You may be a small business but the benefits of appointing a board of directors could be huge. But how do you choose the right people?
It’s a common question amongst many Australian SMEs: is now the right time to establish a board? For some, this question is a result of the recovering economy and improved business outlook. For others, particularly the baby boomer generation of business owners, it’s about preparing a business for sale.
Putting a board in place can be a good thing, but SMEs need to be smart and cautious about how they approach this milestone in their business. Each case needs to be considered on its own merits. While some small companies might benefit from a board, others might not because of their size, stage or structure. Timing is also critical.
It is obviously a huge decision in the life of many SMEs, so here are some tips to help you decide if a board could help your business and to help you get the board skill set right.
Why put a board in place?
A sound, well chosen board will help an SME deal with two major business issues: growth, and succession planning.
Growth: Boards can assist SMEs to manage fast growth (by ensuring appropriate checks and balances) as well as take SMEs to the next level of growth. Owners have to be dispassionate in order to clearly assess whether the business has outgrown their own capacity to take it to the next level. An honest assessment of your own expertise may bring you to the realisation that you need to boost the business with additional skill sets.
It may be that, as an owner, you are technically very good at what has made your business an initial success, but now need assistance with areas outside your expertise or to complement your skill sets. This expertise might be in key areas such as capital raising, doing business in new geographic markets, restructuring, and strategic marketing.
It is not just fast growth companies that may benefit from the guidance of a board. Other signs that it may be the right time to put a board in place include the more negative symptoms of stagnated growth, such as missed opportunities and loss of market share.
Succession planning: All businesses should have a succession plan and exit strategies. This is all the more crucial in the current market conditions. Australia is predicted to face a rush of business sales in the short term as baby boomers sell out. An estimated 60 percent of owner-manager businesses have succession issues. When dealing with these, there are three main options:
o Existing management buy out
o New management buy out
o Sale either privately or through a public listing.
In all three scenarios, the corporatisation and professionalization of a business, by putting in place a more formal board structure and professional management, can be beneficial.
Benefits of a board for an SME
The right directors can help take an SME to its next level of growth – they can provide direction and leadership, and ensure an appropriate level of control for the business. They can complement management’s industry expertise with their business acumen and experience.
As well as growing the business, directors can be a huge support to the owner, who can benefit from the gain of new skill sets and experience not in the existing management team. An independent board can also provide an SME with objectivity, removing some of the emotion from decision-making – especially when hard decisions need to be made about the owner’s “baby”. These fresh insights can provide an opportunity to constructively challenge the “usual way of doing business”.
To raise capital in a tough market in 2011, SMEs will need to assure banks and financiers that they have good governance structures in place and that the business is set for growth. The right board can enhance the reputation and standing of your company for clients, financiers and investors. Another benefit directors can offer SMEs is new networks, especially if your business is expanding into new product or service areas or geographical markets.
How does an SME put a board in place?
Some companies initially put in place an advisory board. This is a group of independent advisors who advise the company in areas such as strategy and business development.
An advisory board is not a decision-making entity and is not regulated under the Corporations Act, although advisory boards need to be careful that they are not in fact a governing board in which case the legal duties and obligations of a director might be applied. Often, an advisory board might be part of a transition process to a more formal, governing board with functions regarding strategy, risk, compliance, and monitoring company performance.
Other companies establish a governing board from the outset, which means the directors have legal duties and liabilities under the Corporations Act. If this is the path you choose for your SME, first you need to carefully consider the following key questions that we ask all clients at Directors Australia who are in this position:
o Is your company ready for the transition – both financially and emotionally?
o What will be the impact of loss of control and independence for the owner?
o Is the timing right given other things going on in the business?
o If yours is a family business, are there family issues to be sorted through first?
o What is the ideal skill set to deliver on your company’s strategic plan and where are the gaps?
There are clear benefits for some SMEs in establishing a board whether to manage fast growth, as part of the next level of growth or for business succession planning. The right advisors will be able to assist your company assess its readiness for establishing a board as well as develop a plan for putting a board in place, and finding the right directors.
