03-31-17 | Printable Version

Should Private Newspaper Companies Adopt Formal Board Practices?

The Whys and Hows of Effective Board Governance

I am asked regularly whether there is truly a compelling benefit for private companies in adopting structured governance practices for their boards of directors. This question has been asked of me hundreds of times, in fact, over the past 15 years by news publishers serving smaller markets. By now, I have advised nearly a dozen community news businesses in moving toward that outcome, and have served as a board member for several. Observing the motivations, considerations and processes of these companies has helped me to understand what I call the “whys” and “hows” of board organization as a tool of corporate governance, namely:

  • Why would a community news business in particular consider formalizing its corporate governance?
  • How would such a company go about structuring its boards of directors, once convinced that it would be advantageous to do so?

WHY

Most community news businesses are independent closely held companies for which organized corporate governance is elective. They may employ a staff of hundreds and generate many millions of dollars in revenue but remain largely unregulated and not subject to the requirements that public companies must follow regarding oversight and reporting by a board of directors. This is a good thing for smaller businesses because complying with such regulations can be costly and time-consuming. But wholly ignoring structured directorship or resisting organized corporate governance can be expensive as well. Newspaper companies may miss many important strategic opportunities by doing so.

Instead of foregoing structured board operations entirely, many forward-thinking news businesses have adopted “customized” models for active directorship, and are reaping positive results. Most have done so in recent decades, usually beginning with the inclusion of independent directors on their boards. A big part of the motivation has been an interest in using the board as a tool to address the industry-shaking changes to news publishing.

We are already a decade or more into this upheaval for newspapers, yet most companies are still struggling to construct sustainable business models that will ensure their future. They recognize that the development of a new business model may be too much to expect of a single chief executive or a management team that is responsible for ongoing business operations. Thus the need to address unfamiliar challenges can lead often to an interest in composing a board of directors with skill sets complementary to the expertise of the internal company team.

Other motivations may be at work as well, such as: 

  • Company owners and leadership may recognize the desirability of re-examining long-held assumptions regarding what is essential to success. This can rarely be done objectively by an internal team and frequently results in the adding of independent members to a company board.
  • A high-functioning board with independent members acts as a sounding board for the top executive, which is especially valuable during difficult times. It is important that directors exercise care for the concerns of the company leader, without interjecting into levels of management within the organization. The number one job of the board is to hire, direct and measure the performance of the top executive, and this is best done in a supportive relationship.
  • More strategically, companies may want or need to elevate the primary role of the board beyond operations reviews, which tend to dominate meeting agendas when there are no independent directors. For example, strategic diversification discussions held exclusively among internal groups may sometimes be limited to incremental steps rather than broader ideas, whereas the inclusion of outsiders may help to generate innovation. I am familiar with newspaper companies that have included directors with technology expertise specifically to help address strategic requirements of their digital lines of business.
  • Boards with independent members can help identify and cultivate upcoming company leaders, whether from within or outside the management team or ownership group. The board works together to provide guidance on succession planning and management changes when those are appropriate. Board meetings should be structured so that key personnel gain visibility and are expected to present well-considered business plans for their areas of authority. Also, members of the board can serve as a professional development resource, with individual directors assigned to mentor high potential employees. If a company is closely held by a family, non-voting “observer” rights can be granted to encourage members of the next generation to become involved.
  • Companies may also be motivated to develop a professional board of directors when owner expectations shift, as economic goals diverge from past practices. For example, it may become appropriate to begin tracking return on equity and economic value creation when those financial measures have not historically been considered important. These rarely fall within the expertise of the internal financial team of a smaller business but can be added by engaging a capable director.
  • One very important benefit for independent businesses of developing a healthy board is that it can be a way to attract expertise that would not be affordable for the company otherwise. Well-respected leaders who will take a fresh look at company strategy can bring tools that are outside the expertise of internal executives, and will do so at relatively little expense (usually less than the cost of a part-time clerical employee).

With all these potential benefits, some question why any company would resist developing a structured and organized board of directors. The most common objection I hear from owners or executives is a concern about “losing control” of their business. This is best addressed – and avoided – by careful consideration of the manner in which the board is composed, or the “how” of the matter.

HOW

A successful initiative to professionalize a company’s board will most often begin with a rigorous examination of the purpose: Are we trying to devise a new strategy? To introduce a new product or service? To diversify outside traditional lines of business? To restructure, recapitalize or exit? Once that purpose is identified, it will be easier to organize a board that supports it. Here are some of the steps that may need to be taken:

  • Outline the appropriate structure and composition for the board. These decisions include the number of members, the length of terms, the mix of “interested” and “independent” directors, meeting frequency, compensation and other considerations. Most companies initially decide to include more than one independent director, but keep a majority of inside board members. It is considered optimal to convene the board for quarterly meetings, plus a budget session and an annual board retreat, in order to foster director engagement. Also, companies are learning that structuring longer terms of board service helps to attract candidates who recognize the investment of time required and are willing to make it.  
  • Identify prospective directors. Many companies achieve their best outcomes when they begin by itemizing desired skill sets and then match candidates to that wish list. One tactic that works well is to ask for referrals from within a circle of business contacts. For instance, while it’s not usually a good practice to ask a company’s attorney to be a board member, that attorney may be a good source for recommendations.
  • Activate the role of the board chair. This person will be responsible for preparing meeting agendas, focusing the conduct of each meeting, and organizing follow up action. Most frequently, the person who serves in this capacity is the top executive of the business. In some situations, however, it may be a non-management owner representative or even an independent director.   
  • Establish and implement committees with charters, timelines and authority. This is key to effective board operations because the real work of the directors is performed in these groups, outside of formal meetings. At least three permanent committees are usually established, responsible  for governance (including director nomination), finance (including audit) and executive compensation. Ad hoc working groups may also be established for a specific purpose and duration. For instance, I have worked with newspaper companies that established committees to formulate early digital roadmaps, before that skill set was readily available among the company’s internal team.
  • Formalize shareholder interactions for board election and feedback. If the ownership group is sizeable, the only governance role most shareholders retain is to elect members of the board each year. It is crucial that the owners and their representative directors communicate clearly about expectations for financial return and liquidity, as well as other important questions and issues, so the owners’ wishes can guide the directors as they exercise their fiduciary obligations.

Numerous other considerations come into play when evaluating whether and how to professionalize a company’s board, but if these steps are taken several positive outcomes can be anticipated. These have emerged in virtually every instance in my experience:

  • Aspirations for the company’s success are raised across the top executive and owner group.
  • Effective action is stimulated and sustained at the board and top executive level.
  • Management performance is upgraded across levels of the organization.

It has been my experience that all interested parties can expect a permanent impact on the business. In fact, I have never observed a company that made the change to a professional board of directors but later returned to prior practices. I consider this a healthy strategy that produces measurable results – and that, of course, is the biggest “why” of all.

Mary Elworth has been in practice as a business advisor, investment banker and corporate director for more than three decades. In 1993, she founded VPoint Group in Chicago and has since been engaged in strategic actions for news and publishing industry clients, as well as industrial and services companies. Her expertise in technology, finance and operations has proven valuable to the success of numerous projects over long-term relationships with privately owned businesses of varying profiles. She can be reached at maryelworth@outlook.com or 312-286-9005.