Do private companies need a board of directors?

Do private companies need a board of directors?

Family business and fast-growing small and medium-sized enterprises (SMEs) often give this issue some thought, as appointing a board of directors, or advisors, can help take a business to the next level.

A board of directors can help - and suit - family business owners, as they can assist with the direction and leadership of the business and ensure the business has the appropriate level of control. The nominated directors usually have solid experience in running businesses and may also have expertise in a particular industry – they can also provide an insider's perspective regarding issues around growth.

How does a business-owner know when it's time to set up a board?

When a business has outgrown the capacity of the founders to manage it, or when the business is experiencing strong and fast growth, then, it may be time to ensure this growth does not get out of hand.

Boards can also add skills that might be lacking and board members can complement skills of current people inside organisations. Not all business owners have all the required skills to operate effectively.

A business may start small but when they experience rapid growth, that's the time they have to start considering putting a board in place. The reason for having a board is to help companies go from very small to strong growth, and making sure they have the right processes in place. Also, it is important a strong board exists for any business, which is trying to raise capital. Banks and financiers scrutinise companies' strategies and governance structures, so a board can reassure potential financiers, that the business is actually ready for growth.

It is also important to pick the right person on the board, no just one of your mates. Most businesses are looking for two or three independent people, depending on how big the business is. The big decision is actually picking the right independent person with the right skill-set.

Basically, when choosing a board member, it is important to have someone who is experienced commercially, and who understands governance and is also good from a network perspective. Look for people with commercial nous, who have the strategy, the big picture and are pro-active.

It is also imperative to have a strong and independent chairman, who can control board meetings and keep discussions on track. This person also needs to be able to work with others, manage ego and potential conflicts.

Where do you find them?

Board members can be selected from the Australian Institute of Company Directors (AICD), or by talking to other businesses that have set up boards. Family businesses often bring challenging dynamics and issues to the table, which may need to be worked through. It is important to understand the emotions, the conflicts, the behaviours and issues that are in the family. Interviewing families can iron out any issues, which may surface later. The pitfall is if you don't understand the family dynamics, then often board will not succeed.