Your company already has at least one director – you. As your business grows, you may notice the increasing tension between working “in the business” – your day-to-day operations – and working “on the business” – developing future strategy, creating policies to support business performance and dealing with compliance issues.
Eventually, your company will get to a point where it will benefit from ‘outside’ or ‘independent’ directors whose experience will help you work “on the business”. These external directors bring valuable experience to guide your company through different growth stages.
Corporate Governance and Board Evolution for profit SMEs
When do I need to expand my board? Most companies expand their boards to help them prepare for a major growth step, such as:
- Raising capital through an initial public offering (IPO)
- Transitioning from family to professional management
- Moving into a new market
- Planning or experiencing significant expansion
- Minimising business risks
Others seek outside help when they encounter new issues, recognise an experience or skill gap, or need seasoned operators to guide them through the daunting challenges any business faces.
For some, notably those in the financial sector, an expanded board is simply an industry requirement.
What is the benefit of expanding my board?
- Better business performance: Independent directors can bring additional skills that your business may be lacking. They can also contribute their experience, especially if they have been through the growth stage of a company, like yours. Independent directors offer you an invaluable source of expert advice and act as a ‘sounding board’ outside of your friend, colleague and family networks. They also introduce their networks that you and your company can draw on.
- Improved access to capital: Outside expertise can improve your company’s positioning and credibility in the market. Establishing an independent board demonstrates that you are committed to good governance and compliance. If you are trying to raise funds, investors will have a greater degree of comfort if they can see real independence demonstrated in your board and an audit committee, chaired by at least one experienced director with financial expertise.
- Management accountability: By distinguishing between management and oversight you take the next step in forming a business with intrinsic value. This enables greater attention to be paid to both governing and managing respectively. Managers become accountable to the owners, who are represented by the board.
What can the board help me with?
The law imposes a number of important duties and responsibilities on directors. A group of directors working within a board structure is particularly helpful in bringing together expertise and advice, in areas such as:
- Strategic direction: ensuring your company develops and implements business plans, strategies and policies to operate with profits and sustainability in mind
- Performance: helping you set and monitor performance targets
- Compliance: ensuring your company complies with its legal and accounting requirements
- Risk: ensuring your company identifies and mitigates risks and looks for new opportunities
How big should my board be?
Your board should be large enough to give you access to diverse skills and experience, yet small enough to operate cohesively and efficiently. The number of board members you determine is appropriate is articulated in your charter or articles of association and can be altered over time if your company’s needs change.
Ideally, your board should also consist of at least one (or more) external, non-executive director(s). Non-executive directors have become an important requirement for sound corporate governance because of their ability to exercise independent judgement in the best interests of the company.
Non-executive directors can also assist guide the board and give an impartial view. They often help to take the ‘heat’ out of discussions.
Who will make a good director?
Your first non-executive directors should be people familiar with your industry and the challenges of emerging companies - ideally someone who has practical understanding of growing a SME. You also need someone you respect, trust and believe you can work with. Also its important they have the time to dedicate to your business.
It is tempting to ask trusted family and friends, or your existing lawyer or accountant to be a director. They are already advisors to you and your company. Remember the purpose of expanding your board is to introduce new leadership, governance expertise and skills.
Also, if directors are to add real value, they shouldn’t be ‘yes people’. They need to be experienced business people with the confidence to challenge management when warranted.
Not every director needs to be familiar with your industry. Professional directors often acquire this knowledge and bring other complementary skills gained from their experience serving on boards. However, it is usually considered appropriate that your overall board composition includes some people with industry experience.
Construct a list of skills that you believe you need and set about finding the right people with those skills. This is the key to constructing a board.
How do I find independent board members?
Traditionally directors are drawn from a pool of former CEOs, lawyers, accountants and financiers. While these are important sources, your company might need other expertise, such as strategy, audit, risk management, IT, human resources or marketing.
Write a job description listing the industry background, relevant experience and specific skills you are seeking. The Australian Institute of Company Directors can assist you in finding talented independent directors via their online service, Directorship Opportunities, (companydirectors.com.au/directorshipopportunities). This service is available to organisations seeking new board members from our pool of members who are seeking new board appointments.
How do I remunerate them?
Remuneration can take the form of cash, equity or a combination of both. The compensation for the director of a small company is usually substantially less than that of a larger company. Many smaller companies offer shares or options to increase the attractiveness of such roles, or because of funding constraints.
Characteristics of an effective director
- Experience as a director
- Able to dedicate sufficient time to your business
- Specialist skills e.g. financial, strategy, human resources, etc
- Judgement and perspective
- Asks probing questions
- Track record of success
- Brings networking opportunities
- Understands the divisions between management and board
- Independence and objectivity
- Willingness to challenge ‘sacred cows’ in a non-confrontational way
- Intellectual curiosity
- Good cultural fit