In the world of public companies, governance oversight by a board of directors is not just a formality—it's a cornerstone of corporate integrity and strategic direction. Boards bring independent, objective input to key company decisions, offering insights and experience that might be missing within management teams. They also act as intermediaries between shareholders and management, ensuring a layer of corporate governance that represents a broad ownership base.
Deloitte's Governance Spotlight: Board Structure and Guidelines (republished in the Wall Street Journal on May 17, 2024) sheds light on current priorities and trends from a survey of 100 public companies. A notable highlight is the growing emphasis on board leadership by an independent chair or lead director, with the CEO often not serving as the board chair. Areas of focus for these boards typically include annual budgets, company codes of conduct, executive succession planning, M&A oversight, and shareholder engagement. Additionally, boards are heavily involved in risk management and addressing shareholder activism.
With this in mind, how can small and mid-sized businesses (SMBs) adopt similar governance strategies? While private companies are not required to have a formal board, many choose to do so. The reasons are compelling:
- Enhancing Decision Quality: Even an informal or advisory board can significantly boost the knowledge and experience available to a small team.
- Building Relationships with Shareholders: As SMBs grow beyond a close-knit ownership group, establishing a governance board becomes crucial. Investors often look to the board for business communication and management oversight, adding visibility and credibility to the company.
Here are some key considerations for SMB leaders contemplating the addition of a board:
- Purpose of the Board: Is the intent to delegate decision-making authority or simply to gain insights? This distinction will determine whether the board is advisory or voting.
- Recruitment of Members: How can you attract members with valuable viewpoints, experience, and contacts? Consider the costs involved, whether in cash, equity, or both.
- Maintaining Relationships: How will founders and majority owners ensure they receive honest, unbiased advice while maintaining a collegial relationship with board members?
- Representation of Shareholders: If there are significant non-management shareholders, how will they be represented to minimize potential conflicts?
- Commitment to Governance: Are you ready to formalize company governance and procedures, especially if adding a voting board?
SMB owners must weigh these questions carefully. Forming the wrong board can be a significant setback, one that many SMBs cannot afford. However, a well-chosen board can provide invaluable wisdom and support, becoming a key asset for growth.
A suggested approach is to start by outlining governance documents clearly and defining the board’s responsibilities. Work with your management team and advisors to identify the necessary skills, experiences, and contacts. Often, your network can help identify potential board members. Ensure a thorough vetting process for every candidate.
Partners at the Florida CFO Group have extensive experience working with boards and can assist SMBs in navigating this process. For more information, feel free to reach out to us.
By thoughtfully considering and implementing these practices, SMBs can create a governance structure that not only supports growth but also ensures robust and strategic oversight.
The Author
Jim Dietz, a distinguished Partner at the Florida CFO Group. specializes in maximizing cash flow and profits, planning for financial growth, and connecting organizations with needed resources. With over 30 years of experience as a strategic financial executive, Jim understands how to listen, evaluate, and prioritize plans to achieve goals. You can also visit Jim's LinkedIn Profile for more information.
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