Every public company has a formal Board of Directors with fiduciary duties to shareholders. However as the owner of a private company I’d like use this post to highlight some of the objectives, benefits and costs of various forms of Boards.
The Advisory Board
This has become quite popular over the last 10 years in the States. It is rare in the UK. The concept involves the CEO forming a team of advisors who meet with him three or four times per year. It can include other executive directors of the company. Often the CEO will invite a business associate with a specific skill set, to add that know-how to the strategy and tactics required for success e.g. M&A or new product development or legal expertise. Advisory Boards have no legal standing and in many ways are mostly just a gathering of successful professional people aiming to give advice to the CEO from a distance.
I’ve become very cynical about what Advisory Boards can achieve, compared with more formal alternatives (see below). I’m sure there are exceptions but in my experience they suffer from the following:
- They don’t meet often enough to really understand the current issues that are affecting the business.
- The expectation of attendees are not clearly set out leading to a talking shop that rarely achieves real strategic and operational insight.
- The CEO is rarely held accountable for actions agreed upon.
- Few companies that form Advisory Boards have robust formal strategic plans. This leads to discussions lacking strategic context.
- The rewards being offered to attendees don’t reflect the commercial reality of Board members time.
- Members to the Board are chosen because they know the CEO, rather than because of the skill set that’s needed to drive the scaling of the business.
Formal Board
There are reasons why Venture Capitalists and Private Equity Players demand a new formal Board structure that is created contemporaneously with their investment! It adds layers of accountability, skill sets and focus that didn’t exist before. Of course it helps that all of this new energy has a balance sheet pregnant with cash to deploy.
- You are building a business to launch an IPO one day and you’ve reached say $10m in profitable revenue.
- You have become big enough in your sector to consider acquisitions as a path for growth.
- You see great potential in expansion into overseas markets.
- You want to raise significant growth capital, say $5, to $20m in the next 5 years.
- You are growing at 40% plus and are moving quickly out of your own comfort zone of experience.
- Your management team’s experience is being stretched and you are missing playbooks to help you move to the next level.
- Use your strategic plan to identify missing know-how in your executive management team. Headhunt people in your network and outside your network to find a shortlist of candidates.
- Define a performance profile for each outside director you want to appoint. This is a list expectations, as CEO, you desire from that person.
- Create a management pack of information that you can create on a consistent basis every month. This should include a narrative of the previous month’s trading performance against plan and all relevant key performance issues. See previous post – What I know about management dashboards.
- Establish a formal agenda and timetable for meetings (at least 10 per year). Board meetings require a standard pack of information to be sent out digitally by the 8th working day after the month end, at the latest. Board meetings should be scheduled for the next 12 months in advance. See previous post.
- Cost – use cash and shares, cash, or just shares. Expect to pay in the range $25,000 to $40,000 per year or equivalent. The best outside directors are busy people. Work out your personalized sales pitch. Why would they spend precious time with your company? Remember these people will come to Board meetings totally prepared, so your are paying for their prep time as well their time at the Board.
- Keep it small to start with, probably no more than five directors.
- Warn prospective Board members that they will be expected to share contacts and facilitate introductions where relevant.
- At the start of the first formal session, have your company lawyer address the Board on the current legal responsibilities of each director. This can be repeated periodically to keep everyone up to date.
Alternatives
If you feel that Boards are not for you it might be worth considering a CEO peer group. In some ways they can achieve almost as much as formal Boards on certain operational and strategic matters. I’d certainly rate them higher than Advisory Boards. The key is to find a good group with non-competitive CEOs in it and secondly to find a great chairperson. Both are key. Check out Loren Carlson’s web site as a great example (of course you can join a CEO group and have a great Board as well).
Hope that helps. Like the way we think? You’ll love the way we work.
