Many closely-held companies, particularly small to medium-sized ventures (say, $5 million – $100 million in revenue) are run primarily by senior management. Particularly where there is overlap between owners and executives, lines of decision-making can be murky, which means many companies de-emphasize the need for regular board meetings. But even in small, closely-held companies, good governance requires board oversight and good board oversight requires strength and diversity of the voices at the table. Rather than adding to governance complexity or increasing the executives’ workload, a well-constituted board should share some of the strategic planning role and increase the company’s stability and value.
Odd Number, but Not Too Many
To avoid a voting tie or deadlock, boards should have an odd number of members (but more than 1!). In closely-held businesses, particularly with a clear majority shareholder, the balance of votes customarily tips to the majority shareholder. On a 3-member board, for example, two members could be insiders and one could be an independent outsider. Or two could be chosen by the majority shareholder and one could be chosen by the minority. Although diversity is valuable (see below), do not assume that more board members is necessarily better. Board meetings will become unnecessarily tedious if members are there primarily to fill seats.
Valuable to the Business
Board members should understand the company’s business and some key aspect or aspects of the market or industry in which the company operates. Ideally, board members also bring to the table a network (of prospects, funding sources and industry players) that can enhance the company’s growth and strategic opportunities. Experience and reach, though, are not a substitute for fit. Effective communication and appropriate deliberation require mutual respect. Board members should be chosen for their technical expertise, but also for their ability to understand and mirror a company’s values. Both internal and external board members should contribute skills that enhance board discussions and outcomes. Ultimately, boards work in conjunction with the chief executive, but have to be willing to evaluate performance. The board can fill this role best when it comprises people who can appropriately assess management’s ability to achieve strategic goals.
Different Perspective
To paraphrase William Wrigley, if two people always agree, one of them is unnecessary. Diversity of viewpoint in the boardroom is critical, particularly for discussions about strategic direction. Consider adding board members who break the current pattern in some way. If not already there, add a woman, a person of color or another voice not currently in the majority. Research is powerful that diverse boards function better (and even achieve higher profits) than boards with more homogeneous compositions.
Ready to Work
Board members have a fiduciary duty to the company, which can be read to include certain important constituencies like the employees, the customers and the shareholders. Done properly, board work is time-consuming and sometimes complex. In addition to availability for actual meetings, board members must commit substantial time to reviewing materials in preparation for meetings and staying informed about the company, its industry and its prospects.
Willing to Speak Up
When companies are running smoothly and making money, board meetings can be peaceful and collegial events. Good boards, though, do not rest during these periods and soak up the prosperity. Proper governance requires constant attention to a company’s SWOT (strengths, weaknesses, opportunities, and threats). Find board members who are willing to challenge the current state and demand accountability from the management team about how things are going and what will be done to address risks and problems.
In short, good boards have a few smart, outspoken, careful people who are not (a) too beholden to the CEO, (b) too eager to hear their own voices, (c) too much like the other people at the table or (d) too afraid to speak up.
For questions on this topic or other issues related to your business, please contact Mary Beth H. Gray at mbgray@kleinbard.com or 215.496.7255.