Summary.    Public company boards are typically focused on oversight, supporting the management team while keeping a respectful distance from day-to-day operations. In contrast, boards of companies owned by private equity tend to be much more hands-on. Often...

Public company boards have made quite a few upgrades over the past decade. They have become far more diverse, more focused on risk management, and more attentive to the environmental impacts of the companies they oversee.

But in other ways, public company boards still look eerily similar to what they looked like 50 years ago, when modern governance rules were first enacted after the high-profile collapse of Penn Central. Directors basically still show up to board meetings once a quarter to approve the strategy, discuss risks, and once every five years or so, select the next chief executive officer.

This seems strange, particularly since the world around them has changed so much.

This approach to board oversight is dramatically different than the ways boards work in the private equity (PE) world. When PE firms build boards for their portfolio companies, they create a governance structure that’s far more entrepreneurial. PE owners recognize the value of a more collaborative model in which directors — often former CEOs themselves — can work more closely with management to drive transformation and results more efficiently. Also, because PE companies are not publicly traded, they are able to spend less time on the formal, bureaucratic, and procedure-laden practices that the SEC requires of public companies.

Specifically, boards of PE companies focus on a handful of guiding rules:

1. Don’t just review the company’s strategy. Help create it.
2. Don’t just expect trust. Build it.
3. Don’t just assess the company’s culture. Help shape it.
4. Don’t just receive information. Provide it.
5. Don’t just look different. Think different.
6. Don’t just fire CEOs. Get to know future ones.

In this article, I will explain and elaborate how these six principles result in more effective boards.

Don’t Just Review the Company’s Strategy. Help Create It.

It’s almost taboo for public company directors to get closely involved with management during the strategy creation process. Following the advice of governance pundits, directors maintain an arms-length relationship to keep perceived objectivity intact, until it’s time to approve the strategy at the appropriate board meeting.

Private company directors are increasingly embracing a different approach. “When we acquire a company, we focus on building a board of directors who are eager to work with the executive team to co-create the company’s new strategy,” says Dave Layton, CEO Partners Group, a global private markets firm. “All of our portfolio company directors are active participants in setting strategy, sometimes getting started as trusted advisors before we even acquire the target company. And because the directors we recruit have extensive operational expertise — often as CEOs themselves — they aren’t afraid to roll up their sleeves and get involved during implementation, either.”

Don’t Just Expect Trust. Build it.

Because directors of PE-owned companies must work more closely with managers, the importance of building trust between the two groups and creating a safe space is thrown into stark relief. The standard public company practice — meeting once a quarter at corporate headquarters — won’t suffice, regardless of how much the lead director wants to create an inclusive environment in the board room. Trust doesn’t magically appear.

Michael Penner and Fredy Gantner, board members at USIC, a privately-owned utility location service company, took a more creative and courageous tack. After its acquisition by a private equity firm, all of the directors, as well as the entire executive team, were invited to scale part of a mountain in the Swiss Alps. At first many colleagues thought Penner and Gantner were kidding. None of them were professional climbers, after all. But it was no joke, and everyone joined.

During the trek, individuals became more vulnerable and began to share personal stories — even their aspirations and anxieties. Soon, everyone felt more comfortable sharing a wide range of perspectives about the future of the business, too. The setting allowed for a robust, candid debate — one in which divergent views were heard and stress tested.

Before coming back down the mountain, everyone was in full alignment on the company’s future direction. “We came back down the mountain with our own ‘ten commandments’ in our arms,” according to Penner. The three-day offsite was so well received, it now takes place every 12–18 months to chart and realign the 5-to-10-year strategic plan.

Don’t Just Assess the Company’s Culture. Help Shape It.

Increasingly, private company boards are encouraging directors of newly acquired organizations to spend time in the field interacting with front-line employees. It’s viewed as a unique opportunity to shape the company’s culture and model the right behaviors in a way that supports the company’s new strategy. How many public company directors can say the same?

USIC directors, for example, rode along in trucks with technicians for several days. Directors listened to their concerns and watched them in action while they interacted with customers. Even though the privately owned company, which had been passed from one PE firm to the next, and was accustomed to cost-cutting, a decision was made jointly — among directors and the executive team — to invest more in technical training and customer support, which ultimately enhanced employee retention and customer satisfaction. “When front line employees saw us spending time on the road and in local facilities, really listening to their concerns — and acting on them — it seemed to instill everyone with a greater sense of purpose,” Penner says.

As important as what directors are working on is the way in which they work with employees. Are directors just showing up to be bossy “know-it-alls?” Or are they partnering with employees, showing a sincere willingness to learn, and incorporating the good ideas of others into their own mental models? “The latter goes a long way towards institutionalizing a culture of continuous learning and embracing change which is always essential for a company in the midst of a major transformation,” says Vikram Talwar, former chairman of the Board of Straive, a private technology company in the ed tech space that is now owned by private equity firm BPEA. “While at Straive, I spent a great deal of personal time in between board meetings getting to know new employees, inherited from three bolt-on acquisitions, asking them tough questions, and figuring out which of their ideas could be integrated into our product road map.”

Don’t Just Receive Information. Provide it.

Rather than waiting once a quarter for carefully vetted information in thick, three-ring binders from corporate headquarters, private company board members are often eager to share as much information as they receive. Since directors spend ample time in the field learning from front-line managers and customers, they almost always possess competitive intelligence.

“I love it when phone rings and it’s an ad-hoc call from a board member,” says Al Subbloie, chief executive officer of Budderfly, a privately-owned energy efficiency provider. “A director once called me after talking to a potential customer that represented a new end-market for us. We used that introduction to immediately accelerate our sales strategy within that vertical. Can you imagine if we would have waited three months until our next board meeting to act in a sector evolving as fast as ours?”

Don’t Just Look Different. Think Different.

To be sure, corporate boards have made strides over the past decade enhancing diversity. But it’s not enough that directors look different; they must be willing to think different, too. They must have the courage to voice unique perspectives inside the boardroom and try new things outside of it. Otherwise, what was the point of recruiting more diverse board members in the first place?

Luisa Delgado, a Swiss born director of a private German-based toy manufacturer called Schleich, recalls vividly when she approached the company’s mostly male executive team with a radical idea. Delgado was convinced the nearly 90-year-old, precision-crafted figurine company needed to overhaul the way it sourced and manufactured toys in a way that was more ESG compliant.

The CEO asked, “Why rock the boat? Consumers aren’t asking for change, and switching to recyclable plastics would be disruptive and expensive.” Yet Delgado persisted and eventually convinced management that embracing sustainability would appeal to an entirely new generation of consumers and accelerate market penetration into new global markets.

Even more extraordinary is what happened next. The entire board worked side by side with Schleich management for the next six months on everything from product design to raw material sourcing to new marketing campaigns. “I assure you, this is not how most public company board members spend their time,” Delgado says. “But we were acting like an entrepreneurial startup team within a company that was nearly a century old, and it worked.”

Don’t Just Fire CEOs. Get to Know Future Ones.

For better or worse, the private equity industry has a reputation for making fast changes when portfolio company CEOs can’t deliver results. Although this trend certainly hasn’t dissipated, some PE firms have become more ambidextrous in their view towards talent management.

Board members are often encouraged by PE-investors to get on a plane and spend face-to-face time with front-line leaders, several times a year, watching them in action where they actually work. Not only does this set the right cultural tone, but it also allows directors to develop deeper connections and draw their own conclusions about the leadership potential of rising stars.

“Armed with this first-hand knowledge, directors brainstorm new opportunities for high potential talent to learn, grow, and possibly even fail,” says Talwar, the former board chair at Straive. The real question on the minds of private company directors is how will the executive respond to a possible high-profile failure, knowing it is on the board’s radar. Will they sweep it under the rug and try to hide it? Or will they reflect on the failure and work on different approaches with the board?

Private company directors deeply value the latter approach. They view vulnerability as the foundation for a meaningful relationship in which information flows both ways.

Benjamin Breier, former CEO of Kindred Healthcare, a company owned and then sold by private equity giant TPG, shared a story. “I remember a time when one of our most promising division presidents came to me nearly in tears. Even though he understood the importance of our company’s aggressive performance metrics, it was nonetheless causing deep anxiety and frustration. At first, I didn’t know how to process my own personal feelings about the executive’s admission. I was caught off-guard. Was he in over his head, or was he being brave sharing his concerns with me? We began an honest dialogue about our strategy, and equally importantly about both of our feelings and better ways to cope, which ended up lasting over a year of regular cadence. Unquestionably we both grew as more self-aware leaders during this process, and he soon gained the trust of the entire board as a viable CEO candidate.”

We have entered a new governance era in private equity. Long gone are the days when PE firms could simply buy companies and saddle them with massive debt. Capital costs have soared, and financial engineering can only go so far. In their search for more enduring advantages, innovative private equity firms and their portfolio companies are increasingly embracing a more entrepreneurial governance model in which board members, with deep operational experience and more skin in the game, work side-by-side with portfolio company executives to co-create the new strategy, shape the culture, and develop future leaders.

If the past decade is any indication of the future, private equity will continue to be the financer of first choice in the real economy. Public companies should be questioning their approach to governance — which hasn’t evolved all that much since the collapse of Penn Central half a century ago — and thinking about what they can learn from private equity.