As a business owner and CEO, you’ve been at the helm of your company through all of its ups and downs. You’ve successfully grown the business, recruited and trained an effective management team and together you are poised for additional growth. At this point in your company’s life cycle, you may be considering the establishment of a board of directors.
At their best, boards can provide invaluable guidance, leadership and insight at a higher level. But it isn’t always a slam-dunk. Don’t fool yourself – you could be setting yourself up for a nightmare unless you adequately address a number of key issues. Careful consideration and planning are essential to building an effective board. In this first piece of a three-part series devoted to boards of directors in privately-held companies, we discuss five board design and composition issues that we believe are important to consider before you launch your own board of directors.
- Official or Advisory?
What kind of board does your company need? Many privately held businesses opt for an advisory board that does not have an official role in finances or making decisions. With an official or statutory board of directors, the directors have a legal commitment to all of the stakeholders. This legal constraint, while causing directors to feel a deeper sense of responsibility, may also inhibit their advice and involvement. Regardless of the kind of board you ultimately design, you must be prepared to accept input and advice from your directors and to answer the hard questions. If not, you should NOT proceed any further.
Will your directors be compensated? This is a tricky area; however, you get what you pay for. Even modest compensation could heighten the directors’ level of commitment. One method for calculating a reasonable compensation is to determine your daily salary (excluding bonuses) and pay your board members for their time at that rate.
- Address Your Needs First.
It may sound appealing to create a Board position for someone you know well. However, it is more beneficial to consider the specific expertise or experience that is missing from your management team and recruit a person whose skill set is a good match for your company’s needs. These directors will complement your existing capabilities while adding a combination of new skills and experience to the boardroom. You specifically want directors who understand your business and who think strategically.
- Identify a Trusted Confidante.
There should be at least one person on the Board who you consider a trusted advisor and confidante. This relationship will enable you to share important thoughts and concerns generally not communicated to the Board or management team. This individual can also provide guidance in between Board meetings and offer open and honest feedback on your performance as CEO.
- Independents v. Investors?
If you have outside investors or financial backers, you will most likely add some of these individuals to the board. To create balance, you should also recruit directors who are independent in that they have no financial or other interest in your Company. These “independents” will provide another perspective when dealing with the big decisions that are likely in your future. A balanced mix of investors and independents will help foster constructive dialogue and consensus around important strategic issues.
To learn more about launching and managing an effective board, stay tuned to Working Capital for the second and third installment of our series on private company boards. Looking for professional help determining if your company is structured for success? RKL offers a wide range of resources and expertise in the areas of strategic planning, succession planning, benchmarking, mergers and acquisitions and more. Contact Paula K. Barrett, CPA/ABV, CVA, partner and leader of RKL’s Business Consulting Services Group or call RKL at 610.376.1595.
Contributed by Gretchen G. Naso, CVA, MBA, a principal in RKL’s Business Consulting Services Group. A Certified Valuation Analyst, Gretchen has extensive experience in general and family limited partnerships and valuations for financial reporting, purchase price allocation and gifting and estate tax purposes.