In one of my earliest blogs, I talked about what makes a professional service firm successful. Specifically, I detailed ten aspects that were certainly important in my own company-build journey and that I have subsequently noted appear commonly in successful, high-growth organizations. In this essay, I talk about one of these – an effective board of directors – and why this needs to be a critical component of your firm’s governance (even at an early stage!).
Building an effective board of directors
I should say, specifically, that an effective board of directors and keeping on top of the discipline of regular board sessions is – without doubt – one of the key determinants to company build success I have observed. Like a business plan, the existence of a board discipline is not an infallible guarantor of forward success. I can say with near certainty, however, that businesses that do not instal such a regular, critical, part-independent, strategic, directional oversight of their affairs – invariably just meander along.
Corporate governance, as a topic, really emerged in the 1990s. Certainly so, in the US and UK, amidst the scandals of BCCI, Polly Peck, Guinness, Maxwell and – into the 2000s – with Enron and Worldcom. For large, listed companies the topic of the board, and the role of the company director, became increasingly regulated and focused upon as a plethora of enquiries (Greenbury, Turnbull, Higgs, Combined Code, Sarbanes-Oxley etc) sought to get under the skin of what had gone wrong in such infamous instances of corporate failure.
But, what has all this got to do with fledgling, owner-managed start-ups I hear you ask?
Well, in relation to the question of how you build a high-performing business – regardless of size and ownership structure – it is very important. Many of the lessons learned are directly translatable!
At the centre of this topic, is the role of the board. I would strongly advocate the establishment of an effective board from the earliest moments – even if you are a sole owner and this all feels a bit too grown-up for your stage of corporate development. The reason for this is that the existence of an effective board of directors accentuates the key difference between directing a business (working on it) and managing a business (working in it). The board focuses on the former and without it you are more likely to succumb to the very common situation of working hard but not smartly.
Please send me
My example board terms of reference
You see, most common themes of corporate failure are to do with misdirection not mismanagement.
There are tomes of guidance on the purpose, structuring and roles of boards, so I only want to point you to the headline, salient features here with an emphatic reinforcement of how key an element I believe this is in the architecture of a high-potential firm.
At its simplest level, the role of an effective board of directors is to do with performance and conformance as the following diagram illustrates. Its key tasks, therefore, are to do with foresight, strategic thinking and high-level oversight of the operational elements of the business.
Figure: Role of the board
In terms of structure, to best achieve this, there needs to be a mix of talent and representation but don’t feel this means a large construct. Even successful $billion-revenue PLCs are run by boards of less than ten members; certainly anything larger can quickly become dysfunctional.
At a certain size, and stage of growth, the separation of Chairman and Chief Executive is a key (and, in my mind, desirable) feature. From the very outset, however, I would strongly advocate including in this composition one or (ideally) two non-executive directors (NEDs). Well selected, these individuals can make an inordinate difference to your firm’s direction and, therefore, success.
At a practical level, you clearly have a firm to run so, whilst it is important that you build in this aspect of your firm’s organisation, board members can’t spend all their time preparing for, and attending, board meetings. The right balance and frequency is a question for you but a very typical arrangement is a quarterly, half-day meeting. A typical agenda will cover the aspects of the figure above as well as any additional, specific items (Reserved Matters) that the company has specified as being of board-level significance.
If you have yet to constitute a board, do so now. Ask around for well-referred, relevant non-executives. In advance of the inaugural session, start to complete a Terms of Reference (ToR) document for this forum (an important document that stipulates its composition, function, reserved matters, delegated authorities etc). You can sign up for a free example template ToR below.