When is the right time to onboard a Board?

Shifting gears this week and sharing the first in our guest blog series by New Zealand-based Henri Eliot, CEO of Board Dynamics. Henri helps boards become high performing and has seen the impact the right board can have on a new venture’s ability to successfully scale. Last week he published his first book Board Shorts, a collection of articles about his own experiences. It is designed to challenge your thinking and upskill readers about the realities of board-life.

Starting a new venture is the easy part. Scaling is really hard. What impact can a board really have on your ability to scale your business? Can you afford one? And the flip side of that, can you afford not to have one? Over to Henri.

Do young companies need a board of directors to grow? By Henri Eliot.

Starting a new venture is easy. Problems arise in scaling them into a larger sustainable company.

Surveys rarely examine how governance and boards can simultaneously foster high rates of innovation and productivity. A stronger culture of boards in entrepreneurial ventures would fill some missing pieces in our entrepreneurship ecosystem.

This does not mean that all startups will need a formal board when they reach sufficient scale. For example, a board is simply not affordable for some small companies, while others find little value recruiting directors who, in startup terms, can’t justify their fees.

Nobody wants to bog down nimble start-ups in formal, complex compliance. Debates about entrepreneurship mostly focus on access to capital and tax and government research incentives. They overlook the value of governance and strategic advice from boards and the nexus between capital and governance.

Capital is a critical issue: most entrepreneurs find it much harder to raise the same amount of capital as their US peers, and so they scale their venture at a slower pace.

The human capital part of the entrepreneurship ecosystem is important.

Building stronger networks and hubs that connect like-minded business builders is vital, as is ensuring there are sufficient mentors for budding entrepreneurs. The next step should be forming stronger links between sophisticated start-up ventures and the governance community.

Private equity firms usually form boards around their private company investments, although they are typically for larger, established organisations. There is very little research on how smaller and mid-sized entrepreneurial start-ups approach governance and board formation. Much evidence is anecdotal.

Personally, I have worked with many founders of small and medium sized start-ups over the years. A recurring theme is that entrepreneurs use mentors and possibly advisory boards but see formal boards as a step too far.

That is understandable, but those with big ambitions to scale their venture globally — and use other people’s money to do so — need strong governance systems. They should view boards as an excellent source of strategic advice and networks; not as an inflexible, costly compliance handbrake.

I wonder if part of the success of US start-up entrepreneurship is the nexus between capital and boards. That is, raising much larger amounts of capital in turn necessitates the formation of boards to ensure funds are wisely invested, which in turn helps drive faster growth and sustained success through good governance. Less access to capital could be one reason fewer New Zealand entrepreneurs form formal boards early in the venture’s journey.

Strengthening the human capital part of the ecosystem, through better engagement between start-up ventures and experienced company directors, is often overlooked as part of the entrepreneurship ecosystem.

Directors too should think about the merits of adding a fast-growth entrepreneurial venture to their portfolio. These will not suit all directors, such as those with only big-company backgrounds and a career in compliance rather than strategy.

Many founders crave high-level advice but cannot afford it. Many directors like the excitement of governing a start-up and the potential equity reward, but understandably want a fair fee for their time.

A priority must be to help more of these young companies scale into much larger organisations. Strengthening the human capital part of the ecosystem, through better engagement between start-up ventures and experienced company directors, is often overlooked as part of the entrepreneurship ecosystem.

Growing your business network is helpful but creating an advisory board is better.

An advisory board is a group of ‘independent’ people who provide non-binding strategic advice and support to the owners/shareholders/directors of an organisation. Unlike board of directors, they are informal in nature and therefore have greater flexibility in how they are set up and managed. They can be created to deal with a specific matter or can be ongoing in nature.

Role of the advisory board

Companies must be clear on the purpose of the advisory board and what they hope it will achieve. This will help determine the required skills, knowledge and experience needed and assist in the selection of members of the advisory board. A clearly defined purpose will contribute to the success of the advisory board.

Advisory boards are generally created to focus on the big picture — strategic issues and industry and market trends. Their principal roles are to provide objective advice and contribute to strategic planning. Good advisers can give fresh insights and thinking on emerging or unfamiliar issues, respond to ideas from management, play devil’s advocate and supply high quality objective advice to support the main board’s decision-making. Many advisers are selected because of their contacts and their ability to facilitate introductions to potential suppliers, customers etc.

The ultimate aim of having an advisory board is value creation. If the advisory board is not creating value, then reconsider who sits on it or whether having one is the best means of achieving the purpose. An advisory board adds value when there is an appropriate mix of people and there is open, frank and free-flowing discussion.

Choosing the right people to fill your board is the most crucial part of the process and can often be the most difficult.

Here are key issues to bear in mind when considering a board of directors:

1. What type of board is best? Many small businesses maintain advisory boards for feedback only. That may be adequate for some businesses, but a formal board of directors assumes a fiduciary responsibility for how the company is run.

2. Whom do you choose? Do not automatically choose people from your immediate network. The best board members are those who understand your business, have the necessary time to commit to the role, are of a supportive disposition but are also prepared to challenge and debate, have a strategic perspective, and bring excellent connections to the business world.

3. Avoid mirror images. An effective board is comprised of people of diverse backgrounds and viewpoints that can differ from yours. The board should not be afraid about offering guidance and feedback that may be disconcerting. A board meeting should embrace robust debate when it arises to reach agreed consensus.

4. How will the board function? Once you’ve decided on a board, you need to address the mechanics of its activities. Create an accountability structure between the executive team and the board of directors. The frequency of board meetings will differ from one company to the next. Although the average is every quarter, structure your board’s schedule to address your needs.

Board Shorts by Henri Eliot

Board shorts is a classic collection of briefings for aspiring or experienced company directors. Each section should be consistently entertaining and educational simultaneously for the reader. 
This book is a fitting way to mark several years of governance experience through another lens and allows the reader to flip through the book at leisure. 
These briefings cover most areas of interest for people in corporate governance and provides a global perspective. Board shorts was conceived by myself over the past couple of years through many requests from readers to have all my articles in one collection. Bearing in mind I have written over 100 articles, it was a challenge to select these 28 classic briefings for you, the reader.
Boards Shorts offers insights on effective governance for aspiring and experienced directors. Henri gives his perspectives on a range of topics from establishing a board of directors for the first time to review the boards performance.

*Article adapted from one first published in the NZ Herald.