Why Does My Private Company Need a Board of Directors?

April 1, 2014

By David Shaw, Founder and CEO, Knightsbridge Human Capital Solutions

Why don’t more private companies have a formal board of directors?

As founder and CEO of a successful private company, I’ve asked myself this question many times. I’ve seen so many organizations utilize advisory boards and networks of confidantes to guide their businesses. But they stop short of establishing a board with formal accountability and oversight. As a result, they miss out on the credibility and wisdom that a formal board provides.

In discussions, I’ve heard other CEOs express fears about “loss of control” that comes with a formal board. Or they complain about the administrative burden they would have to endure if large decisions had to be vetted through a board. Based on my experience, I believe these fears are profoundly overstated. Establishing and maintaining a board is neither onerous nor unmanageable — if you do it right, and for the right reasons.

The benefits of a formally constituted board
The first and most compelling motivation for establishing a board is accountability. With a real stake in the company, and a legal accountability to shareholders, boards are a magnificent source of balanced and objective advice and guidance. However, that is not where the benefits end.

A formal board can provide comfort to financial institutions, which tend to see the board as a sign of integrity. Shareholders will see the board as a means of protecting the interests of all investors, not just majority stakeholders. Customers will find solace in your board, especially if you have recruited directors of sufficient profile and reputation. And last but not least, a board can be a source of protection for employees, ensuring that their place of employment does not fall victim to the whims of any one individual. A board is the ultimate protection for the broader interests of employees and shareholders.

How to make it work
It goes without saying that the composition of your board is key to ensuring you reap all of the potential benefits. The size, orientation and philosophy of your directors will become part of the culture of your organization.

Size. Keep the number of directors to a minimum to make it easier to manage. Canada’s largest companies typically operate boards with a dozen or so members, although some can have upwards of 20 directors. As a rule, a board with at least seven members will provide diversity of opinion, and ensure healthy debate.

Diversity. Although many organizations believe that industry experience is paramount, diversity of experience and varied skills are valuable commodities for any formal board. Diversity complements the existing skill sets of the organization and provides new perspectives on ongoing challenges. And it guards against the tendency of some boards to become too introspective or stuck in their ways. At Knightsbridge, we don’t look for directors with expertise in the human-capital industry, but for expertise in areas where we may be lacking internally, such as real estate, technology, and government relations.

Independence. Ensure there are directors of sufficient independence to balance the influence of large investors. This is critical at Knightsbridge, where there are a few large shareholders as well as many smaller shareholders, including employees. Not only does this independence protect smaller shareholders, it also improves overall effectiveness and ensures the board does not get gridlocked when making big decisions.
Values and management style. Directors should share and embrace the values of the culture of the organization they are overseeing. The board, along with the CEO, sets the tone at the top that filters down throughout the organization. That does not mean that your directors should be clones of one another. Contrasting, complementary management styles ensure directors challenge one another and engage in the difficult conversations.

Reputation. Board members should have sufficient profile and gravitas. Having respected, well-regarded directors can be an enormous source of credibility for your organization. It will build confidence among shareholders, customers and employees alike. Knightsbridge was privileged to have the late Greg Wilkins, CEO of Barrick Gold, serve as the chair of its Audit Committee before he passed away in 2009.

The mandate. After constituting a board, it’s important to establish a mandate that will focus its attention on those issues that will bring the most value to the organization:

Overall business strategy: This may include issues such as the organization’s vision and values, service or product offerings, market penetration, acquisitions, innovation initiatives, and capital structure.
• Succession planning: The board is particularly well placed to press senior executives to identify an cultivate successors to ensure seamless management transitions.
• Integrity of financial reports: In the current market environment, investors and lenders demand spotless financials. The board can ensure that best practices are paramount in all financial reporting.
• Organizational culture: Too often, organizations are too busy with their day-to-day responsibilities to worry about culture. The board is that source of sober reflection on culture, including the keenly important area of employee engagement.

An effective board requires regular attention and maintenance. This is a group that, regardless of differences of perspective or personal style, must be able to work together. It must be able to disagree on certain issues, even vehemently, with the comfort of knowing that such disputes are kept within the boardroom. A dysfunctional board can, in some instances, be worse than having no board at all.

The responsibility for ensuring board effectiveness ultimately falls to the chair. This is a position that must be filled carefully. A good board chair is a source of guidance and expertise. The chair has an obligation to build and maintain constructive relationships with other directors, and with senior executives. In fact, a chair must be a mentor, coach, confidante and trusted advisor to the CEO and the executive team. Knightsbridge has been privileged to have Courtney Pratt as our Chair since 2006. His deep business, industry and governance experience, combined with exceptional people and leadership skills, have made him a trusted coach and mentor not just to the board and myself, but the entire Knightsbridge team.

A solid committee structure is key to an effective board. The chair will ensure that board committees are headed by strong, opinion-leading directors. Without fully functioning committees digging deeper into individual issues, the board will be denied key information when it comes time to make decisions.

The fears held by many private companies of establishing formal boards are, in my experience, misplaced. Boards are not meddlesome, bureaucratic millstones that limit an organization’s growth and progress. A board is a dedicated source of guidance and expertise. It can build new credibility, and spark confidence among lenders, customers and employees. Once you understand the full value that a board can bring, the question that arises will no longer be “Why should I establish a board?” The true question will be, “Why didn’t I establish a board a long time ago?”

David Shaw spent 23 years with PepsiCo, including four years as CEO of Pepsi Cola Canada, in addition to assignments in Australia, Singapore, and Turkey. In 2001 he founded Knightsbridge Human Capital, which now operates in Canada, the U.S. and the U.K. He sits on the boards of Fiera Capital, Brick Brewing Co. Ltd., and Mother Parkers Tea & Coffee Inc. He can be contacted at dshaw@Knightsbridge.ca.

This article originally appeared in the Director Journal, a publication of the Institute of Corporate Directors (ICD). Permission has been granted by the ICD to use this article for non-commercial purposes including research, educational materials and online resources. Other uses, such as selling or licensing copies, are prohibited.

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