Management: The A Team

A well-chosen board can supercharge your management. Here's how to get the best advisers working for you

Danielle Ayotte and Julie Dix were at a crossroads. In 1999, they had started Taggies to sell Dix's invention-a baby blanket made with soft satin loops for babies to play with. The pair had no business experience and relied on the occasional advice of experts recommended by their friends. But by 2003 their Spencer (Mass.) company was growing rapidly, and the hit-or-miss approach wasn't enough. "At every turn, it seemed we had another challenge to face," says Ayotte. "We kept going to experts, but in a very fragmented way. We realized we needed everyone in one room." They asked seven people with various specialties, from marketing to law, to sit on a board of advisers.

It was a wise move. "The board helped give us our direction in everything from financing to marketing and our internal structure," says Ayotte, who is treasurer; Dix is president. "We don't have a CEO, we have a board." The directors' advice aided them in boosting revenues to $1 million that year, up from the $750,000 they had expected. It has since guided the 23-employee company's expansion, both at home and into other countries. Sales in Canada and overseas accounted for about 10% of Taggies' 2005 revenue of $5 million.

As Taggies' founders discovered, a board can be one of a small business owner's most effective tools. Most company owners wear many hats, but it's the rare person who excels at everything. And even the most talented entrepreneur can benefit from the impartial counsel doled out by a board of advisers or directors. A board, says Craig Aronoff, co-founder and principal of the Family Business Consulting Group in Marietta, Ga., opens the door "to extremely good, experienced people you wouldn't be able to get access to otherwise." In addition, they can provide an entrée to potential customers and even funding sources. And they do it for considerably less than you would pay a consultant—sometimes even for free.

That doesn't have to mean you'll end up reporting to the board the way CEOs of public companies usually do. Instead, owners of privately held companies can choose to create an advisory board that they are not bound to obey. And entrepreneurs who still own most of their company's shares can even create a board of directors that's empowered to give advice but not orders.

Despite a board's usefulness, only about 20% of small businesses have boards active in decision-making, according to Frank Schneider, a small business consultant at Schneider Consulting Group in Denver. By law, every incorporated business must have a board of directors, but at many small companies that often means the owner and his or her kids rather than a group of experts who can really contribute to the enterprise. Many entrepreneurs worry that a board would just be more people meddling in a business that isn't theirs.

Of course, a board is only as good as the people on it. And finding the right members takes some planning. You'll want to determine your company's goals and then pinpoint people suited to each of those tasks. You'll also need to decide on the board's—and each individual's—role and responsibilities, as well as appropriate payment, length of tenure, and, in this litigious age, whether you need to buy directors' insurance coverage.

INVESTOR-BACKED companies typically form their boards at an early stage. But for privately held companies with a choice in the matter, it's a good idea to wait until your company is on its feet. "Companies first have to get their internal systems working well before they can turn their attention to a board," says Schneider Consulting's Kim Schneider Malek. When the time is right, "decide on your goals and what you want the board to do," says Barbara Weltman, a small business adviser in Millwood, N.Y. Think about the issues facing your business, as well as the areas of expertise in which you feel you are the most lacking. With those questions answered, you can write job descriptions noting the skills you are looking for. Do you want the directors to act more as a sounding board, or are you looking for mentors? Make a list of people you know who might be willing to serve on a board or refer you to potential advisers, including accountants, bankers, lawyers, and people you know through community associations. It's often best to have members with in-depth knowledge and experience in a single area you need assistance with, such as law or marketing, as well as someone who has run a business. One caveat: Avoid inviting friends to join, as they lack the objectivity you need. Also stay away from people who are already on the boards of competitors.

Don't get bogged down trying to arrive at a magic number of advisers. Experts recommend that your brain trust be no more than five people, including insiders. "Larger numbers slow things down," says Robert Anderson, a partner with the law firm of Hale Lane Peek Dennison & Howard in Las Vegas, who specializes in small businesses.

For Bart Whitaker, the time to form a board of advisers came two years after he became CEO of Whitaker Oil, an Atlanta chemicals distributor that his grandfather had started in 1923. While Whitaker says his father, the previous CEO, had disliked listening to outside advice, Whitaker himself was eager for it. In 2000, Whitaker invited three outsiders—a family-business consultant, a retired executive from a major supplier, and the former head of another family-owned business—to sit on the board, which at the time consisted of Bart, his father, and two sisters. Says Whitaker: "We've had the best six years the corporation has ever had," with sales last year of $65 million. The board urged him, for example, to create a long-term business plan and institute a formal budgeting process. And Whitaker credits the board's guidance in helping him install a more professional management approach, reducing staff turnover by 50%.

Small business owners have considerable leeway when it comes to paying directors and advisers for their time and effort. Directors receive far less than they might on a big public board, typically a stipend of $3,000 to $10,000 a year, plus a fee of $500 to $1,500 for each meeting. As for advisers, small businesses often don't pay them at all. Ayotte and Dix simply treat their advisers to dinner after each meeting. But Bob Michelson, CEO of Goliath Solutions, a $10 million Deerfield (Ill.) company that tracks the performance of retail displays, gives members of his board equity in the 50-employee company.

As you might guess, money seldom motivates people to serve on boards such as these. Aronoff even suggests choosing well-heeled advisers for whom compensation isn't an issue. More important, especially for retired business professionals and entrepreneurs, is the opportunity to stay involved in business and share some of the wisdom accumulated over the years. One of Whitaker's board members, Kenneth Hyde, is a former executive with Shell Chemical who did business with Whitaker Oil for many years before retiring in 1999. "Serving on the board keeps my thumb in the pie," says Hyde, who lives in Marietta, Ga. "I spent most of my career marketing. This gives me a different overview of business."

WHEN INVITING people to join a board, you'll want to make clear what they're getting involved in. Aronoff suggests writing a one-page description of your business that gives a general idea of its profitability and growth history, as well as its goals and challenges. Then call your potential candidates, explain that you're trying to build a board, and invite them to meet and discuss the possibility of serving on it.

You'll also need to lay down some ground rules in a written document, preferably in consultation with a lawyer. That should include details such as each member's length of tenure and the participation of nonboard family members. And, especially in cases where board members are former entrepreneurs with little previous board experience, make clear what you expect of them. "They have to understand that they are not there to manage day-to-day operations," says Schneider. "That is the job of management." You'll want their advice on big-picture issues, such as marketing campaigns, overseas expansion, and performance management systems. They aren't there to supervise your staff.

Some entrepreneurs, however, ask exactly that. Matthew Marolda is CEO of StratBridge, a 12-employee, $5 million company in Cambridge, Mass., that analyzes data for public companies and sports teams. Three years ago, Marolda enlisted five directors, paid them in equity, and turned them into a low-cost senior management team. For example, one person who excelled at sales was made, in effect, an acting vice-president for sales. "It was a way to find people who could add value, without paying for executives on staff," he says.

Most boards meet quarterly, although many entrepreneurs also meet individual advisers one on one. No matter how often your advisers get together, it may take a while for the group to jell. Six years ago, Wendy Lane, president of Lane PR in Portland, Ore., formed a four-person advisory board for her $2.5 million company. A good six months passed before the advisers really got to know her, and each other, well enough to function at top speed. Even a fairly like-minded group can disagree from time to time. And although there is no legal requirement for a business owner to follow the recommendations of an advisory board, you've asked these people for their assistance, and it doesn't make much sense to ignore them. If you do, you may find it difficult to hang on to board members.

Ultimately, no matter how much work you put into assembling the group, you should be prepared to rejigger its composition. As your business evolves, you may need to work with advisers with different areas of expertise. And you may find some members aren't offering the insights they once provided. "You want them to give you fresh ideas," says Aronoff. "Someone who has been sitting around for 20 years and saying the same things, they're stale." The simple solution is to replace board members when their terms have ended. Your board, like the other parts of your company, is a work in progress.

By Anne Field

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