Why should my company have a board?

Most of my startup and small business clients are operated by the majority owners – a founder/CEO holding 70%, for example, or the CEO who owns 100% of the company.

For each of these situations, its incredibly uncommon for the company to have a board. Why is this?

NB: I’m not talking about technical corporate governance compliance for corporations, which tend in these situations to have a single-member board of directors – unless they’re in California, of course (Section 212 of the California Corporations Code provides for a general minimum of three directors, with exceptions if there are less than three shareholders). I’m talking about having boards that function like traditional boards of directors.

What does a board really do?

These owner-operators think about the board’s function in a large public company – to serve as the agent of the shareholders to govern the activities of the C-suite managers of the business.

They’re half-right – that is the primary corporate governance role of the board in any corporation. Boards serve that function, but it’s not the only value they provide. And that’s why I’m writing this post.

What boards do is (1) select strategy, (2) supervise the CEO, and (3) advise and assist the company. They provide introductions to customers, strategic partners, new hires, potential buyers and targets, and advisers. A well-run board provides advice based on the range of specific experiences and skills across each of the directors. That advice is what these self-owned, self-managed, and self-governed business are missing out on.

What a board does for any of these companies is improve the quality of the discussion that is (should be!) part of the decision-making process for whoever makes the decision.

If you’re a majority holder or sole shareholder, you can still benefit from that improved decision process and the resulting advice, even if you don’t take it.

How can I benefit from a board without giving up control?

First, creating a board doesn’t mean that you have to give up the ability to control the company. For example, consider WH Shipping, a company my partner and I ran for a while that imported cement into the Persian Gulf. We kept responsibility for our material decisions, but we hired two senior executives to be on our board. We had regular board calls and received ancillary advice from time to time as issues, concerns, and outright problems popped up. We didn’t give them power other than the attention we paid to them, and they gave us good challenging advice.

There’s an anti-pattern here too. I know of a public company that was worth over a billion dollars back in the 1980s (back when $1B was an awful lot of money). The majority holder was also the CEO, who held over 70% of the shares. This was a public company, so it had a board then. It had a board through the 90s. It had a board into the early 2000s, when the value of the company was down to $10 million, including its real estate. And it still had a board a few years later when the company went through Chapter 11 with an equity value of less than $1,000. Yes – 1/1,000,000th of its previous market cap. There are a lot of bad investments, market-chasing pivots, and bad decisions required to do that. To me, the biggest single factor behind this slide was that the board – different people over that long period of time – essentially seemed to just defer to the CEO’s whims/decisions/ideas. By doing this, they weren’t doing the CEO any favors. Certainly the $700 million the CEO lost was not a fringe benefit of unfettered decision-making and an intellectual vacuum in the boardroom.

By depriving that CEO of challenging constructive criticism and advice, the change of better decisions evaporated because the process from broken from the get-go. Who knows how many of those board meetings didn’t even need to happen, for all the rubber-stamped non-discussion that occurred?

So one benefit of having a board is the value that you get from a higher level of thoughtful and challenging debate on strategic decisions.

What else does a board do for me?

Another benefit is that having a board and board meetings is that you will prepare for these meetings by
– preparing standard financial history and projections
– forcing yourself to make your decision process explicit, by revealing your facts and assumptions
– putting your sales funnel and progress on paper

I’ve used this Eisenhower quote about the value of planning more than once, but it gets more valuable each time:

In preparing for battle I have always found that plans are useless, but planning is indispensable.

aka:

Plans are nothing; planning is everything.

In fact, if you’re skeptical about going all the way and asking advice from outsiders, do the dress rehearsal: build a standard board package for your business and prepare it each month. Think about the questions you would ask your #2 if you were away and out of touch for a month. That’s a reasonable first draft of what should go into that package. Merely putting it together will help you dramatically.

The combination of these benefits is the difference between working in your business and working on your business:
– connections
– advice and assistance from outsiders
– the benefit of vigorous discussion
– the benefit of planning and preparing for a board meeting

So get yourself a board – even if they sit outside your formal governance structure, you’ll learn more than you thought merely by forcing yourself to outline, reveal, support, and examine your own reasoning.

1 Comment

  1. How do I create a board? — Rick Colosimo on March 4, 2016 at 8:03 am

    […] read my post on the benefits of having a board in your closely held company, and you’re convinced. You’re ready to move forward but […]

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