CREATE A HIGH-FUNCTIONING Board of Directors – Address the challenge with expert advice

10/01/2010

by Michael Stalker
MCS Financial Advisors

RECENTLY, A FOURTH-GENERATION OREGONIAN in a family business asked me about developing a high-functioning board of directors. Based on my own board experience and research, creating a high-functioning board can be a substantial challenge.

For the purpose of this article, high-functioning means that board members have relevant experience and expertise; the ability to speak their mind in a proactive, constructive manner; and the ability to differentiate their role as a board member from other relationships they may have with other board members or the company. In public companies, the board of directors’ purpose is to represent highly dispersed shareholders’ interests and to hold management accountable for the performance of the company. While accountability is the objective, boards of privately held businesses will often find shareholders to be both concentrated and employed as company executives. Management’s accountability to shareholders becomes blurred when they are one and the same. However, additional stakeholders—like the community, employees, and family members—must be taken into consideration.

Finding interested and independent board members is more easily said than done. It is common for private company boards to be handpicked by an owner/manager to suit the owner/manager’s objectives, which often center on maintaining control with minimal accountability to stakeholders. It is not unusual to name the company attorney, accountant, or even financial adviser to the board. Before naming your attorney or accountant as board member, consider that you don’t have to appoint professionals as board members to get valuable professional advice. In fact, such professionals may be reluctant to speak their mind when their personal income is dependent upon maintaining their existing company relationship. Law and accounting are compliance (rules-based) professions that are often not geared toward entrepreneurial risk-taking, competitive strategy, or management, and appointing your lawyer or accountant to the board can enshrine one professional’s viewpoint and exclude others.

Are there exceptions to the above? Yes, provided the business owners are clear about what they want from their professional board members beyond their expertise, and the professionals can differentiate their roles and responsibilities as board members—rather than as family members, employees, managers, strategic partners, or knowledge vendors (attorneys, accountants, financial advisers)—before entering the board room. Board members should be encouraged to consciously disconnect their other roles within the company before convening as a board. Giving board members a written job description with an explanation of their fiduciary duty to the welfare of the company (not to other individuals or their self interest) is a good start.

How do you know when the board is working? When it engages one to two times per year in difficult yet civil conversations—those conversations that create a sense of camaraderie, shared purpose, and accountability; and that result in changes in policy, behaviors, strategy, and sometimes personnel to the betterment of the company.

A great paper on empanelling boards of directors for private family businesses can be found in “Guidelines for Family Business Boards of Directors,” by Suzanne Lane, Joseph Astrachan, Andrew Keyt, and Kristi McMillan in the June 2006 Family Business Review. The paper suggests board membership of five to 12 directors, and advises that board member compensation be the equivalent of the CEO ’s daily rate (calculated by dividing the salary by 250 annual working days). Provide a board manual and require that each member acknowledge reviewing its contents with their signature. The National Association of Corporate Directors offers a guide for creating the manual.

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Michael Stalker is the founder of MCS Financial Advisors, a nationally recognized SEC Registered Investment Adviser. He has also served as an expert witness in securities litigation.