Thinking about creating a board for your business? – Part 3 of 3
Considerations for a Board of Directors
Establishing a private company board of directors is a daunting and time-consuming task for any entrepreneur regardless of the size and complexity of the business. A board of directors has the responsibility to carry out their duties without conflict and to ensure that all decisions are arrived at in the best interests of the company and shareholders, and that all shareholders are treated fairly.
Board composition is a key governance area, which refers to the make-up of the board such as: board independence, committee structure, industry and geographical experience, functional expertise, competencies, gender, age, backgrounds, character and personal attributes, and CEO duality.
Boards are typically composed of three types of directors:
- Independent outside directors – those directors who have no personal connections or business dealings with the company;
- Affiliated outside directors – those with a pre-existing relationship with the company; and,
- Inside directors – those who are selected executive members of the company.
Board independence is another key area, which refers to the relationship between board members and the company; specifically, an independent director is a director with no substantial capital invested, no contractual obligations, and no relationship or ties to the business or its principals. However, tenure is increasingly being viewed as a significant factor in independence. The belief amongst many institutional investors is that long-tenured directors are more likely to be indebted to management and therefore less capable of independent thought and action. The current thinking on tenure best practices is that directors serve a maximum of nine years
Unlike a publicly listed company board of directors, a private company board of directors can be creative in the committees it establishes, which can be largely determined by the needs of the business. However, areas such as finance, governance, and human resources are critical to include.
Many entrepreneurs and family owned businesses experience the innumerate benefits to having a board of directors, and discover that the time and investment it requires to create, nurture and maintain one is of high value and very much worth the effort. Some key considerations include:
- A leader to Chair the board and direct meetings.
- Committee chairs to drive the mandate of the committees.
- Leadership of governance, compliance, and risk management oversight.
- Well run board meetings, creation of the agenda, and providing minutes.
- Set valuations for share issuance or investment.
- Represent the company and all shareholders.
- Provide needed expert knowledge and experience to help guide the business.
- Be an independent and objective voice on complex family enterprise issues.
- Take the long-term view for the next generation, and not just for the short-term.
- Provide leadership in times of crisis/conflict.
- Provide the framework for CEO accountability – assess performance, set compensation, hiring and firing.
- Hold management accountable to the vision, and business objectives.
- Contribute to the strategic direction that will sustain the company for the long term.
- Guide the company through any M&A, divestitures, or selling of the business.
- Diversity – Having a diverse board with the right mix of experience, skills, industry knowledge, perspectives, personal attributes, gender, and background, is essential for long-term value creation. Diversity of experience and thought is proven to result in better decision-making, and can be translated into a competitive advantage. Look outside your immediate networks to find qualified and diverse candidates.
- Hire members for a specific term, ideally 2 to 3 years so you have a built-in renewal mechanism. However, when the board is being established for the first time, implement a one-year term to allow you the opportunity to assess the individual’s contribution and fit.
- In order to have a high functioning board, concentrated effort must be put into the key elements that make it effective. These include:
- Ensuring the board has the appropriate composition;
- Identify and recruit the right people who possess a blend of skills, experience, characteristics, and perspectives, which are aligned to the business needs;
- Ensuring the culture of the board is transparent, inclusive and respectful;
- Appropriate governance structure, and regular review of board performance;
- Well-organized meetings, ensuring adherence to the agenda;
- No individual should be allowed to monopolize the meetings;
- Ensuring all members of the board is given the opportunity to participate; being attuned to the personalities and potential contributions of all members;
- Ensure the board has the right leadership to guide its members towards a shared focus on the organization’s strategy, culture, governance, capabilities, and building trust and confidence among all stakeholders.
Lansdowne Board Intelligence
This is not a guide to set up a board. Rather, it is meant to be a helpful overview for business owners who are considering whether or not they should have a board for the first time. Business owners are advised to retain experts to guide them when setting up a board.