When entrepreneurs seek counsel on developing their business -- whether the goal is to accelerate growth, add new capabilities, provide governance or improve profitability -- I frequently offer the same advice: Consider the make-up of your board.
Business owners are responsibility rich and time poor, so it’s no surprise that creating, maintaining or engaging a board of directors may not be a high priority for private companies, particularly when it is not required. Nonetheless, sound advice from a strong board with intimate knowledge of your business can be invaluable to good business strategy and operations, and can cultivate competitive advantages. In fact, a recent private company board survey found nearly half of participants categorized their boards as “indispensable” or “very effective” at driving corporate strategy, according to Lodestone Global.
If your goal is to attract outside investment, or if you are considering a sale at some point in the future, the board of directors can be critical to the process and to reaching a successful outcome. As an investment banking advisor to private companies, I have witnessed firsthand how strong boards can be a great asset and source of strategic thinking for clients. For example, there was a family-owned financial services firm that sold at the top of the market in 2007 at a very favorable valuation. The interesting part is the family had no previous intentions of selling, instead grooming their son to run the fast-growing and profitable business. But, a veteran board member, recognizing the market environment and future economic risks, encouraged the family to test the market for a sale -- a wise decision.
In creating an effective board, first think about your ideal composition and what skills, experience and personalities would be most beneficial for your company.
The most constructive directors for entrepreneur-led companies tend to be those who have built and run companies of their own; sector-specific experience is especially valuable. Consider your management needs -- are there gaps in experience or expertise where a board director could provide guidance and support your strategic goals? Another good approach is to seek prospective board members who have built departments and teams, and have deep expertise in certain subjects such as law, supply chain or accountancy.
Finally, in terms of target size and construction, aim to strike a balance between executive and non-executive directors. There is a no magic number, but often private company boards of five to seven directors work best.
While attracting directors with the best minds and most relevant experience is the top priority, the second should be empowering them to offer their objective, candid advice -- even if this means pushing back against the chief executive or status quo. Creating an environment for this type of candor is easier said than done for entrepreneurs who are protective and passionate about their businesses, but a conscious effort to do so can pay dividends.
Another important element in ensuring maximum board value is to incentivize members by seeking an alignment of interests. Rather than just offering cash compensation, consider paying directors a combination of stock and cash. Granting a form of equity encourages a longer-term commitment to the company’s future success. Often, directors are paid half in cash and half in stock. The stock allocation forces directors to think about the business over the longer term and creates a vested interest in the outcome, and typically, in time, the stock is worth more than the cash payments.
Review and recruitment
Once you have assembled your board, set the terms to ensure there are opportunities to rejuvenate the membership over time. It is a good idea to set three-year reviews to ensure the count, competencies and mix of directors meet the evolving business needs. Some of the most successful companies have a committee to conduct a board review annually. Defined terms and autonomous committees are especially useful, considering board members themselves are “less effective in taking proactive steps to ensure that they maintain a proper mix of skills,” according to a 2016 survey on board director evaluation and effectiveness by the Stanford University Rock Center for Corporate Governance and The Miles Group.
Should the review determine that the company needs to pursue a new board candidate with a certain set of skills or business connections, it is imperative to approach potential prospects effectively. Established connections are often the best place to start, so turn to your network and those of existing board members. Business advisors can also be good referral sources. Lawyers and bankers, for example, have broad and diverse connections among colleagues, peers and current and former clients. Finally, if these avenues prove unfruitful, there are a number of recruitment consultants who specialize in finding candidates for board positions.
As you move forward, bear in mind the impetus for adding board members is rarely a result of major company changes or shifting strategy. More often it is driven by a desire to continuously fine tune the business and its direction, and successful board appointments should be based on trust, respect and collaboration -- attributes to consider during the selection process and nurture throughout a director’s tenure. At Cascadia Capital, as advisors to entrepreneurs and family-owned private companies, I can testify from personal experience just how important a board of directors is to a company’s success.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by the Entrepreneur.com.ph editors.