What Is Private vs. Public Board of Directors?
Comparison of a private vs. public board of directors reveals various similarities and differences between the two groups.3 min read
Comparison of a private vs. public board of directors reveals various similarities and differences between the two groups. While the boards of private and public companies are fundamentally similar in structure, they differ in the rigidity of their protocols and compliance requirements.
Overview of Public Versus Private Corporations
The two general categories of organizations are stock corporations and non-stock corporations. Stock corporations divide into public and private corporations:
- Public corporations are large companies that actively trade on exchange markets such as the New York Stock Exchange. The general public typically knows about such companies because the media gives these companies generous coverage. Examples of public companies are Microsoft Corporation, Google, and Apple, among others. Public corporations must adhere to strict rules, and their revenue must reach the multimillion-dollar range.
- Private corporations are smaller companies that don't participate in exchange markets and have fewer rules and requirements.
Organizational differences between public and private corporations dictate specific requirements for the boards of directors of both type of companies. While general rules and responsibilities, such as the duties of directors, election protocols, and meeting formats, are the same for private and public enterprises, the public boards of directors must follow many more elaborate procedures and requirements because of a greater liability.
The boards of public companies must consist of independent business executives with a wide range of expertise, such as:
- Corporate strategies
All board members must commit to at least 200 hours per year of meeting time.
Directors of a public corporation must present the issue to the board before voting a certain way. In a private corporation, directors can vote a particular way as long as there is no harm to:
- The general public
- Minority shareholders.
The Culture of a Private Board of Directors
Private companies are typically family businesses or partnerships, and these close relationships determine the company's culture. Private companies may offer stock or shares, even without trading on the stock market. Often, the CEO is either the founder or the main shareholder.
Having the CEO as the major shareholder makes it impossible for the board to veto decisions or to fire the CEO. In a private enterprise, the board of directors usually plays the role of an advisor. Since private companies don't have to follow Sarbanes-Oxley (SOX) regulations, managers can control what information they share with the board.
Public Boards Face Increased Regulations and Scrutiny
According to SOX, public corporations must disclose their relationships with other companies and people to prevent any conflict of interest. Their boards of directors must be independent and highly qualified. The boards are in charge of:
- Hiring the CEO.
- Deciding on the CEO's compensation.
- Strategic planning for long and short terms.
Public corporations must file their reports on time and make sure they are consistent to prevent any doubt whether the information is complete or correctly presented. They must offer a clear and detailed explanation about all numbers in the reports.
Differences Between Serving on a Public and Private Company Board of Directors
- Information disclosure is the main difference between public and private companies. Public companies must fully disclose their financial statements and have complete transparency of their relationships with other organizations and individuals. Having the complete information is often an issue for the boards of private companies. It happens because of outdated financial systems, management's excessive control of the information, the absence of internal systems, and other reasons.
- Ownership also serves as another big difference between public and private companies. While public companies' boards are responsible for corporate strategizing and hiring or firing the CEO, boards of private ventures often act as advisors to the CEOs and have no power to veto a decision or to fire the CEO.
What Private Companies Can Learn About Board Structure From Public Companies
- Board independence: Compared to public companies' boards, boards of private companies tend to be smaller and less independent as they usually include owners, company lawyers, and accountants. Attracting outside directors is a good business practice, which allows the company to benefit from an outside perspective, independent decision-making, and accountability.
- Board size: Larger boards have an advantage because of larger skill and expertise variability.
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