Four Steps to Establishing a Board in a Private Enterprise
High-performing boards take time to design properly, but — once established — can add significant value to an enterprise.
So you have decided that your company would benefit from a board of directors. Where do you start? What do you do? How long will it take? Here are four major steps you can follow to begin your journey towards good governance.
Determine What Type of Board
If you are the owner or CEO and want to maintain total control, be the decision maker and retain accountability, but would appreciate fresh insight, observation and experience from outside experts, perhaps an advisory board is for you. As CEO, you hire and fire the advisory board. They are not accountable or liable for corporate decisions and actions. The CEO is not obligated to follow their advice.
The advisory board can bring experience and credibility. These individuals can act as a sounding board to the CEO and they can provide insight into new customers and markets. They can provide feedback to the CEO and enhance the environment and discipline for regular reporting and processes.
However, a legal fiduciary board may be a consideration under one or more of the following:
- If you want to pull back from the business and want strong oversight for the CEO and management;
- If you are looking for a large infusion of capital or major change in the equity structure including a change of control;
- If you have significant family challenges with succession or operations;
- If you want stronger controls and oversight of the business; or
- If you feel the business has outgrown your experience and could benefit from a bigger picture view.
A fiduciary board with legally appointed directors will be more complicated to set up and will require attention to corporate governance issues, protection of shareholder’s rights, securities law, liability and other areas of concern. This type of board hires and fires the CEO, engages in strategy, manages risks, deals with succession and is responsible and accountable for the performance of the company.
An advisory board is often a good place to start as it is easier to establish. However, an advisory board does not have the same accountability and responsibility as a fiduciary board which may limit productivity and effectiveness, in particular if you are looking for the board to be transformative or impactful or deal with crises or big decisions. It is relatively easy to change the type of board over time, so making a choice and getting started is more important than selecting the right type of board for the long-term.
Select an Effective Chair
The selection of the board chair is a critical decision — even more important than picking the type of board. You will be working closely with your chair for years to come and you want to ensure it will be a solid and rewarding relationship. An effective chair will help establish the governance process and expedite the recruitment of directors. The chair and the CEO jointly establish the culture and tone at the top for the organization, including the board.
Searching for a board chair can be difficult. Local chapters of governance organizations, such as the Institute of Corporate Directors (www.icd.ca), and executive search firms can help with a search. Check with your business network, includingcorporate advisors such as accountants and lawyers. You are looking for someone with solid business acumen and success, who has experience with boards and with whom you will be comfortable working.
You want someone who will give advice and ask questions, but not someone who walks in with all the answers and tries to take over. This person will have to draw out the views and skills from all of the board, so you do not want someone who wants to run the show on his or her own. The person has to be flexible enough and have the time available to work with your business. You need a good listener to ensure that he or she knows what you want and need from the business. Meet with several candidates and discuss your business with them and what they think a good board looks like.
Design the Board Operating Practices
One of the key objectives of a board, in particular with private enterprises, is to ensure the organization is successful and satisfies the objectives of the shareholders including their short- and long-term goals, risk appetite and exit strategy. Create a document (often called a board charter) outlining the objectives of the board, the roles and responsibilities of directors, and operating norms. Consider the ideal size of the board and the committee structure to achieve the mandate. Review how many internal directors are required in addition to external independent directors. Assess the expected time requirements from the board and determine the fees you will offer the external directors. Determine term limits for directors and director succession. Having a simple framework in mind will not only help expedite the efficiency of the board, it will also help with recruitment of directors.
Recruit and On Board Directors
The board chair will work with you to jointly develop the skill matrix you want from directors on your board and to brainstorm potential candidate board members to fill the positions. Typically, you do not want to fill your board with your current advisors or consultants to the company, such as the firm’s accountant or lawyer. It is also advisable to avoid close personal or family friends — you want independent directors that can maintain a business relationship. We suggest filling the director slots one at a time because you want to consider the nature and mix of business skills, networks and personal attributes to ensure maximum diversity and synergy amongst your board members.
An ideal board will act as a team and will have a distinct culture working to achieve the goals of the company. It is desirable to have a well-planned on boarding process that gives directors a thorough background of the business. You want them to be acquainted with the history and competitive nature of business, the industry forces currently affecting the company and the strategy of the organization. It is always advisable to have some directors with experience in the business and some with an outside point of view. If possible, select a director (or directors) with an understanding of the wants and needs of your customers and suppliers.
What you do not need is someone who will dive deep into the operations of the company and offer his expertise at that level. The discussions at the board table should be undertaken with an understanding of the corporate operations, but at the strategic level. These people will ensure the company sets and lives its strategy and create the foundation for a profitable and robust future.
Having a high-performing board will add value to private enterprises and potential valuations in the event of a sale. There is no right or wrong answer to designing and establishing a board. It is a team, just like any other team in your organization. Establishing a high-performing board will take time, so ensure you start the process well in advance of when you believe you need it in place and operating at a high standard. Set the bar high, focus on acquiring talented directors and challenge the board to help drive the performance of your organization.