally require significantly less time than corporate boards and tend to be less structured. These roles typically come with clear agreements outlining the required duties and time commitment. Some advisory boards meet as a group, while in others, especially startup advisory boards, CEOs and executives may engage individually with advisory board members. In some cases, advisors are selected for their profile within the industry, and serve almost exclusively to provide credibility to the organization.
When companies look to add independent directors, CEOs and boards seek individuals they trust. In an advisory role, you have the opportunity to become an indispensable resource and develop strong relationships with executives and others in the boardroom. We frequently receive requests with our Private Equity (PE) firms partners for introductions to experts in specific areas or industries. These firms seek experts to contribute to due diligence and serve as advisors to the CEOs and boards within their portfolio.
When contemplating an advisory board role with the goal of securing a board seat, it's crucial to communicate your interest clearly from the outset. While not a guaranteed pathway, advisory board roles can increase your chances of being considered for a future board position.
Nonprofit Boards: A Different Mission and Networking Potential
We also receive a lot of questions about whether nonprofit board service is a stepping stone toward for-profit board opportunities. In all cases, we recommend you accept a nonprofit board role only when you genuinely align with the cause and are passionate about its mission. All board service occupies a critical element of your life: time. Assuming there’s interest in the nonprofit and you have the time to commit, a nonprofit board seat can provide good exposure to governance and the basics of how boards function. However, nonprofit board service is not requested as a competency when for-profit boards approach us with openings.
Sitting on a nonprofit board can serve to expand your professional network. Many of the larger nonprofit boards attract executives and leaders from diverse industries, so it’s possible to develop relationships with those who also serve on corporate boards.
Unless you serve on a well-known nonprofit or Industry Association board, we recommend you list your nonprofit board service in the Volunteer section of your LinkedIn profile rather than the main experience section as a best practice.
Here’s the bottom line: to maximize your chances of securing a corporate board seat, the best investment of your time is to activate your professional network, as outlined in our last newsletter.
In the next installment of “The Boardroom View,” we will break down the basics of board compensation.