Governance is critical for companies of every size. The maturity of a company can impact the scope and detail of a board of directors’ responsibilities. A board should grow and evolve with a business. For smaller businesses, the board is often involved in specific decisions, especially if the CEO is a first-time leader of a company, as opposed to the more typical oversight role in larger companies.
While there are specific requirements for boards of publicly traded companies, boards for newer private companies can consist of the owner/CEO and perhaps a colleague or family member or two. A larger company should be aware of its needs and expand its board, improving the accountability of the management team.
Many family businesses stay rooted in early, informal stages of governance. Often, “board” members lack substantial governance (and sometimes even business) experience. An entrepreneur looking to expand quickly and profitably would be advised to network and connect with savvy individuals with expertise in its industry who are open to being engaged directors.
CEOs of growing companies can benefit from expanded boards and perhaps adopt advisory boards to help with strategy and related topics but not be concerned with governance. Particularly an owner / CEO or first-time CEO may be reluctant or even too busy to ask hard questions about strategy, especially if this leader has few if any true peers on the management team and board.
Early board members are often investors in companies. In considering outside equity capital, it is vital to think about the people and the approach to building companies and governance that potential investors bring to their portfolio companies. Independent directors, or those unassociated with management or significant investors, should have valuable, relevant skill sets such as financial expertise, industry knowledge and/or governance experience.
Larger companies and public companies generally have boards of five or more as well as standing committees. The board typically focuses on the oversight of strategy, financial reporting and capital structure, compliance and risk, and management. The primary committees are Audit, Compensation, and Nominating / Governance. There has been an increasing trend to having a non-Executive Chairman (a Chairman who is not the CEO) that separates leadership of the company (the CEO) from the leadership of the board (the Chairman). If the CEO is also the Chairman, a Lead Independent Director should be elected by the board to be the primary (but certainly not exclusive) liaison between the board and the CEO and to lead meetings of the independent directors.
A board should adapt and evolve with a company. A high-quality board is often more engaged with the details of specific decisions with smaller companies and moves into more of an oversight role with larger companies. For any company, however, directors with good chemistry and appropriate backgrounds should create an effective board that can help drive profitable growth and oversee management on behalf of the shareholders and other constituencies.
Jonathan F. Foster
Founder & Managing Director – Current Capital Partners LLC