Getting more out of your Board of Directors

By Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

With many companies – particularly early-stage ones – the Board of Directors is seen as little more than a legal necessity. But it can be so much more including an important force for growth and a gyroscope that keeps things on course and sure-footed.

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I work with a lot of CEOs who are trying to move their companies out of the mid to high single digit run rates. The journey from five to twenty million in annual revenue is one of the most difficult in the evolution of any company. CEOs need to reinvent themselves at least two or three times during the process.

The senior team at five million will be radically overhauled and resourced by the time the company hits twenty million. The cottage culture will have given way to an increasingly professionalizing one. The competition that the company faces in their business development efforts will be better resourced, smarter and more efficiently managed.

By the time a company reaches the high teens in annual revenue, the whole question of governance becomes a significant issue

. Management will be spending a lot more time managing the business. The original team, with their overblown titles, will have been replaced with new faces that actually have the skill sets necessary to carry them.

In the best of all worlds the recruiter who had the title VP of HR is now replaced with an individual who understands, and can effectively deal with, the HR issues that can bring a company down. The controller who had the title VP of Finance or CFO has been replaced with a person who can manage banking relationships, oversee an increasingly complex financial reporting system, keep track of a complicated options and equity ownership situation and effectively manage relationships with investors and potential investors. There may be a more experienced COO and possibly even a Chief Administrative Officer (CAO) on the team.

One of the most significant changes in corporate resourcing occurs with the board of directors. Partially as a result of Sarbanes-Oxley and partially as a result of the demonstrated risks of inadequate board supervision, there are many more good boards and more good directors on boards than there used to be. The change began with public companies to be sure but has begun to spread to private ones. Even emerging companies are organizing and recruiting board members to serve on audit and compensation committees. The more enlightened institutional investors are increasingly insisting on having experienced board members in lieu of their own representatives.

A CEO who is facing the need to overhaul an existing board in order to support and control faster growth faces a set of challenges that can be daunting even in the best light. Here are just a few guidelines for board membership and management that may help:

1. A Working Board: Make sure that you organize a small working board. Large boards tend to be passive audiences for presentations by management. You need to have a manageable group of committed people who will sit around a table and actually engage in collaborative discussions about issues, trends, plans, challenges, etc. For most companies below the twenty million in annual revenue, five or six is more than enough and a dozen is way too many.

2. Avoid Celebrities (or people who are convinced they are): I once gave a lecture to a class that was focused on entrepreneurial issues. They had been divided into teams and charged with developing a business concept and working through the planning stage. My lecture was on advisory boards and how to build them as business development engines. One of the projects had a higher-education twist and the team had thought to recruit college presidents. I pointed out that these people don’t work for a living anymore. They are fundraising celebrities. Another CEO had put together a board of successful entrepreneurs who had cashed out of their businesses and were ‘hobbyists’ board members. She was frustrated because none of them wanted to do any heavy lifting. Celebrities like to think that their name is important enough to make a difference. This is mostly untrue. Workers tend to focus on making meaningful contributions to present problems. Pick the workers every time and your board will work for you.

3. Independent Directors: Your board should have a majority of independent or outside directors. The best possible board will have only one insider – the CEO. In fact, it is rarely a good idea to have the CEO also be chairman of the board. The two roles are inherently in conflict. The function of any board of directors is to protect and extend shareholder value. They do that by effective oversight of management. Independent directors can meet that fiduciary responsibility much more effectively. The brutal fact is that a group of inside directors who see each other on a regular basis and have been regularly drinking the corporate bath water is a waste of time and money. It is also an indication that management has an aversion to adult supervision.

4. No Service Providers Please: Keep your lawyers, accountants, investment bankers, commercial banks, business partners and, if possible, your investors off of the board. For most of these categories, you’ve already paid for their best thinking. All of them will have agendas that will, sooner or later, conflict with their obligations as directors. By the way, I do make one exception to this rule – intellectual property. If the company is involved in the development and deployment of new intellectual property, I consider it prudent to have the counsel that covers those issues on the board.

5. Avoid Promoting Corporate Espionage: Don’t allow your board to become a link to your competition. Be very careful who you allow into that inner sanctum. The board should be privy to the innermost trade secrets of the company. In order to do their jobs effectively, board members will have to understand the strategic and tactical plans that the company is operating under. They will also need to be familiar with innovations that are about to be launched against competition. Board members who have conflicts of agenda or loyalty should be avoided.

6. Facilitate Contact Between Board Members and Management: Make sure that you encourage your directors to interact with and have access to key members of your senior team. For a board to do its work effectively members need to have well based assessments of senior team members and their thinking on critical issues. Most board meetings will involve presentations by selected members of your team. Give directors the opportunity to evaluate those people before they are asked to evaluate their ideas. A benefit from this policy is that over time senior management will get to know individual members of the board. Often important mentoring relationships will develop – major advantages result as the experience of your board members works in service to your team.

7. Set and Enforce Metrics: Board members are properly accountable to the shareholders – and to the shareholders alone. It is very important that there be a clear set of metrics for continued board membership. New board members should understand what is going to be required of them, be clear that their fiduciary relationship is to the shareholders rather than the management and be aware of the various reasons for which they may be removed prior to completion of their term. Accountability yields results.

8. Thievery is Seldom a Good Policy in the Long Run: Don’t steal the time of those who would help you. Companies that do not compensate board members for their contributions end up with ‘charity boards’. Even at the early stages, you need to recognize the willingness of very substantial people to help your company grow. At first, equity accumulation in the form of options may be all that you have – and that is what you need to use. But, as the business grows, you should stand up a policy that includes a retainer, honorarium for meeting attendance and a formal way to recognize extended service. You also need to be sensitive to the risks that board service brings. In the early days you may not be able to afford D&O insurance but you should put a policy in place as soon as possible.

9. Disclosure is Vital: Complete and open disclosure to your board members is critical not only to the future of your company but to the financial well being of the directors. Board members tend to react negatively to lies by omission – and these lies always come out – so don’t do it. As a matter of policy, err on the side of more disclosure. Full disclosure is one of the best ways to build trust between your team and board.

10. Oversight is the Name of the Game: An effective board is all about management oversight. If you build a corporate culture that sees them as outsiders and ‘enemies of the state’, you will lose the battle to reap benefits from the board and, over time, will lose key members of that board. I recently watched a substantial portion of a board dissolve because senior management had formed a cabal which cut out most of the board members. As a result, and within an amazingly short period, some very important resources left the board. It may seem easier, and even rational, to avoid the close scrutiny of an effective board but, in the long run, avoidance is simply a bad option. Subject your team and yourself to board oversight and the chances of succeeding with your company will go up sharply.

A couple of comments about the process of overhauling existing boards might also be in order. First, most early stage companies take a rather informal approach to constituting their first board. In many states, there are requirements for a minimum number of members and those are generally selected from the team and their immediate family. The process of overhauling or professionalizing a board can cause serious stress when it becomes necessary to remove charter members. As daunting as this process may seem, it is important that it takes place. All board membership should be seen as temporary and the decisions about who will be on or who will leave the board should be solely in the hands of the shareholders. As a company grows it needs a more and more effective and well resourced board of directors. You ignore these needs at not only your own peril but at the peril of other team members, the future of your company and the interests of your shareholders.

Finally, the restructuring of an existing board is best done with an outsider’s eye overseeing the process. This may be either a consultant who specializes in board design and population or a sitting outside board member. In any case, management should have only a contributing role in the restructure. The alternative is equivalent to letting the foxes design the hen house.

© Dr. Earl R. Smith II

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Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic adviser to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration

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