“I don’t need or want a board of directors!” This is the view of many CEOs and owners of small to medium-sized companies. Getting advice from their accountant, lawyer, or golf buddy is all the help they need. “I’m doing OK.”
If your goal is to grow your company, then creating and working with a fully functioning board of directors will materially improve your chances for success. Operating as a resource, a coach, a big question decider, a risk manager, a monitor of progress, and the center of governance, your board can be a valuable asset for your company.
Some boards are passive and inactive. Some are fully engaged and contributing to the success of the company. I call these engaged boards High Value Boards.
High Performance Is A Choice
Setting high standards and expectations for yourself, your team, and your company is an option. You can choose that path, or you can choose a less challenging path. Think about a board of directors for your company in that light.
If you believe your company will meet your expectations mostly on the basis of decisions you can make by yourself with occasional advice from advisors in your circle, then don’t bother with an active board. If you have high performance expectations for yourself and your company, putting a High Value Board in place should be one of your core building blocks.
A Board of Directors is a Pain in the Butt!
Being your own boss and not accountable to anyone is an easier way to run a company. Many company owners started their business for just that reason. The argument against a board that sets expectations and holds the CEO accountable goes like this:
- I am doing OK without a board.
- A board takes a lot of my time and my team’s time.
- I have to educate the board about my business.
- How can they help me when I know more than they do?
- My board is my founding partner and my primary investor. No one else matters.
- A board is expensive.
- The board will not grow my revenues or profits next quarter.
Creating a High Value Board does require an investment of time and a relatively modest expense. And the return on that investment will not be in the next quarter financials. If you have no investors or family members expecting long term profitability, then a lifestyle company with no one looking over your shoulder could be the way to go.
If you, your investors, your team and extended family have higher expectations for the company, the improved performance and long term value creation are well worth the hassle factor of having a High Value Board.
Why Have a High Value Board?
The board must assure that the company complies with its public charter as a corporation. While that responsibility is at the core of a board’s role, this discussion focuses on the value the owners and senior leadership of the company receive from a High Value Board.
Added Resources – Board members bring their network to the company.
Coach, Advisor, Sounding Board – Every CEO needs trusted advisors and coaches who understand the company and will listen and advise without an agenda of their own.
Accountability – The board is the forum for establishing plans and goals for the company. The board reviews and evaluates performance on behalf of the shareholders.
Risk Manager – The CEO is responsible for offense. The board is responsible for defense. What could go wrong – really wrong?
Short Term vs Long Term – Striking a balance between short term and long term performance is always difficult. The board is the venue for setting that balance.
Credibility – Investors, lenders, customers, key recruits, and collaborators want assurance your company will be successful. Their willingness to invest funds and time rests on their assessment of the capabilities of your team, including your board.
More Valuable Company – The combination of leveraging board resources, seeking counsel, being accountable, avoiding big mistakes and building credibility will make your company more successful and more valuable – for your shareholders and yourself.
What is the Board’s Job and Its Role?
The board of directors does NOT manage the company. Management of the company is the responsibility of the CEO and the leadership team.
A High Value Board will:
- Provide governance for the corporation – compliance with laws & regulations
- Provide shareholder representation
- Hire and fire the CEO
- Approve strategy, policies & procedures
- Monitor performance
- Manage risks
- Approve material transactions
- Review and approve financial plans and reports
- Assure accurate reports to shareholders – equal visibility to all shareholders
When the board is diligently performing these roles over time – not easy to do – the overall performance of the company and its leadership will improve. Higher expectations produce higher performance.
The board’s role in a non-public company can be quite different depending on the ownership of the company. Non-public companies can be owned by:
- a single founder
- multiple family members
- VC or PE funds
- a founding team
- a founding team and outside investors
Ownership is an important differentiator because the board’s role will depend on how ownership of the company participates on the board, and what its needs are from the board. In the case of a CEO with 75% or more ownership of the company, that owner could make all decisions herself. But if she is smart, she will create a board of directors who will provide independent counsel to help her be more successful.
In the case of a single outside owner or controlling shareholder such as a VC or PE firm, the board’s role is to represent that owner in its supervision of the company management. The board’s role is to get the best leadership to run the company and execute on plans consistent with the owner’s financial goals.
For companies owned by a wider group of shareholders – still a private company – the board acts on behalf of all shareholders. Major decisions will be brought to the board, including who is the best person to run the company at this point in time. In cases where the owner(s) manages the company and controls the board, that owner looks to the board to answer: “Are we doing this right?” and “Can we do better?”
How the Board Does Its Work?
The board works by consensus whenever possible. The board’s process is dialogue, probing questions, what if, what can we agree on?
Board organization includes:
- Board Chair – The chair manages the board and its agenda in consultation with the CEO. For smaller companies, the chair is often the CEO.
- Board Committees – Audit and Compensation are standard board committees. Other committees are created to address the specific needs of the company, such as strategic planning or M&A.
- Board Size – Generally, the board will be 5 to 11 members – an odd number. If the board is much larger, members see their role as less important.
- Board Members – The CEO should be a board member. Major outside investors will be represented on the board. Independent board members bring specialized expertise or a broader understanding of how companies similar to yours operate and compete. Diverse points of view are essential when expressed constructively.
- Board Compensation – Compensation is some combination of cash and equity. More equity in smaller companies and more cash in larger.
- Executive Sessions – Executive board meetings without company management present are a must. For lots of reasons, discussions are more open and frank when the CEO and other management are not part of the conversation. If the CEO is the board chair, the board should select a lead independent director to conduct executive sessions.
Making Your Board of Directors into a Value Asset for Your Company
Creating and maintaining a High Value Board of Directors can make your company more profitable and more valuable. Here are steps you can take to make your board into a powerful member of your corporate team and improve your chances for success.
- All corporations must have a board of directors. But you, as the business owner, must decide whether your aspirations for the company and yourself warrant the time and expense of a High Value Board.
- Create a board with a combination of relevant expertise and diverse experience and points of view.
- Include board members who will commit the time to understand the company and do the work you need from the board.
- Major investors will want board representation. Be clear that being on the board means they are representing all shareholders and not just their interests.
- Invest your time to educate the board. They do need to understand the policy, procedures, culture, strategy, risk, and governance.
- Don’t keep secrets from the board. Trust and candor are essential.
- Ask for feedback, options, advice – don’t be silent hoping the board does not ask questions.
- Make the board part of your team – not a problem to be managed.
Creating and maintaining a High Value Board of Directors can make your company more profitable and more valuable. If you have high performance expectations for yourself and your company, your board will be one of the core building blocks. The board will operate as a resource, coach, big question decider, risk manager, monitor of progress, and center of governance. A strong board will make your company stronger and make you a stronger leader.