When Florida engineering firm PBSJ Corp. added the first outsiders to its board of directors in 2005, forced to do so by new Sarbanes-Oxley regulations for employee-owned firms with a certain amount of shareholders, the unease was palpable.
"It was a culture change for the firm, and it took a while for the board and employees to accept non-employees being involved in its governance," says William D. Pruitt, a retired CPA who was named to head the PBSJ board's audit committee. "The independents more represented the shareholders, rather than the management team, and there was a shift of power to the board." It would take a crisis for insiders to appreciate the independents' value.
That crisis was the audit committee's almost immediate discovery—via whistle-blowers—of an internal $36-million embezzlement scheme by PBSJ's former chief financial officer, among others, that had gone undetected for nearly 15 years.
"The investigation was managed independently by the committee, and sometimes it was uncomfortable for management, who could not be informed of the results until the end," says Pruitt. "It was long and expensive but very effective in cleaning up a huge threat to the firm."
Frank Stasiowski, another board outsider and president of design-firm management consultant PSMJ Resources Inc., says uncovering and resolving the scheme required 54 board meetings. "Had outside directors not come into the company and asked seemingly simple questions of accountability, the embezzlement might have gone on for another decade," he claims.
The perpetrators got jail sentences, and the company implemented significant oversight reforms. "I was at first slow to accept the independent directors, but I am so appreciative of what they did for PBSJ," says former CEO Robert Paulsen. "They provided superb mentoring and guidance to senior management while holding us appropriately accountable."
Pruitt remained on the board until 2010, when PBSJ was acquired by U.K.-based design firm Atkins. "Over my five years, the firm completely switched from a family partnership model to a board-led public-company model," he says. Pruitt says he will join the board of engineer NV5, a Florida infrastructure design firm formed by acquisition in 2010, when it completes an initial public offering now in process.
Changing Roles and Responsibilities
Boards of directors in industry companies may not face such dire challenges, but much is changing in their roles and responsibilities. As firms broaden in ownership structure, comply with new regulations and seek new growth in a tough economy, management is searching for directors with fresh input on long-term strategy and financial-management best practices.
Smaller, privately held firms also are reaching deeper into their ranks for expertise and diversity or even reaching beyond—bringing in "outsiders" as voting members or as non-voting advisers to raise board deliberations above day-to-day operational cacophony.
"The days of board members, insiders and outsiders, being selected because they are golfing buddies of the CEO or chairman are over. Directors have a heightened sense of fiduciary liability and insist that any board they serve on, public or private, is meeting basic standards of governance and professionalism," says Hugh Rice, head of contractor consulting firm FMI's mergers unit. "Having outsiders is viewed as bringing adult supervision to corporate governance."
Ian Rusk, managing principal of AE management consultant Rusk O'Brien Gido, says boards should not function "like just another layer of operations management, with directors advocating for their respective divisions, regions or offices, instead of focusing on the well-being of the firm as a whole. A board of directors should not be a congress."
Industry experts add that higher boardroom standards can translate to higher company value. "One of the big differentiators that we look for is not just financial results but also management and leadership capability, bench strength, and focus. When we see outside board members and a structured, strategic board environment, we tend to find a firm that is very serious about its success as a business," says Colvin T. Matheson, managing director of Matheson Financial Advisors Inc. "As an ex-banker, it usually gives me more confidence that I can expect a higher level of accountability and quality of information, which reduces risk. So, it reinforces some of the softer, behavioral aspects of creating shareholder value."
But reaching to the outside can have its risks, including making it harder for key insiders to achieve career goals of company board service, says Robert Wilson, former CFO of consultant Woodward Clyde who now is a an AE firm board member and adviser.