Boardroom Dialogue: Minimizing director turnover

One of the results of my survey on boards of private equity-backed companies could be news to several VC's out there: boards of financially successful companies had a lower turnover of directors. In the survey respondents profiled a specific board and indicated the level of the exit or its current financial performance if there had not yet been an exit. In looking at the nearly 200 boards, there was an average of 1.4 directors leaving the board in the relatively short life of these boards. (For those not familiar in the industry, the board is typically overhauled at the exit.) Some boards had higher turnover and more of those ended badly for investors.

While some of the churn is anticipated because of new financings, there were a number of other more unexpected reasons the directors left, such as the departing director's lack of interest or time (the two are related), and a director being asked not to return. For the latter, I heard this echoed in comments from a VC who mentioned that the outside or independent director from industry was only needed for a year and then he would replaced, sort of like he was used up. I suppose that if you're only looking to use the person's contacts then yes, he/she is easily used up in a year. However, that is exactly the problem attitude that leads to a weaker board.

Why does high director turnover lead to weaker boards and correlate to weaker financial outcome for investors? It takes time to find a new director (months) and another chunk of time to get up to speed on the inner workings of the company and the board itself. This can be a year. More importantly, boards that feel that a short stint from a director is useful have missed the point. If someone seen as useful for a short time -- he/she is a consultant and should be hired as such. The role of a board member is not project specific. Indeed, there is a hint that such a person is somehow subordinate in that boardroom -- other reasons why SARBOX's stance on board members getting consulting contracts applies to good governance in general. The board members should form a group of peers to oversee and guide the company over the longer term, acting in the best interest of the company and all its shareholders -- more on that in another posting. This peer group is not a bunch of friends, but knows each other well enough to constructively disagree. Any departure or new arrival of a board member means a period of adjusting before the group can reach its effective level of open frank debate. And as you all know, time is of the essence for these companies.