Small Business Boards: Practice Vs Theory

The public and private feedback to my last post lamented that the real world does not usually align with my description of how boards should operate. But others like Dan Stojanovichopined that “boards do need considered, intelligent, informed, compassionate, practical, adventurous, creative, ethical and shrewd thinking, in order for the board to help clarify vision, articulate a binding narrative and motivate people to commit to the plan within an environment and culture which not only facilitates but energises planned achievement.”

The Most Important to Get Right

Human relationships– a Chairman, CEO and board members who collaborate, cooperate and who are effective communicators will usually add more value than a board lacking these qualities.

Therefore as noted in my earlier Blog the Board hires and fires the CEO but the Board must be there to support the CEO and management team. Good interpersonal skills help create an atmosphere where creative tension or constructive conflict is productive in driving innovation whereas adversarial relationships are almost always destructive.  Passion is good, independent thought is good but compliant passive participation is bad. Disagreements between board members, CEO and management resolved well usually add value. Constant harmony rarely stimulates innovation and as George Bernard Shaw reminded us more than a century ago “all progress is dependent upon unreasonable men.”

Successful businesses must be able to pay their bills so meeting short term goals is essential but not sufficient to create a successful business in the longer term.  Once the bills are being paid then long term thinking is much more important for the future prosperity of any business. A good board focuses on future performance rather than looking back.

Our great economists and philosophers have warned undue influence in the economy, companies or communities leads to poorer outcomes. The Chairman, CEO, board member or employee needs to fill their role properly by making productive contributions without unbalanced or inappropriate influence from others.

Board members should be prepared to roll up their sleeves and drive the work of the board it is not a role for pontificating and issuing critiques on management and operations. The board needs to research, investigate and contribute especially to strategy so they are well equipped to probe and offer strong guidance to management. But they should not meddle in execution and operational detail. In a good company the board is responsible for strategy but the CEO is best placed to articulate the vision and strategy of the company to staff, customers and the broader community.

Board members need to act ethically. This is fundamental as good ethical behaviour makes a difference. Boards need to show that ethical governance can help the company achieve more, better, faster and with greater certainty than is otherwise the case.

A good board enhances the reputation of the company through the reputation and connections of all the board members and these connections to the external world prevents the company from becoming insular and inward looking.

Legal compliance is essential but personal responsibility for achieving the desired goals of the corporation is even more important. If a board spends too much time on completing checklists it will not be spending enough time on adding value to the company. But good check lists can save time and measure what is creating value for the company. See this link for my presentation on verification in step by step business planning.

Finally the Board must take care not to unnecessarily consume the resources of the company including their own remuneration (either cash or equity) but more importantly, management and staff time.

Shareholders and Directors

As Professor Peter Sheldrake pointed out to me after reading my earlier Blog the relationship between shareholders and directors is tricky: in law, directors do not represent shareholders, nor are the ‘accountable’ to them. Directors are accountable to their role as defined in the articles of a company, and, in broad terms they have to fulfil the roles you set out at the beginning. This means monitoring the external relationships and environment of the company, ensuring legal compliance, monitoring performance, determining strategy, and ‘hiring and firing’ the CEO. Shareholders elect directors, but they are electing people to ensure that the company is properly run, not specifically to look after their interests.**

The other issue that Peter mentioned is that a key issue for directors today is to ensure that a company is not only legally compliant, but also that proper audits are undertaken: internally to ensure systems and processes are both appropriate and are complied with, and externally that the annual audit is properly conducted, and that actions are undertaken to deal with any shortfalls or concerns that the external audit may reveal.**