Alexandra Cain investigates the finer details of when and how a small company should establish a board.
The question of whether and when to appoint a board is something with which many business owners struggle. While it’s easy to take a view that boards add a layer of unnecessary complexity to smaller companies, they are actually an effective way to inject fresh thinking into a business and challenge management.
But there are both advantages and disadvantages when it comes to creating a board for your business and it’s worth understanding what these are before appointing directors.
On the plus side, Grant Field GAICD, chairman of business advisory group MGI Australasia, says forming a board can ensure better corporate governance across a range of areas including purpose, corporate vision and strategic direction, branding, risk management, HR and accountability.
“Having a board also offers access to a wider skill-set and a broad level of experience and networks to draw on, as well as a greater degree of independent thinking. There is also the opportunity to bounce ideas off others. Two or more heads are always better than one,” he says.
But it’s important to remember engaging with the board will take time away from core business activities. Phil Owens, a business coach with The Bigger Game, argues if a decision needs board ratification to move ahead, it can constrain the flexibility small businesses need to pursue opportunities.
It’s also important to remember directors generally need to be paid. Costs vary depending on the nature of the board, as well as the size and industry of the business.
“For smaller family and privately-owned companies looking to set up a board for the first time, a director might cost between $2,000 and $4,000 per month or $25,000 to $50,000 a year.
“For larger family businesses with an existing board looking to replace a director, fees might fall between $3,000 and $5,000 a month or $35,000 to $60,000 per year or higher,” says Field.
However, it is important business owners do not let these figures deter them from establishing a board. Small businesses usually start out by appointing a more casual board of advisers who may not need to be paid, before creating a formal board of directors.
Another approach is to start out by working with a trusted mentor, before creating a board of advisers.
Andrea Michaels MAICD, managing partner of South Australian law firm NDA Law, explains that advisory boards help to improve the business’ strategic planning.
“It can also be a step towards making business owners feel comfortable they won’t lose control of their business by appointing a board. This is a common concern with family businesses,” she says.
Michaels also states that business owners and senior management should also have their own mentors.
“This can help them with their individual performance,” she says.
Owens says an advisory board is useful in a fast-moving business environment.
“Often advisory boards are set up for specific challenges rather than ongoing interaction.”
Keeping up appearances
Another option is a supervisory board, which can be useful for ensuring compliance and defining and managing risk, particularly in businesses that operate in heavily regulated spaces.
Judy Sahay set up a board of advisers when she established her digital marketing business Crowd Media 18 months ago. The seven board members come from a range of areas, including engineering, finance and media. She says having a board gives the business gravitas when pitching for work.
“It’s important to find the right directors for your company. We try to meet up every eight weeks over Skype, a phone call or a coffee.We’re capital raising at the moment and it helps having venture capital represented on the board,” she says.
Kent Aughey FAICD, executive director of Ashington, a business sales specialist and private family office in South Australia, has extensive experience setting up boards for his family business and his own company. He set up a board for Ashington, his family’s business, when it was in a transitional phase. That board was eventually retired several years ago and he is currently in the process of setting up a new board.
The initial board was an opportunity to introduce non-family members into the business to help bring different, unbiased perspectives into the company. Aughey decided not to include the business’ existing accountant on the board because he was already an adviser to the business.
Instead, the board comprised a lawyer specialising in the property sector, a finance expert and an investment banker.
“Having the board helped me to better understand due process and think more deeply about the governance aspects of the business,” he explains.
Benefits of a board for SMEs
There are lots of advantages for small businesses that decide to put a board in place. Importantly, a board structure adds value by offering a higher-level view on the business than those who are working in the business day-to-day can take. Because they are not connected to the operational aspects of the business, board members can stand back and take a bigger-picture perspective.
They are often more easily able to consider substantial issues such as risk management, governance and overall direction than the business owner. Boards can also add a layer of corporate governance that is often missing in smaller entities. By paying closer attention to governance, and subsequently putting in place more formal governance structures, businesses put themselves in an advantageous position when it comes time to sell the company down the track.
Finally, appointing board members with a diversity of skill-sets exposes the business to a wider set of ideas that can be helped to push the business forward, as well as identify new markets and customer segments.
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