Why do people start their own businesses? In a wide variety of polls and informal responses, entrepreneurs say that one of the largest reasons is so they can be their own bosses. Sixty-seven percent of American entrepreneurs listed that as a motivator. While enjoying independence and control is valuable to owners, it can be challenging at the top. For this reason, many entrepreneurs create a board of directors or advisors to help them better manage their businesses.
Why Does a Company Need a Board of Directors?
While it can be satisfying to “report to no one,” it also means that for too many business owners no one is watching or evaluating what they are doing. No one is there to keep them on track. No one will tell them when they are making bad decisions. They also have no one to give them the benefit of their experience in business.
Some people can work very well without a boss. They will assess their companies, create a list of goals, and be disciplined about taking the necessary steps to accomplish them. They will carefully benchmark the results, taking stock and changing course when necessary and consulting experts for advice when they have problems.
Then there is the other 99% of the population.
There is a reason why most workplaces have managers. It’s because nearly everyone performs better when they have to be accountable to someone else. Owning your own company doesn’t magically change any of that. This is why so many companies choose to involve a board and fill it with experts and objective parties. It’s very easy for an owner to get caught up in day-to-day management, putting out fires instead of assessing weaknesses, focusing on goals, and implementing value drivers that will build greater success over time.
What Can a Board Do?
In addition to creating accountability, an active board can do a number of important jobs, including:
- Assisting the owner to achieve the business plan
- Growing the company
- Advising the owner on how to manage difficult employees or problems between workers
- Resolving family issues within small or medium size family businesses
- Connecting the company with resources outside itself such as financing sources, partnership opportunities, and leaders within the community
- Lending gravitas to the company
Owners of small and mid-size companies will frequently assume that only large companies have a board of directors or advisors. This is not true. Not every company can afford to assemble a group of experts and pay them for their time and talent, but plenty of smaller companies would benefit from having regular meetings with people who could advise and support them.
Different Types of Boards
A board of directors is what people generally think of when they hear the word “board.” It calls to mind an image of moguls dressed in expensive suits sitting around a large, rectangular table in a high-rise building. Medium sized businesses often have professional boards of experts to call upon. This is far from the only kind of board there is, however. Small and mid-size companies will often put together a board of advisors to assist with managing the business. For privately owned businesses, these groups do not have to be formal. They may not even be called boards.
A board of advisors could be a group of people that an owner or owners gathers regularly for support, guidance, and the chance to toss around ideas. An owner may ask them to serve on an advisory board because of their experience with finance, legal matters, administration, or sales and marketing. Every owner is different and has different skills and experience so there is no formula for a perfect board. However, the people on the board should share the same ideas about the company’s mission and needs. They should also naturally get along with the owner without a lot of friction between them.
The first proto-board a company often has will consist of the owners, their accountant, their lawyer, and some friends or family. These people are good for giving advice, but they may not be the best people for the job in the long term. A more ideal board will consist of people who aren’t employed by the company and who will give honest, even harsh feedback if the owner is exercising poor judgment in managing the company.
The board is there to serve the best interests of the company, after all, not just to prop up the owner or stroke his ego. The company lawyer can be a great resource, but will he give the owner strong criticism if it means he’ll get fired? Friends will similarly pull their punches if they know that it will ruin their relationships. This is why it’s better to ask objective, knowledgeable outsiders who can be objective to serve on either a board of directors or advisors.
How does this relate to exit planning? A good board will help the owner plan for the business’s future. When the company is young, that will mean making it profitable. Later it can help with growing the company or expanding it into other markets. And when it’s time for the owner to begin planning for a transition, the board can act as a sounding board and resource both for him and the new owners. A stronger company is easier to market and sell too. It’s always helpful to have experienced group of business people available to give advice and keep owners accountable. That is why we at Prometis Partners recommend establishing a board of directors or advisors to our clients during the exit planning process.