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Private Equity

How to Unlock Value With a Better Board


Creating an impactful and balanced board of directors is as much art as science. Juggling different personalities, skill sets, and motivations isn’t easy. But as private equity investors well know, a successful portfolio company board can be a uniquely powerful force for value creation in middle market companies.

Jeffrey Kadlic, Evolution Capital Partners
John Castle, Branford Castle Partners

We talked to John S. Castle, Managing Partner of Branford Castle Partners, and Jeffrey Kadlic, Founder and Managing Partner of Evolution Capital Partners, about the role of a portfolio company board of directors, and how to assemble and manage an effective board.

In this article, Castle and Kadlic address topics including:

  • Must-have (and nice-to-have) characteristics of a successful board member
  • Where to find board members
  • The most important role of a new board
  • When to bring on new management
  • How to maintain enthusiasm over time
  • How to structure meetings effectively

Finding the Perfect Fit

“As investors, we can guide companies, but the answer can’t always come from us,” says Kadlic. “It’s better if somebody else is saying the same thing,” or better yet, helping clarify or refine their advice.

According to Kadlic, “The ideal board member is somebody who has been in that exact same space, done that exact same thing, and had a huge amount of success.”

Industry contacts are a non-negotiable, says Castle. “The board should fundamentally be able to open doors for the company in the industry they’re in, and facilitate meetings that will help the company obtain business” they might not otherwise be able to get.  

Particularly for firms investing across multiple industries, it’s crucial to have a voice on the board with first-hand experience in the space and up-to-date knowledge of trends who can look at the company performance and know the right questions to ask, says Kadlic. For example, “‘If the industry has grown at 10%, why are we growing at 5%?’ In order to ask that questions, you need to know the industry growth average.”

But there may be times it’s necessary to cast a wider net. “People aren’t clamoring to be on the board of a $2 million revenue business unless it’s in Silicon Valley,” says Kadlic, whose firm invests in second stage companies with $4-10 million in revenue and 20-60 employees.

“We look for people who have industry experience or business model experience,” says Kadlic. For example, Evolution Capital Partners invested in a medical training business looking to grow through geographic expansion. For that company’s board, they considered a wide range of people who could potentially be a great fit — from someone in the restaurant business who has expanded through a franchise model to hospital administrators with deep industry knowledge.

While retirees will have ample time to devote to board responsibilities, they may not be best suited to provide introductions. “Retirees’ Rolodexes get stale fast — within 6 months,” says Kadlic.When you make the announcement that you’ve retired, you might as well have flown to Australia.”

Just as important as industry experience and contacts is the board’s relationship with the management team. “The main criteria for the board is, ‘Would the CEO call that person for advice?’” says Kadlic.

To find board members, he recommends turning to personal networks, as well as CEO and LP relationships. LinkedIn can be a great source to identify potential board members; “you’d be surprised how receptive people are.”

Potential future buyers or even customers can serve as effective board members, assuming the company is comfortable with sharing sensitive information or can set up necessary safeguards to protect intellectual property and other trade secrets.

Because Evolution Capital works with businesses at earlier stages, they find it useful to create a board of advisors in addition to a board of managers (the equivalent of a board of directors). The board of managers meets monthly and handles “more foundational things that aren’t necessarily strategic,” whereas the board of advisors is responsible for the strategic thinking expected from a larger company’s board of directors. For similarly sized companies, this model can provide an advantage when recruiting potential board members as well. Unlike a board of directors, “with a board of advisors, you don’t necessarily have to give them a full financial statement,” which makes the idea of inviting potential strategic acquirers or customers more appealing, says Kadlic.

Building an A-Team

“The first thing a board needs to do is listen,” says Branford Castle’s Castle. “So many boards come in and say, ‘I know better than you.’ There are few businesses where the existing management team or owner doesn’t know the business to a greater extent than you do.”  

“If you’re a good private equity investor, you and your team have seen a lot of different circumstances or a lot of different aspects of companies that maybe the management team hasn’t seen before,” says Castle. “You might be able to examine a company, and say listen, we think that your systems aren’t where they need to be. You struggle to get information to us and distribute information throughout the organization.” These insights are indispensable. But while a board might help a company improve communication and implement new systems, execution ultimately rests on the management team’s shoulders. “It almost doesn’t matter what great laid plans there are from the board; you’re unlikely to have the type of outcome you want without the right management,” Castle says.

Ensuring the company is under the right leadership should be the board’s primary responsibility after an investment. “If the board does that one thing right, it’s 90 percent of the way there. They could pretty much drop the mic and walk away after that.”

As investors, says Castle, “we don’t like to change management. We really love when the manager that came with the business is the right person. The hope is to work with existing management 100% of the time. And frequently, we do.”

But there are times when it becomes necessary to bring on new or additional managers for a company. In these cases, the board’s bird’s-eye view and past experience is crucial. The board must have the discernment and industry know-how to identify breakdowns in leadership. “Financial concerns are part of it,” says Castle, but sometimes, larger industry or economic trends may be to blame for a company’s triumphs or struggles. “If the company is doing well, often that means the manager is making good decisions—but sometimes the manager is just the beneficiary of a rising tide.”

Keeping Up the Energy

“At first, being part of a board can be kind of exciting — there’s a newness to it. You get a charge out of meeting new and interesting people; you identify low hanging fruit and make some early progress,” says Kadlic. “But it gets more difficult over time to sustain that energy.”

Absenteeism isn’t the problem so much as a general downturn in enthusiasm and preparation. People might dial into a meeting instead of flying in, for example. For some board members, this may just be a temporary dip in their level of commitment. But other times, someone may have run their course in terms of value add, in which case Kadlic says it’s the firm’s policy to have a conversation and go their separate ways.

The most engaged board members are, perhaps unsurprisingly, those also interested in writing a check. While bringing on board members as investors requires a valuation and can be a more complicated process as a result, Kadlic says that investors tend to be highly committed and more likely to keep up a high level of intensity over time.

Investors are often more likely to challenge the status quo as well. “You don’t want to end up with a yes-man board,” says Kadlic, “where they don’t want to ask tough questions or don’t want to have a confrontation with the CEO.”

The worst situation, he says, is one in which someone asks for questions, and there’s “dead silence.”

“It takes courage to say ‘No, I think you’re wrong,’” says Kadlic. He adds that “everyone can benefit from a confrontation” if framed the right way. “Confrontations don’t have to be confrontational. It can be a learning moment for everyone.”

Running the Show

Ideally a board should spend 90% of their time looking forward, and 10% looking back, Kadlic says. However, given that it’s easy to get sucked into analyses of past performance, the job of the chair is to create and stick to an agenda, with discrete amounts of time allotted for each part of the discussion. Setting goals with the CEO is a crucial first step; Kadlic recommends identifying three things that, if accomplished, will make the meeting a success. The chair can then work backwards from those goals to create the meeting plan and communicate it to the board.

Throughout the meeting, ensure that the discussion stays concrete and actionable by keeping a list of to-do’s, e.g., introductions to be made or research to be done. At the end of the meeting, recap the to-do list, being sure to identify who is responsible for what and by when.

Kadlic also recommends a “check-out” at the end of the meeting, in which every board member rates the meeting from a 1-10 in the concluding few minutes, and explains the rationale behind their ratings.  

Measuring Success

Ultimately, the best indicator of a board’s success is the company’s performance, says Branford Castle’s Castle. “If the company performs well, well, then, everything worked out. If the company didn’t perform well, then everybody is blamed to some extent.”

Within that broad distinction, an investor can also measure success by the strength of the relationships cultivated. “Fundamentally, I think that the best relationships are ones where you have really smart and really capable people at the management level talking to smart and capable people at the board level. There’s a mutual respect between the two groups. With mutual respect you can accomplish just about anything.”

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