Investors’ Favorite Small-Cap Boardroom Hire6 minute read

By Small-Cap Institute

Unlike in most mid- and large-cap companies, it’s common for small-cap companies to be operated and governed by those who are either new to public company roles, or by those who lack significant experience operating and governing public companies.

Ask most experienced small-cap investors and they will say that one of the best, yet most overlooked, actions a company can take to increase their chances of success is to appoint an experienced public company board member as non-executive chairperson.

Great chairpeople can be transformational influences on any company, but it’s particularly true for small-caps.

  • Experienced chairpeople have worked with numerous CEOs throughout their careers, and they are often well-suited to provide the CEO not only with operational mentorship, but also provide counsel on how effective CEOs work together – and communicate with – public company boards.
  • By definition, chairpeople are responsible for presiding over the board. When small-cap companies have less experienced CEOs, less experienced board members, or both, oversight of the company on behalf of shareholders is invariably going to suffer.  But when a seasoned chairperson is added to the mix, board members often quickly learn what is expected of great boards.
  • The influence of a talented chairperson is not just felt inside the company; they are often skilled in interacting with stakeholders and media as well.

Where Do You Find Them?

Fortunately for small-caps, there is no shortage of experienced board members who would like more board opportunities.

Consider these cost-effective methods of finding them.[1]

Caveat Emptor

Every small-cap company has a limited number of board seats, so there are always risks in adding anyone new to a board.

It is also a risk to appoint an outsider to a board leadership role, versus someone who has been elevated to that role from within by their peers.

But the benefits of adding an exceptional chairperson to your board can more than outweigh the risks, provided that small-cap boards avoid one critical mistake in their search: conflating “experienced directors” with the notion that “the best directors are from large companies.”

There are, of course, many experienced mid- and large-cap board members that can be value-added additions to any sized company.  But it is a mistake for small-cap boards to seek out only those with larger company experience for two principal reasons: (1) it is often based on a mistaken premise that small-cap investors value directors with larger company boardroom experience over their equally experienced smaller company peers; and (2) there is no evidence whatsoever that board members of larger companies make better board members in general, much less for smaller companies (and the anecdotal evidence is often the opposite).

In a piece for members entitled, Small-Cap CEOs: Think Twice Before Adding a Large-Cap Executive to Your Board, an experienced small-cap institutional investor recounted the “good,” “bad,” and “ugly” that they witnessed first-hand when large-cap execs with little or no small-cap experience joined small-cap boards.

Here’s an example of one of the “ugly” fact patterns:

Corporate finance disasters. Large-cap companies rarely need to access the equity capital markets, and when they do it’s almost always from a position of strength and leverage – strong balance sheets and extremely liquid stocks. On the other hand, many small-caps are serial capital raisers, and often transact financings from positions of weakness and vulnerability – everyone knows they are running out of money and their stock is illiquid. Here’s the rub: when I was an institutional investor, many of our portfolio companies either waited too long to raise “must have” capital, or they turned down “market terms” all because a large-cap board member noisily applied big company corporate finance sensibilities to a marketplace they didn’t understand – at all. This problem is exacerbated by the fact that “other” board members are often overly deferential to the new board member who operated, governed or advised famous companies. Just because someone works on an Indy 500 pit crew, doesn’t mean they are the best person to change the brakes on your Lexus.

Takeaways

  • Small-cap boards, be smart: if your company is operated by a CEO with minimal public company experience or your board is largely comprised of directors who are new to public company governance, your board and company would likely benefit from adding a highly experienced public company director as non-executive chair.
  • If and when you do that, make sure to communicate, in plain English, to your stakeholders about why the addition of the new chairperson is a good idea.
  • Give the new chairperson every chance of success by thoroughly on-boarding them.

[1] You will note, that the bullet-pointed list does not include asking friends, asking family, or asking existing board members.  Each of those groups could, of course, provide a referral to a quality board member.  But as SCI has set forth in numerous articles and in its first webinar, board members who are friends or acquaintances of the CEOs or of current board members are less likely to think and act independently, because they were invited to the board by… friends.

[2] This isn’t an exhaustive list, rather just an example of some organizations.  SCI has no direct or indirect relationships with any of the listed organizations.