Experts say that in order to mature, build strategic alliances and gain access to capital, growing companies need some sort of advisory group, even if they are not legally obliged to appoint a formal board of directors.

A vibrant young private company attempting to navigate its way through the challenges of accelerated growth will find that a strong, diverse board or advisory group can give valuable assistance in a variety of ways, not least of which is endowing it with credibility in the outside world. It reflects extremely well on a business owner, for it shows that she can take criticism and is prepared to allow others input into her vision for her business.

The primary function of a board is to enhance management, not replace it. The CEO is the one who develops and executes the company's strategic vision, while the board's duty is to influence, react to and make suggestions about strategic issues. Through periodic meetings, the directors help ensure that the organisation's resources are effectively managed, and that it complies with applicable regulatory requirements. They monitor financial performance, and the success of the company's products, services and strategy.

The most effective boards are made up of individuals who can bring a range of diverse and complementary skills to the organisation. Directors' talents should not duplicate those of the management team, but instead fill any gaps and provide additional expertise that may be beneficial, especially if the industry is changing rapidly. As an example, boards are increasingly seeking people with experience in technology, global business, e-business and marketing.

Desirable personal qualities include integrity, intuition, vision, the ability to make effective decisions, think strategically and handle conflict, good interpersonal skills, and the strength of character to do the right thing for the company and its shareholders even when there is a potential conflict with their own business or personal interests.

All board members should be well-connected, boasting a broad range of contacts to whom they can reach out as potential customers, suppliers, strategic partners or financiers, while some directors should be highly experienced entrepreneurs in the market the company is aiming for. A growing entrepreneurial company should try to attract outsiders who have been through the entrepreneurial process and understand the typical issues confronting a growth-oriented organisation, for rapid growth has impoverished many more companies than it has enriched, and directors who have previously weathered that storm can guide newer companies safely through the worst patches.

Individual board members can also make significant contributions to a business, playing high-value, short-term consulting roles for aspects such as financing, executive recruitment, acquisitions and general corporate strategy.

Recent years have seen the reduction of boards to more manageable levels: a board comprised of more than twelve directors limits debate of key issues because members have to wait their turn to speak. Boards of between seven and eleven are typical in most organisations, with the average size of a public Fortune 1000 (USA) company board being eleven. In order to avoid tied votes, odd numbers are preferable.

The founders of many smaller, private companies are often so concerned about losing control that they pad their board with friends or family members. While it's acceptable for the board to include one person who is close to the CEO, the rest of the members should be 'outsiders': in other words, they should have no ties to the company or to its leader. Strong, independent directors who are not in any way beholden to the management team will ensure that what needs to be done, is done.
Smaller companies will find a board of five to seven members is ideal. With a five-seat board, the CEO or founder should be the only insider to serve. If the decision is made to appoint two insiders, the other person should be drawn from a key operating function such as marketing or finance. In this situation, seven board members may be more appropriate because if the outsiders are to make a worthwhile contribution, they must be present in sufficient numbers to outvote the owners.

The problem with friends and family - 'insiders' - is that they may fear offending: only someone not closely involved can bluntly tell the business owner, without fearing the consequences, that a particular strategy is so full of flaws that is bound to end in disaster. Any friend that is appointed must be the type who can straight-talk the owner in a one-to-one situation.
Because of the time commitment required, many companies insist that directors sit on no more than two boards, believing that directors will not be fully engaged with their company if they spread themselves too thinly. Successful boards are those whose members make significant commitments of time and energy. Attending every relevant meeting is mandatory - and there is a definite trend towards more frequent meetings because the traditional quarterly meeting of old is inadequate to deal with the business complexities of the 21st century. Directors are expected to keep abreast of all changes and developments relating to the industry to which the organisation belongs. In order to add value, they also need to get to know the business, which demands that they spend time at the company, and with customers and suppliers.

Personal chemistry is critical to group dynamics, so it makes sense to select outsiders who demonstrate good rapport with the management team. Even with the right mix of directors, though, it will still take time for them to develop confidence, trust and familiarity. Effective board members will work at developing relationships with fellow members outside the scheduled meetings, which simply don't provide sufficient opportunity to build relationships. Whether it's informal telephone chats, extraneous meetings organised by the board leader, or getting together for lunch, this interaction is essential for group dynamics.
Board requirements and responsibilities are laid down in legislation and stock exchange listing requirements. Best practice expects a written charter, developed with the company's solicitor to ensure it reflects all legal requirements, that outlines aspects such as structure, membership criteria, selection, composition, meetings, procedures, performance, committees, relationships, leadership and responsibilities.

One factor that many companies include in their charter, especially with advisory groups, is a stipulation of the length of time a member may serve. The advantage in establishing a limit is that it ensures the directors stay fresh and current, provides for new skills and talents to meet the changing needs of a business, and offers a discreet way to terminate ineffective board members - especially in situations that may be sensitive. Your solicitor will advise on the legalities.

And just as a board of directors assesses the performance of the person running the company, so they must accept that their own performance will be assessed. A 1999 SpencerStuart study found that 50 percent of S&P 500 boards claim they have a formal evaluation process in place - a dramatic increase over the 1996 figure of 13 per cent. Research shows that those boards that do conduct evaluations are much more effective.

Evaluations need to be done in a positive and motivating manner: best practice has each director assessing his or her own performance, along with the performance of the other directors, and the board as a unit. Results and feedback should be confidential, delivered to each director by the lead director or a governance committee.

So how does a small, growing company start recruiting 'star' directors? Typically, the initial selection is a local business veteran who is willing to tap other executives. Your accountant, solicitor, Chamber of Commerce or networking group are good starting points: one of them is sure to be able to recommend a suitable candidate.

Be prepared to sell that candidate on your company, as they are sure to ask why you want them, and why should they join the board. So before embarking on the recruiting process, put together a package that will paint a complete picture for prospective directors. Perform an objective analysis of your business: where it is now, where you envision it will be a few years down the track, and what you'll need to get it from here to there. Consider such factors as competitive pressures, the impact of innovation and technology on the industry and other aspects of risk assessment. Include a complete company history from start up to present, an in-depth review of the company, the backgrounds of key staff members, their attitude towards growth and change, the major processes that drive the operating cycle, audited or reviewed financial statements, and details of the role the group of outsiders is expected to play.

To attract the best people to your board, you should expect to compensate them for their time. While there are no set rules regarding director compensation, benchmarks exist.

Some companies set up option packages for board members, either in addition to a retainer or as a significant component of compensation. The idea is to expose directors to the same risk and rewards of economic performance as other stakeholders, including employees, shareholders, customers and suppliers. Directors who hold a meaningful stake in a company will have its best interests at heart. Sunbeam director Charles Elson says that directors should purchase company stock out of their own pocket, and should be compensated primarily - even substantially - with the stock. "There ought to be enough money invested so that there's a proprietary interest, and the loss of it will make the director throw up," Elson succinctly declares.

The best boards adopt a culture and operating style that ensures the board and management operate as a dynamic team, because it is impossible to achieve optimal results when the two groups are at odds. Boards can be susceptible to a wide range of dysfunctional practices, such as the CEO who views the board as a necessary evil or a burden, taking pride in keeping them in the dark, providing as little information as he or she can get away with, or setting rigid agendas and running formal, highly regimented meetings with no room to move.

Management may have to contend with directors who aggressively challenge their leadership, or cope with entrenched board culture where new directors who want to make changes are stymied by a slew of unwritten and unspoken rules, inertia, and intense resistance to the prospect of doing anything differently.

A CEO or business owner can get more out of directors by treating them seriously and looking after them. It's increasingly in the CEO's self-interest to nurture a positive working relationship with directors: boards are demanding better, and quicker, results from chief executives, and are becoming less forgiving. It's a case of deliver - or else.

So treat directors with respect: remember, they are extremely busy people who are making a substantial time and energy commitment to your company. Ensure that meetings start promptly, that they are carefully planned with the agenda and associated information package distributed well in advance to give board members sufficient time to study it, that the agenda is followed and that the meeting is kept on track without veering off into unimportant side issues. Keep accurate minutes of meetings. Reimburse travel expenses promptly.

Make them comfortable, feed them well, and have some fun together.

:::Originally published in Her Business magazine