Having a board might by some be motivated with the legal reasons, by others to control or be able to offer tabouret seats to important people. By many entrepreneurs also motivated by having people buying and reselling their products and services. However, there are many and important reasons having a board and non of them is about power, buying or reselling products and services.
Every time I get the honor to be asked for a board assignment I always ask why and what I can do for the shareholders. If the answer is helping them selling or open up my network for selling the answer is always no. I will explain why by first I will provide some theoretical foundation:
Agency Theory: This is about aliening the interest of the CEO (in a public company with an employed CEO, not founder or owner) with the shareholders. By making sure the CEO has the same interest he or she will act in the interest of the shareholders and not in other personal interest. The trouble is of cause in large corporations where the CEO has a second layer in order to control, whereas personal interest might influence. However, by appying modern corporate governance rules and regulations the second layer can easily be controlled. This theory does not reduce the board to a control function rather explaining the importance of aligning the interest of the CEO with the shareholders. However, the question is then raised; what role does the CEO play in the board and shall the CEO be in the board at all?
Stakeholders Theory (my interpretation of Freeman’s theories): It is a theory practiced in Japan, continental Europe and Germany where all large interest groups get a seat on the board, e.g. employee groups and large shareholders. The idea is that all stakeholders shall be considered, however regardless of small entrepreneurial companies or large public companies this only work for easy decisions rather then complicated and hard-to-make decisions where interest groups only will focuses their interest instead of long term wins. An alternative is having a committee of board election presenting a board to the annual meeting for voting. This give a possibility form a strong and balanced board securing all interest as well as competencies, relations, reputation as well as network and integrity. This can be lead by the chairman or by an external part appointed by the major shareholders.
Stewardship Theory: It is based on the assumption that decisions shall be motivated by something greater than the personal interest, a theory based on utilitarianism (the greatest good for the greatest number of people). I a board this means always acting in the greater good for the society and world as a whole, typical what you migh expect from a non-executive director.The criticism to this approach is that there is a fuzzy interlinkage between end and means, and that everything is a goal and then nothing becomes a goal.
Shareholder value Theory. This theory is utilitarianism but for the one with the greatest number of shares, i.e. the greatest good for the greatest number of shares. However, it is not an easy task to decide what is best for the shareholders as this might rapidly change over time and in accordance with number of shares and financial power. Just think of a entrepreneurial company owned by the founders, used to decide by them self. One day they run into an opportunity, and grab that but need a capital injection. The project does not pay off early enough and the company desperately needs money, they get it but diluted to minority owners. Now the new majority owners decide what best for them at that are to sell out the profitable parts of the business then close it down. The era is ended, people lost their jobs and the entrepreneurs are out of business. How is right or how is wrong? If the entrepreneurs were allowed to act in their favor as majority owners, why should not the financiers have the same favor? The problem is the same as for the stewardess. Is everything allowed just because it is good for the greatest number of shares? This impact the way a board work and outline future options.
Other aspects of board work is that owners, founders and other stakeholders might want to strengthen the strategic work and view upon the board work in order to develop the business long term as well as short term. Short term discussions normally means balancing power, interest, point of views, as well as providing second thoughts and options. Long terms are more of strategic skills, knowledge and thinking. Other reasons might be expert knowledge in a certain area or a general expert in the company laws. It is also common to dress up the board with famous names or inviting business people with extensive networks.
My advice five to all of you that are running small and mid size privately held companies, especially entrepreneurial companies, when rethinking your board strategy:
- Find a balance between executive directors (working in the company) and non-executive directors (from outside) to balance interest and power as well as helping you with long term planning as well as short term prioritizations. Blend experienced board professionals with experts in certain areas and if possible with different gender and backgrounds. Typically 1/3 executive directors and 2/3 non-executive directors. Make sure each board member knows what and how to supposed and contribute.
- Appoint a strong external chairperson with integrity and ownership in the business. Make sure the dialogue between the Chairperson and the CEO works fine and is both demanding and developing.
- Make sure that the CEO, if not the founder, is shareholder (preferably step by step, but with well defined criteria’s from day one) aligning the interest.
- Define the owners instructions in written, containing risk level, expectation of return, exit potential strategies, social and environmental ambitions and goals, personal ambitions, governance and control function. Make sure to defined and enroll the board´s rules of procedure as well as the CEO Instructions.
- Elect a committee of board election. Lead by someone one trust and integrity, preferable the chairperson or the majority owner.