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Matthew Neff: Why does even a small, private company need a board?

July 20, 2018

NeffThe vast majority of companies in the United States are small, privately owned, with fewer than 500 employees. Many are family-owned, some are venture-capital-backed, others are supported by private equity.

They might have complicated financial structures or are so simple they are run out of a checking-account register. Their strategy might be international finance, mergers and acquisitions, or selling tires.

But they all have one thing in common: They are better off having a board of directors—and one that includes outside parties.

Why? A good board serves multiple valuable functions. If nothing else, regular meetings require company management to articulate where the company is (performance) and where it is going (strategy). Everyone might agree on what the company can and should do, but having a periodic report from management and questions from a board add a discipline that is in itself valuable for management.

Second, a good board has three over-arching responsibilities: Define strategy, select and hold management accountable, and safeguard financial performance. If you strip down all the things a board does, it really boils down to these three critical objectives. Management executes the tactics to accomplish these goals, but having an outside body hold management accountable yields positive results.

Third, a healthy board will ask questions of management, and board members will inject their individual business experiences into the discussion. This is critical, and why having a diverse board is so important. You want a variety of perspectives. Different experiences, disciplines and training add value to board deliberations.

And you want genuine debate and discussion. A board member who does not participate adds no value, other than window dressing. If all board decisions are unanimous, you’ve either found the easy business we all have been searching for (truly a unicorn) or you are not having the vigorous business discussion you should have. After that vigorous debate, everyone should lock arms and walk out of the room as a team, knowing that a full range of views has been considered.

Which leads me to my final point: What is a “good” board? One that includes diversity of perspective and shows a willingness to speak up (and out) and debate, and to contribute to a group chemistry that affirms questioning. In my experience, it’s not the bad judgment about known facts that does the most damage; it’s the thing you never saw coming. The blind spot, the change in the market, the risk incurred that didn’t seem that significant at the time but, when cumulated, turns into a potential disaster.

A good board is always asking, What’s next? What don’t we see? What’s the next threat? How can we improve this? The board can also help management take a longer-term view—look not just at the tactics of performance today, but at the future and how and whom should be identified to create that future.

If you view your board as just a nice ornament, you should expect that output: ornamental. There are some CEOs who simply want mushrooms—watered, fed, kept in the dark. A strong CEO wants a strong board, one that will put leaders through their paces on a regular basis, whose members will ask probing questions and help management avoid the freight train it never saw coming down the track.•

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Neff is of counsel at Bingham Greenebaum Doll and a senior adviser to Evolution Capital Partners.

 

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