Special Report: ENTERPRISE: At Your Service: CORPORATE GOVERNANCE
YES, YOU SHOULD HAVE A BOARD--THE RIGHT ONE
To many small businesses, a board of directors is one of those trappings of Corporate America that seems to bring little or nothing to the party. Stocked with a spouse, a cousin, and a lawyer or accountant, it convenes annually, at best, to comply with state laws. Worse, it costs money.
By taking such a lackadaisical approach, you may be missing an opportunity. A formal, independent board of directors can be a valuable resource to help with long-range planning, strategic issues, and personnel matters. Outside directors bring a fresh perspective and new ideas. For fast-growing companies, they provide a crucial check on hastily executed management decisions. For family businesses, they can help sort out complex relationships and hold management accountable to family members who, though owners, aren't active in the business.
"Most important, it's a great stimulator of strategic thinking," says John L. Ward, a professor at Loyola University Chicago, whose research shows that companies with independent boards are more profitable, grow faster, and have better succession plans. "It's also a group of supporters and empathetic listeners who are enthusiastic and care for your success."
CONTROL ISSUES. A formal board stocked with outside directors also can give you clout when you're seeking financing, says Edmund B. Galvin, a partner at Coopers & Lybrand's Chicago office. "Lenders, venture capitalists, and, ultimately, shareholders are increasingly looking at the board as a way to assess management," he says.
While more private companies are setting up independent boards, only about 15% of closely held businesses currently have one, says Ward. Some owners don't realize it is feasible or that anyone qualified would be interested in serving. But any company with 50 or more employees should consider setting one up, says Ivan Lansberg, a management consultant in New Haven.
Many entrepreneurs fear that an independent board would rob them of control and the freedom to make quick, creative decisions. But in practice, directors have little control. Since they serve at the pleasure of shareholders, directors can easily be voted off the board. Moreover, boards are generally--and more appropriately--used to advise on long-term strategic matters, where battles over control are less likely, says Lansberg.
For a company with fewer than 100 employees, it makes sense to have three outside directors, one inside director, and yourself, says Michael Janicki, who directs BDO Seidman's family-business consulting practice. You can retain a director for $2,500 to $10,000 a year, although fees depend on the size of the company and the frequency and length of the meetings. To keep costs down, hold quarterly meetings that last three to four hours. Also, try to find directors from the local business or academic community, to save on travel expenses. Directors' and officers' liability insurance is often a requisite for recruitment and may cost as much as $25,000 a year for a private company, estimates Janicki.
The best directors are often entrepreneurs from industries other than your own who may have overcome similar hurdles. Seek directors who can add skills that your management team may lack. Would it help to have greater expertise in marketing, finance, or operations? Look for people with some board experience, preferably with a for-profit.
Your professional advisers, attorney, accountant, or local executive search firms can help you identify candidates. Arrange an initial meeting to discuss your plans and to make sure you're compatible. Once you've selected board members, provide them with written guidelines so they will understand their responsibilities. Janicki suggests imposing a renewable three-year term limit to provide nonperforming directors with a graceful way to exit the board. Make the most out of your meetings by sending directors a packet of materials ahead of time, including financial updates, company news, and a detailed agenda.
OBJECTIVE FEEDBACK. If you aren't comfortable having outsiders on your board, you can still get the benefit of outside advice by setting up an advisory council. These panels have many of the benefits of formal boards but don't offer directors as much prestige and won't carry as much clout with sources of financing. The fees paid to advisers would be comparable to directors' fees, but costly directors' and officers' insurance wouldn't be necessary.
If you do take the time and expense to set up a formal board, you need to be committed to consulting it on important decisions and taking directors' advice. "That's one of the most difficult aspects," says Janicki. Hearing objective feedback on your business decisions may take some getting used to, but it will serve you far better than the rubber stamp of a board of family and friends.
Making a Board Work for You
-- Keep it small. Three outsiders, one insider, and yourself makes sense for companies with fewer than 100 employees.
-- Plan quarterly meetings that last three to four hours.
-- To keep expenses down, pick the best candidates from the local business community. Look for skills your management team lacks.
-- Write guidelines so board members understand their responsibilities. Impose renewable three-year term limits.
DATA: BUSINESS WEEKBy Amey Stone in New York