Archive for September, 2018

Boards: Why, When, What and How to Build the Best Advisory Group for Your Business

September 2, 2018

WHY? The reasons for having a board are varied and include:

Strategy – independent views / voices can challenge and improve strategic decision making with other perspectives, plus help guide your business

Expertise – bring in others who know the industry, or a provide skill that is missing or needs oversight

Succession Plan – you may want to move on to another business or retire; thinking about in advance who is going to take over is important

Innovation – outsiders can foster modernization, improvement

Governance – a formal board process will ensure a company is properly managed

Credibility – quality names will add to the integrity to your company

WHEN should my business get a board?

Establishing a board isn’t necessary for all entrepreneurial ventures; venture-backed companies routinely start out with a board from day 1, and privately held companies, those that bootstrap their way to success, may be small enough to navigate day-to-day operational issues without one.

There are a few scenarios where creating a board not only makes sense but can be a critical part of growing the business to the next level.

Contemplating big moves – businesses that have significant growth opportunities or face significant threats or decisions can find a board very helpful.

CEO or owner decides to step down – a board can be instrumental in finding a new CEO, supporting his or her transition, and holding the person accountable to the owner’s objectives.

Next generation succession – a board can help with the leader’s plan to bring his/her children into the business, a handover that he/she may find difficult can be eased with a board composed of parents, adult children, and advisers who discuss business issues and make decisions together.

For many entrepreneurs who have become successful doing things their own way, the formality of board meetings, can be off-putting. But that doesn’t have to be the case. 

WHAT type of board is the best one for your business?

First, figure out what kind of board you want. There are a range of board types to consider, each appropriate for different situations. 

A board of insiders – composed of shareholders and company executives who come together to make decisions on key issues related to the business. This type of board can be appropriate for closely held businesses that are not necessarily facing major issues, but want to lay the foundation for the future by taking some of the first steps toward more formal governance.

A board of insiders can also be an effective way to involve the next generation of family owners in the process of making major decisions.

These types of boards are relatively easy to assemble, requiring little if any legal setup, and can be an effective forum in organizations that lack sufficient debate and interaction at the senior leadership level.  

An advisory board – generally composed of a combination of insiders and outsiders, but they don’t hold their positions on the board in an official capacity. Owners get the benefit of outside thinking and expertise, but in a less formal context.

Advisory boards work well for owners who are not ready to give up any control, but want advice and support on a range of issues. This can apply to businesses that have a relatively small ownership group that are facing major long-term strategic issues in which a consistent, outside perspective can be helpful.

A well-run advisory board is often more helpful than a formal board; it’s easier to recruit great people, everyone is independent and you can structure meetings in whatever format makes most sense.

A fiduciary board with a minority of independents – has a formal role in the organization; the members have decision-making authority laid out in the corporate bylaws and are also subject to the liability associated with board membership. Keeping the number of outsiders, those unaffiliated with the company or the ownership group, in the minority keeps the decision-making firmly in the hands of insiders. This can be more comfortable for owners who want to maintain their authority while moving to more independent oversight.

Ownership groups that are considering major changes in their ownership structure, either by raising capital or selling a part of the business, may elect to form this kind of board to demonstrate a level of governance and oversight that will be important for outside investors. 

A fiduciary board with a majority of independents – is what you see in most public companies and many large privately held companies. With a majority of outsiders, the board generally functions more objectively and independently than if it were dominated by insiders. While still acting on behalf of the owners, the board is more likely to drive the strategic agenda and have more authority.

These boards also typically can and need to attract members with a higher level of expertise and experience. Most privately held businesses that pursue this route have an ownership group that, for a variety of reasons, has decided to turn the majority of the key decisions over to a board. Perhaps the founders have sold their stakes in the company, ownership has passed on to a next generation of owners who don’t know much about the business, or the owners are preparing to go public or pursue some other liquidity event.  

HOW to proceed?

Once you’ve made the decision to form a board, how do you actually move forward?

  1. For a first-time board, you should aim for 5-9 members, to ensure a range of opinions but not so many that everyone will be fighting for airtime. Consider looking for people within your network to serve on your board before going to a search firm or recruiting more broadly.
  2. With regard to pay, you should expect to pay board members enough to make them feel appreciated, but not so much that they feel like they are doing it for the money. One useful rule of thumb some companies use is they compensate the board at a daily rate equal to the CEO’s effective daily rate.
  3. Finally, no friends, customers, suppliers, or other connected individuals who are obviously underqualified or has a conflict of interest; they can compromise the effectiveness of the board. Everyone you choose for your board should be there because he or she has something to contribute and is willing to deliberate the issues carefully before, during, and after the meetings.

Once the board is up and running, here are a few guidelines to get the board off on the right foot.

  1. Make sure the board functions well as a team. It is as important to get a group who works well together as it is to get people with the right experience or expertise. Effective discussion and decision making requires good chemistry, so interview for personal fit and character as well as what is on the résumé.
  2. Give the new board members some breathing room to be effective. Initially, it can be tempting for you as the leader/owner to set the agenda, dominate the discussions, and focus only on what you are interested in. You need to make sure you are listening, especially early on. After all, you formed a board, presumably, to get support and guidance from others.

Consider going as far as giving the chairmanship or other important responsibilities to other members of the board to distribute the balance of authority.

  1. Define the board’s authority clearly. Be clear about what decisions they can make and which ones they cannot. This will help focus the discussions on what they can affect and reduce confusion between the roles of the board, owners, and CEO.
  2. Finally, set the tone that every board member works on behalf of all It can be tempting for board members to align with one or a group of shareholders, especially if they were introduced to the board by said shareholders. For the board to stay focused on what is best for the company and thus the entire shareholder group, they should avoid pushing a particular shareholder’s agenda.

To address your fear of somehow losing control by bringing in a board, it’s important to make clear that the board reports to you (and your partners, if you have any) as the owners, not the other way around. This is generally documented in the corporate bylaws. You, as owner(s), will retain the ability to make the key decisions, including selecting board members, while delegating only the decisions you choose to the board.

Many owners look back at the founding of their board as a critical moment in the long-term success of their business and in their own success as owners stepping away from the business.

Understanding that boards can be designed to fit the unique needs of every business can ensure that you get the expertise and support you need without the unnecessary bureaucracy or any unintended loss of control.

If you consider why, the range of options for what type and how to build a board, you’ll be far better positioned to know when you’re ready for one.