(Editor’s Note: The author has many years of experience serving on the boards of directors of dozens of privately held companies.)
Only about one-half of Inc. 500 companies report active, engaged boards of directors. Yet, in my experience, boards of directors are a critical success factor in fast growing companies.
It is “lonely at the top” for entrepreneurs without an active, functioning board of directors. And there are many business issues that simply cannot be discussed with the internal management team and require the sage advice of “been there, done that” entrepreneurs and businesspersons. To whom is an entrepreneur to turn? Regardless of other advisers an entrepreneur takes on, I advocate that entrepreneurs of rapidly expanding companies develop and utilize a high-quality board of directors sooner rather than later.
By meeting regularly, board of directors instill a discipline for an entrepreneur of regularly looking “at” the business and not “in” the business. Frequent looks at the company from 30,000 feet are critical to maintaining the intended course. Stepping back and looking at the numbers and strategic issues is a role that too often is postponed by an entrepreneur immersed in a business without an active board.
Equally important are the frequent, between-board-meeting interactions involving the directors and CEO. For example, a unique problem arises for which the entrepreneur has no prior experience. A quick call or perhaps lunch with the right director sets the CEO off towards a carefully crafted solution. Believe me: having a few experienced businesspersons “on call” to assist in resolving day-to-day problems is quite comforting to an entrepreneur.
As an entrepreneur, I remember the quick assistance provided by one of my directors on a sticky, management team compensation issue. As a director, I remember mediating a dispute between partner entrepreneurs that required good knowledge of both the partners and the business. I observed my fellow directors stepping in – using their considerable business experience and talents – to resolve difficult issues with large customers and assist in avoiding legal disputes. Each of these resolutions had priceless value to the entrepreneur at the time.
Following are excuses I often hear from entrepreneurs that do not have a board of directors:
- I don’t want to be controlled by my board! Good directors have no interest in control, only assisting the CEO in growing the company. You should immediately replace directors with a need to control.
- I don’t know the right people to serve as directors. Within your network, or perhaps once removed from your network, is probably a long list of potential, high-quality directors.
- I don’t have time for a board of directors. Let’s see…isn’t that the same as saying “I haven’t got time to get good advice?” CEO/entrepreneurs need to work on the business and in the business. A board of directors enables you to effectively work on the business, while frequently providing sage advice between formal meetings.
- I can’t afford a board of directors. Most directors have no need for cash compensation. Their compensation should be a small piece of equity in the business.
- I can’t afford the Directors and Officers (D&O) insurance required to solicit good directors. Surprisingly enough, many small, rapidly growing companies do not carry D&O insurance. D&O insurance is expensive: $8,000 to $20,000 per year for smaller companies. It is up to you and the board to determine when is the risk appropriate to begin reducing liability exposure with insurance.
- A board of directors will require me to become Sarbanes-Oxley compliant. This legislation is applicable only to public companies and to those private companies near a transition to public ownership (IPO or M&A). Nonetheless, some features of Sarbanes-Oxley are simply good governance and should be adopted by all private companies.
Building and operating a board of directors is admittedly challenging. It requires networking to find the right people and the courage to go “hat in hand” to those senior businesspersons to convince them that helping you build a successful business is the right thing to do. Further, it requires discipline to take time away from operating in the business to reviewing progress and planning for the future. But, with a solid board by your side, you will honestly say it is no longer “lonely at the top.”
© 2006 Ewing Marion Kauffman Foundation. All rights reserved.
William H. (Bill) Payne Senior Program Consultant Kauffman Foundation