Role of Boards of Directors in Small Companies

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The Role of Boards of Directors In Small Companies
Importance of a Board
Boards of Directors are common among high-tech start-ups and fast growing companies, and are mandatory for public companies. They are, typically, key contributors to the success of those companies. Most boards of directors are composed of experienced businesspersons, investors and others who can provide expertise in the direction of the venture. They yield sufficient power to replace the management team if they consider the performance to be less than acceptable. Commonly, they receive monetary compensation and in many cases, equity participation as well. Being responsible for the business, board members are exposed to personal liability, thus forcing the company to provide costly Directors and Officers Liability Insurance coverage.

Boards of directors exist to hold management accountable for achieving the business plan, creating shareholder value and assisting the owner/CEO in growing the enterprise. They also provide advice and counsel, but their primary function is to ensure accountability. A strong board can also help a young company build credibility in the outside world.

Most owners of small or midsize business perceive the keys to success and long-term growth to be new products, new markets and solid management. Most small businesses don’t have a board of directors because they cannot afford one and because their owners don’t think they need one. In fact, the perception of most small business owners is that “a board of directors is only for big business.” This cannot be further from the truth though, as most entrepreneurs desperately need a source of advice and support, and the accountability of having to report to someone.

Accountability is a key to the success of entrepreneurial ventures. Business owners love the fact that they report to no one; as owners they have the “God-given right to procrastinate” and consciously or unconsciously, this is one of the major driving factors for many people becoming business owners. The flip side, however, is a lack of accountability that too often leads them to complacency and failure. As entrepreneurs, they get too involved in the day-to-day running of the business, in firefighting, in doing the things that they like or they feel comfortable doing, while neglecting the leadership activities and eventually they lose sight of their driving vision. The end result is that the business doesn’t evolve, and owners eventually find running the company increasingly unpleasant or beyond their capabilities.

For private companies, putting together a board with outside directors is optional, but there are undisputable reasons to have one. Assembling a team of diverse, active directors sets a course for long-term stability of the company and having that external source of accountability is key for keeping companies, and particularly privately owned businesses, moving forward. The reality is however, that most small business cannot afford a costly board of directors, and thus, they must find other effective ways to get the accountability and help they need.

Advisory Boards
An advisory board is a viable alternative. Companies can get tremendous benefit from thinking outside the box; this may mean approaching business executives in very different industries, or someone who sees the world of business from a very different perspective. Setting up a team of advisers can provide the entrepreneurs with valuable outside guidance.

The entrepreneur who starts a business on a great idea but has no managerial experience, can be “lost” in the hard world of business. Seasoned entrepreneurial executives who have been through it all before can guide them and help them avoid pitfalls. It is a fact that very few entrepreneurs have all skills needed in running a business. It's rare for someone to understand administration, operations, finance, sales and marketing, and human resources, and to be a great leader as well. So it makes sense to find board members who can complement the skills of the entrepreneur.

For many start up companies, the “board” ends up being the founders of the company and perhaps the accountant, attorney, family and friends. However, there is huge value in expanding the board to include outside directors -- those who do not work for the company, are not family or friends, but offer their time and advice to help shape and guide the company. There is a price to pay for these benefits, as the founders give up some control when they put outsiders on the board.

A board of peers relieves the feeling of “it’s lonely at the top” that most owners and leaders of small enterprises have. Entrepreneurs need a forum where they can openly express their ideas, concerns and plans. In every company there are many issues that the CEO cannot openly discuss with employees; i.e., plans that affect those inside the company, but an outside board gives him a valuable sounding board where he can openly and candidly talk about them.

Selecting Members
Once the purpose of the board is clearly defined, the CEO must dedicate the effort to recruit the right board members. They must be the best people available who fit the purpose; they must have the expertise to help in the management of the company and a shared understanding of what the mission and needs of the company are. An effective board is composed of outsiders who have been through the entrepreneurial process and understand the operating issues that a growth-oriented company typically faces.

If the advisory boards are composed of CPAs, attorneys and other professionals who work for the company in their profession, the board may fail. It is difficult for them to give disinterested opinions because they are paid by the business and they don’t want to lose it as a client. Also, having a bunch of “yes-men or women” in a board maybe good for the ego of the owner/CEO but they will not contribute with innovative ideas or harsh criticism sometimes needed.

It is important to recruit board members that have similar values to those of the CEO so that the board would not be a mismatch with the culture created by the owner/CEO. He/she must be clear about the expectations and must make sure the potential board members agree with them. Personal chemistry does matter; it makes sense to take the time to find qualified outsiders who have a good rapport with the company's leadership and an informed interest in its industry's challenges.

It is clear that having a board of directors or advisers can be very useful to the entrepreneurial CEO; however, it is not a question of forming or joining a board and expects results automatically. He/she must be willing and able to be completely open and truthful with it and to dedicate effort and time to the board and its directives or advice. Communication with the board must be frequent, candid, and complete about all aspects of the business, good or bad. The board cannot help the CEO develop strategies or solve problems if it doesn’t know what’s going on.

What type of board?
What is the right type of board for a small company? Can the company afford a highly paid board of outside experts? Is the CEO/entrepreneur ready to report to a body of outsiders? Can he/she interface openly and humbly with them? Can he/she accept that a group of outsiders who previously had no role in the company, will “tell him/her what to do?” After all, he/she is the one who put all the sweat and tears in forming, growing and managing the company. Is an advisory board or a managing board best suited for the situation?

These are choices that the CEO must make to select the best alternative for the business. The decision on whether to have a board with outside directors should be based on an understanding of the value expected from the board, the needs of the company and the needs of the CEO/entrepreneur. A board of directors that is formed without well-defined purposes or with the wrong expectations is doomed to fail.

The most common type of boards is paid boards with outside directors who meet to monitor the progress of the company. If everything is going well, they tend not to have much to say. If there are problems or issues, they are often critical of the CEO and the management team and can take action of some sort. A board can also meet more frequently and offer significant ongoing support and help the owner or management team in the strategic decisions affecting the company.

The working board brings the CEO into regular contact with knowledgeable people whose wide experience can prove enormously helpful. The working board also helps the CEO fight the isolation that comes with leadership no matter what the size of the company. Since management must report to the board regarding all aspects of the business, the working board brings a helpful discipline to the operations of a closely held firm. The board also can help resolve family issues surrounding the small or midsize firm, particularly when management must deal with disgruntled family members. Another tangible advantage is that a board gives the firm visibility in the outside world, connecting it with financing sources, acquisition targets, strategic partnership opportunities, and with the community in general.

Nevertheless, paid boards also have significant disadvantages. In addition to the high cost and the issues already discussed, some entrepreneurs don't want to spend time recruiting members, planning agendas, and luring advisers to meetings. Not every CEO of privately held corporations is fond of independent boards of directors because, by definition, the working board strips the CEO of his or her autonomy, and for many CEOs that’s a good reason not to have one.

Many privately held companies are opting instead for informal advisory boards. As elected members, directors have a fiduciary duty to the shareholders and to the corporation and are potential targets of lawsuit; consequently, they must be insured by the corporation with D&O liability insurance. Advisers don't face the same risks; as a result, a very viable alternative that is becoming very popular is for busy entrepreneurs to turn to peer advisory groups, in which local businesspeople meet regularly with a facilitator and help one another solve problems.

Alternative Boards
In their best form these alternative boards are formed and facilitated by specialized organizations that have developed systems proven in the multiplicity of boards formed within them, and improved with the experience generated in the large number of boards managed. The system relies on the combined experience of the members in their various fields, bringing to the table a wide range of expertise. They offer small and mid-size business owners independent views that are based on a variety of approaches to the solution of problems. They also act as sounding boards and infuse each member with valuable new ideas. One of the key advantages of these alternative boards over the paid boards is their much lower cost and the absence of liability of the members.

Another key is that each member shares their company strategy and action plan, as well as their personal visions and missions. It is the strategic vision that is so difficult to maintain when you’re spending all your energy making the business work from one day to the next. Consequently, one of the priorities of these boards is the guidance provided by the facilitator to develop the vision, mission and strategic planning of each of the member companies. The plans are reviewed by the boards and followed throughout the implementation of the strategies and tactics.

Another key to success is the willingness of the participating business owners to expose the details of their businesses to the group, under the protection of confidentiality. Since only non-competing businesses are allowed in the same group, members talk about touchy business issues, such as selling a business or firing an employee that they may not be able to discuss with their employees.

Final Analysis
In the final analysis, each individual business owner, President and CEO must make an honest evaluation about who they are and where they are most comfortable before choosing the kind of assistance and support that will be suit their needs. The worst thing they can do is do nothing. You don’t know what you don’t know!

Stevan Wolf , The Alternative Board Delaware Valley

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