3 Critical Small-Cap Challenges Awaiting New Board Members That No One Talks About

5 minute read

3 Critical Small-Cap Challenges Awaiting New Board Members That No One Talks About

By Small-Cap Institute, Inc.

After having undertaken thorough diligence with respect to a prospective small-cap board opportunity, a common question for first-time board members is: “What can I expect once I actually join the board?”

Unfortunately, much of the information written about public company board service is produced by large-cap experts under the assumption that their content is applicable to all sized companies.  It is not.  For that reason, boardroom rookies are often caught off guard in their new small-cap roles by a handful of things that can impair their ability to succeed as directors.

Baptism by fire

Unlike in larger companies where there might be a highly structured, multi-day offsite for new board members, the majority of public companies in the U.S. – small-caps – offer either skeletal or nonexistent orientation.  While this is an unwise practice[i], it is common, and it often leaves new board members to fend for themselves.

If you join a board that has little in the way of “onboarding,” be smart:

  • Plan on spending time with the CEO, CFO, counsel, committee chairs, board leadership, and audit partner individually to get a sense of the “State of the Union”
  • Listen to the last few quarterly earnings calls
  • View a recent investor presentation webcast, and review the most recent sell-side equity research coverage of the company (if the company has coverage)
  • Listen to the most recent quarterly earnings calls of the company’s key competitors
  • Speak individually to all of the independent board members about what’s “top of mind” for them
  • Ask the company’s secretary or board leader to send you the materials for the last several board meetings
  • If you do not know what you should be looking for when you review SEC filings and financial statements, ask for help from board leadership

CMPOs, PIPEs, RDs?

Most large public companies rarely face serious capital markets challenges, so many corporate governance “experts” rarely discuss the universe of topics therein. But if boardroom education were produced by and for small-cap directors, capital markets would be a core component.

Many small-cap companies either regularly require outside growth capital or are only a business hiccup or two away from needing it.  It’s just a mathematical fact of life in companies that are less mature and often more thinly capitalized.

If you’re joining a small-cap board, and you are not conversant with financing structures like confidentially marketed public offerings, private investments in public equity, and registered direct offerings to name a few, then consider taking a few preparatory steps:

  • Read some of the excellent pieces written by this leading law firm
  • Join Small-Cap Institute (SCI), and read pieces like a “Comprehensive Overview of Small-Cap Financing Structures,” “Some Frank Observations About What Small-Cap Officers/Directors Routinely Get Wrong About ATMs,” and others
  • Once you feel better informed, consider asking more focused questions to the CFO, your new board colleagues, or raising them in SCI’s interactive member forums

Overseeing a novice public company CEO

By far and away one of the most common and biggest challenges for small-cap board members is governing a company being operated by a CEO who has never run a public company before.

Smaller companies are innately riskier than larger ones to begin with, and that risk ratchets up a notch or two when the CEO is a public company novice.

Here are eight practical things to consider if you are joining a board of a company run by a less experienced CEO.

  1. When you speak to the other independent board members, take note of how aware they are of the CEO’s inexperience and weaknesses?
  2. Do the current slate of independent board members have the requisite skills and experience to mentor the CEO?
  3. Does the CEO know what they don’t know, and are they coachable?
  4. Has the board met with the company’s investor relations professionals – without the CEO present – to better understand the CEO’s strengths and weaknesses in interacting with the buy-side and sell-side?
  5. Has the board met with human resources – without the CEO present – to discern whether the company is able to attract and retain high quality employees?
  6. Have any of the independent board members accompanied the CEO to meet directly with investors?
  7. Is the CFO an experienced public company executive, and are they a strong partner for the CEO?
  8. If the company lacks the ability to help, support, and mentor the CEO internally, has the board sought external coaching?

Small-cap board service is replete with unique challenges that are largely ignored by large-cap-centric corporate governance content in the U.S., so stay tuned for more practical guidance aimed at elevating small-cap performance.

[i] In the member’s content library, there is a piece entitled Setting Your Board Members Up to Succeed.  The first sentence of the article reads: “Great small-caps are not only disciplined when it comes to appointing new board members, but they take the extra step of setting directors up to succeed by thoughtfully preparing them.”