Much has been written, and even more spoken, concerning the value of introducing formal governance in private companies. While larger enterprises may have made the transition naturally, smaller companies, particularly those that are closely held or family businesses, may struggle with the formalities and more rigid processes that come with formal governance. A necessary first step in the transition to formal governance is widely accepted as the addition of independent members to the enterprise’s Board of Directors.  

In this article, the authors first present arguments that illustrate the value of independent directors, and through a progression of logic, discuss issues central to a company and describe how independent directors can provide guidance and improve business performance. Then, the authors introduce thoughts concerning a set of barriers that typically spring to life when a family or closely held business contemplates the transition to formal governance. 

The Value of Independent Directors for a Private Company 

1. Objective Oversight and Accountability 

Independent board members bring an outside the company perspective unbiased by the internal dynamics and lived experiences of those that often have built and run the company today.  As such, independent directors are positioned to see thing differently and provide impartial evaluation of strategy, risk, and execution performance. They are guided by their fiduciary responsibility to ensure both the board and executive leadership decisions are in the best interest of the company and its stakeholders. 

More simply, independent directors provide conflict-free advice. Whether a single independent director or the majority of the board, they can more easily identify sensitive issues which are difficult to surface by insiders thereby improving governance. Equally valuable is the independent director’s ability to explore and offer novel solutions to improve performance absent internecine influences.    

The inclusion of independent directors positively changes board dynamics and performance. Their presence alone signals to the company, investors, customers, and stakeholders alike that the company values increased transparency, objective governance and accountability which cultivates confidence in the company.   

2. Strategic Vision 

By the nature of independence from management, independent directors help to shift the focus from short-term gains to a future looking perspective that informs strategy, risk and succession goals. Some independent directors have extensive international experience, bringing relevant global insights. These fresh and broad perspectives help the board begin to think and act beyond the current conditions and help guide the company to exploit opportunities and avert risk that ensure sustainable growth and profitability. 

To that end, independent directors bring value to crafting strategic vision and dependent strategic positioning. They bring generalist insights from other industry, domains, and knowledge that aid them in interpreting the competitive and market landscapes in new ways that overcome hidden boundaries and blind spots.  

Navigating the turbulence created by the rate of change and convergence has never been more difficult. The board has a critical governance role in assessing the dynamic landscape and charting a course for sustained success. Independent members are well positioned to assist in offering scenarios and “what if” questions that raise plausible future events often driven by external factors. These plausible scenarios increase the preparedness of the board to govern the company in times of disruptive political, social, and economic shifts that create both new market opportunities and new types of risk.  

3. Enhanced Risk Management 

We now live in a new normal, characterized by incessant change that extends across markets and industries that serve them. These changes are driven by the rapid advancement and adoption of technology with both foreseeable and emergent risk to business enterprises.  Independent directors are critical to anticipate and identify known and new types of risk.  

Independent board members often have diverse backgrounds outside the company’s industry, education, and leadership experiences that bring novel approaches, and challenge inside or group thinking. The “outside” director draws on diverse and often different experiences to look beyond the boundaries of the company and market to identify external factors and influences that the company has not confronted in the past to include technology, financial, regulatory, or operational. 

The independent board members play a key role in compliance, ensuring the company adheres to applicable laws, regulations, and industry standards, reducing exposure to legal or reputational risks. Increasingly, the independent member’s position enables them to encourage the board to think about and direct the development of contingency plans for a range of emergent risks.  

4. Knowledge Gap Bridging 

Independent directors fill critical knowledge and skill gaps to fulfill a board capability matrix and provide effective oversight of management.  Many private companies have existing or emergent knowledge and expertise shortfalls across a broad range of areas to include strategy, enterprise risk, finance, technology, and regulatory compliance. 

Cross-industry insights brought by independent members benefit private governance by helping a company innovate and stay competitive in its field. Moreover, these insights enable the mentorship of executives and rising leaders, which directly contributes to near term performance but importantly helps create a bench of talent that enables leadership continuity and succession.  

5. Improved Decision Making and Board Effectiveness 

Independent directors enhance clarity of purpose by guarding agendas and guiding discussions that align with strategic goals and avoiding distractions or personal biases. Decision making is improved with effective prioritization that balances issues of immediate attention while ensuring consistent attention and decisions on long-term goals.  

Independent members often introduce decision-making tools and frameworks that enhance efficiency with clear frameworks that optimize finite board time for improved decision making. 

Boards that suffer from the lack of structure, process, and coherent agendas can be easily distracted and lose focus on the core issues requiring attention and decisions. Structured governance and meetings foster rigorous and focused discussion on critical topics that enable decisions that achieve productive outcomes. Within a well-structured and executed board process, independent directors are more able to offer alternative perspectives that enhance the quality of boardroom discussions, decisions, as well as projecting future agendas and required decisions.   

6. Risk-Tolerant Innovation 

No longer can the tried-and-true way of doing things guarantee future success. The pace of social and technological change today demands that business enterprises seek continual improvement, and most importantly innovation, to maintain competitive advantage. Companies that fail to evolve accrue hidden risk and will ultimately face crisis or failure. Independent directors encourage safe experimentation evaluated through a different lens of risk tolerant innovation. Growth necessitates taking calculated risks to fuel continual innovation judiciously balanced with a measure of stability and near-term predictability.  

Opportunity is contextual and fleeting and should be exploited when possible. Independent voices challenging the status quo that is comfortable and falsely seems to be less risky. They question practices that have been outpaced by time, no longer effective or efficient. They identify signals for emergent opportunities and propose forward-thinking strategies that competitively position the company for success tomorrow and beyond. 

Private companies with outside directors who bring knowledge of and experience with emerging technologies drive efficiency and innovation to increase competitive advantage. Much of a board’s uncertainty and reluctance surrounding technology adoption can be overcome by new perspectives, insights and know-how. Equally, this expertise improves overall board oversight while simultaneously empowering management.   

7. Strengthen Stakeholder Confidence 

Private company success is reliant on credibility, reputation, and stakeholder confidence.  An atrophy or loss of confidence can have catastrophic consequences to a company that are difficult to overcome. Every company has a unique ecosystem of stakeholders to include family and/or employee owners, investors, suppliers, workforce and customers. The inclusion of independent directors signals a significant shift in a commitment to professional and effective governance that can bolster confidence especially in times of uncertainty or crisis.  

The presence of independent directors on private company boards enhances customer and employee trust that might not be present with inside-only directors. It demonstrates a commitment to ethical practices, transparency, long term success, and confidence in consistently sound decision-making. These conditions are necessary to foster loyalty among stakeholders who exercise influence on sustained performance, especially employees and customers.  

Independent oversight is a key enabler for reputation management. An outside view questions assumptions to overcome internal blind spots that may have unintended negative consequences. By ensuring the company’s reputation is a key factor in each decision, it is actively managed and protected thereby anticipating and mitigating risks of public backlash or controversy. On the positive side, the resulting high confidence and trust can improve access to capital. 

8. Long-Term Viability and Sustainability 

Independent directors promote strategies that increase effective governance and inform effective cycles of management planning and execution that together cultivates resilience. The ability to build the capacity to absorb and adapt to uncontrollable factors ensures long term enterprise viability and sustainability.  Independent governance increases a company’s capability to successfully confront anticipated or surprise market fluctuations and industry disruptions to mitigate risk and seize unforeseen opportunities 

Growth-oriented governance benefits from the independent outside voice. They offer new strategy and goals that guide the company toward sustainable growth in new ways often not considered.  Dependent upon industry, company values, purpose, and vision they help to balance profitability with social and environmental responsibility.  

Long term viability and sustainability demand visionary leadership. Many private companies have been built on the vision, hard work, and commitment of the founders and employees that successfully struggled and found success. However, those experiences alone are insufficient to manage the evolving landscape of tomorrow. The transition to independent governance is a critical benchmark on the path to long term success. It guards against group think, questions the efficacy of current approaches, highlight new influences, and propose new ways of winning in the competitive space. They assure that the company remains adaptable and forward-looking in an evolving business landscape. 

Overcoming the Barriers to Governance 

Turning now to the common psychological and structural barriers preventing business owners (especially those in closely held or family-run companies) from making the transition to formal governance, for closely held and family-owned enterprises, the shift from relying solely on internal expertise to incorporating an independent board is a defining moment.  

While the benefits of outside perspective such as enhanced strategic clarity, risk mitigation, and improved accountability are well-documented and appreciated, many business owners are reluctant to embrace the advantages. Instead, these concerns give rise to hesitancy and are often overthought with focus on the downside scenarios. Because of their deep roots in culture, psychology, and even bias from experience, these concerns are frequently the principal barriers to establishing effective formal governance. 

1. The Fear of Losing Control and Diluting Authority 

Primary among owners’ concerns is the fear of losing control. In closely held businesses, control is frequently equated with the family's legacy and identity, making the introduction of outsiders feel like a threat to the established order. Owners worry that independent directors will dilute their authority or challenge long-standing family decisions. Anxiety will increase as the specter of change materializes. 

The Counterpoint: Business owners often overlook the practical reality that control is not automatically surrendered. If family directors intentionally maintain a majority on the board, they retain ultimate control while still benefiting from the independent, objective counsel of outside directors. Moreover, a well-structured Advisory Board with independent directors can provide most of the strategic benefits without the fiduciary mandates and perceived loss of control associated with a statutory board. 

2. Emotional Barriers: Embarrassment and Lack of Confidence 

Introducing an independent board invites scrutiny, which can tap into an owner's fear of embarrassment. Owners who are less secure in their position may worry that independent directors will suggest new ideas or challenge existing strategies, thereby reflecting poorly on their current leadership. 

The Counterpoint: A confident business owner embraces continuous improvement. In today’s complex and rapidly changing business environment, no single leader can possess all the necessary answers. Acknowledging this reality and leveraging external expertise will demonstrate maturity and strength, positioning the owner as an executive who prioritizes the enterprise's long-term health over personal ego. 

3. Confidentiality and Privacy Concerns 

Transparency is the foundation of effective governance, yet it clashes directly with the owner's natural instinct for confidentiality and privacy. Families may be reluctant to share sensitive financial data, nascent succession plans, or complex interpersonal dynamics with outsiders, fearing leaks or reputational risk. 

The Counterpoint: This risk is manageable through formal legal mechanisms. All directors, both family and independent, should initially sign a comprehensive Non-Disclosure Agreement (NDA) and further complete an undertaking annually to reaffirm the absence of conflicts of interest and their ongoing acceptance of the NDA terms. This formal practice reinforces the legal and ethical importance of confidentiality and provides an explicit framework for handling sensitive information. 

4. The Perceived Burden of Cost and Time Commitment 

Establishing and maintaining a formal board involves a tangible investment: director compensation, meeting preparation, and administrative support. For businesses with lean operations, this commitment can feel burdensome. 

The Counterpoint: While the upfront cost is real, the long-term Return on Investment (ROI) in risk mitigation, strategic clarity, and disciplined growth may well outweigh the expense. A high-functioning board provides proactive oversight that can prevent costly missteps, open new market opportunities, and streamline succession, all of which drive exponential value over time. 

5. Skepticism Regarding Value and Expertise 

Some owners operate under the belief that outsiders cannot possibly understand the nuances of their business or add meaningful insight, leading to a perceived lack of value from an independent board. 

The Counterpoint: This skepticism often stems from a misunderstanding of the strategic role an independent director play. Typically, directors are not meant to manage the day-to-day operations; rather, they bring diversity of industry experience and thought, an ability to think at a high level, a mindset that understands translating strategy into action, governance best practices, and quite often a valuable external network. To ensure value is delivered, boards should conduct an annual self-evaluation process to formally assess their effectiveness, output, and contribution to strategic goals. 

6. Navigating Family Dynamics and Succession Anxiety 

Independent directors inevitably risk touching the proverbial third rail in a family enterprise or closely held business: family dynamics and succession anxiety. Introducing outside voices to these highly charged areas can risk exacerbating existing tensions or forcing conversations about leadership transition that owners are emotionally unready to face. 

The Counterpoint: This is often where independent directors prove their greatest value. A well-functioning board provides a structured, neutral setting for difficult conversations. An independent director, often a seasoned professional, can introduce and facilitate dialogue around sensitive topics like succession, roles, and equity more effectively and objectively than family members alone. They serve as a stabilizing, non-partisan force. 

7. Resistance to Formalization and Director Selection Uncertainty 

Many entrepreneurial businesses thrive on agility and informality, viewing formal governance structures as bureaucratic or rigid. Coupled with this is the practical challenge of director selection uncertainty: owners may lack the networks or processes to find qualified, trustworthy independent directors. 

The Counterpoint: While formalization does introduce both structure and process, both are key to accountability and repeatable success, leading to a better ROI as noted above. Regarding selection, resources like the Private Directors Association (PDA) -among others- can help owners identify vetted, qualified professionals who align with the company's specific needs and culture. Often, no-charge board listing services are a component of the services offered. Further, skilled independent directors understand that "culture beats everything" and will work to ensure any changes are congruent with the existing or evolving family consensus. 

8. The Very Act of Taking the First Step 

When considering adopting a formal governance structure and appointing independent directors, it can be daunting to take the first step when it may not be clear what is needed and what must be prioritized. This lack of clarity may indeed be the single biggest hurdle, possibly eclipsing the fear of losing control discussed earlier. It might be better stated as, “You don’t know what you don’t know.” 

The Counterpoint: While simply appointing independent directors without thought as to purpose and desired outcome is unlikely to deliver success, there is substantial merit in committing to the process and charting a course to the desired destination. Often, a crucial conversation at the shareholder level can reveal where gaps exist and what risks or opportunities must first be addressed. Potentially, insights can be gained through conversations with the enterprise’s external advisors such as legal counsel, accounting professional, or business advisor. By committing to such a review needs may be identified, priorities established, and the correct combination of skills, experience and culture can be determined. For example, the exercise might demonstrate that the first step is to develop a strategy for the enterprise, and the appropriate independent director profile should include that expertise. Alternatively, it might show that role clarity and succession planning are priorities. Having both clear expectations and a process map can help the enterprise mature and evolve, and to successfully incorporate formal governance. 

Acknowledgement: The authors greatly appreciate the suggestions provided by Dennis Kessler of PDA’s Chicago Chapter in the development of this article.