Getting the Most Out of Your Board of Directors

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Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

With many companies – particularly early-stage ones – the Board of Directors is seen as little more than a legal necessity. But it can be so much more including an important force for growth and a gyroscope that keeps things on course and sure-footed.

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I work with a lot of CEOs who are trying to move their companies out of the mid to high single digit run rates. The journey from five to twenty million in annual revenue is one of the most difficult in the evolution of any company. CEOs need to reinvent themselves at least two or three times during the process. The senior team at five million will be radically overhauled and resourced by the time the company hits twenty million. The cottage culture will have given way to an increasingly professionalizing one. The competition that the company faces in their business development efforts will be better resourced, smarter and more efficiently managed.

By the time a company reaches the high teens in annual revenue, the whole question of governance becomes a significant issue. Management will be spending a lot more time managing the business. The original team, with their overblown titles, will have been replaced with new faces that actually have the skill sets necessary to carry them. In the best of all worlds the recruiter who had the title VP of HR is now replaced with an individual who understands, and can effectively deal with, the HR issues that can bring a company down. The controller who had the title VP of Finance or CFO has been replaced with a person who can manage banking relationships, oversee an increasingly complex financial reporting system, keep track of a complicated options and equity ownership situation and effectively manage relationships with investors and potential investors. There may be a more experienced COO and possibly even a Chief Administrative Officer (CAO) on the team.

One of the most significant changes in corporate resourcing occurs with the board of directors. Partially as a result of Sarbanes-Oxley and partially as a result of the demonstrated risks of inadequate board supervision, there are many more good boards and more good directors on boards than there used to be. The change began with public companies to be sure but has begun to spread to private ones. Even emerging companies are organizing and recruiting board members to serve on audit and compensation committees. The more enlightened institutional investors are increasingly insisting on having experienced board members in lieu of their own representatives.

A CEO who is facing the need to overhaul an existing board in order to support and control faster growth faces a set of challenges that can be daunting even in the best light. Here are just a few guidelines for board membership and management that may help:

1. A Working Board: Make sure that you organize a small working board. Large boards tend to be passive audiences for presentations by management. You need to have a manageable group of committed people who will sit around a table and actually engage in collaborative discussions about issues, trends, plans, challenges, etc. For most companies below the twenty million in annual revenue, five or six is more than enough and a dozen is way too many.

2. Avoid Celebrities (or people who are convinced they are): I once gave a lecture to a class that was focused on entrepreneurial issues. They had been divided into teams and charged with developing a business concept and working through the planning stage. My lecture was on advisory boards and how to build them as business development engines. One of the projects had a higher-education twist and the team had thought to recruit college presidents. I pointed out that these people don’t work for a living anymore. They are fundraising celebrities. Another CEO had put together a board of successful entrepreneurs who had cashed out of their businesses and were ‘hobbyists’ board members. She was frustrated because none of them wanted to do any heavy lifting. Celebrities like to think that their name is important enough to make a difference. This is mostly untrue. Workers tend to focus on making meaningful contributions to present problems. Pick the workers every time and your board will work for you.

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