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Do You Need A Board Of Directors?

2009 | Jul 29 in Entrepreneurship , Business Development , Home Page News , Leadership

By E-Myth Business Coach,

As a small business owner, you’re always prioritizing efforts and making resource decisions. You may feel like you live in your own world... wearing all the hats of the business, or “doing it, doing it, doing it” as we often put it. Of course, we recommend getting an E-Myth Business Coach to help guide and support your business development process, but today we’re discussing a different kind of support group – one that is perhaps underutilized in your business: your Board of Directors.

Starting a board of directors and maximizing its usefulness may not be high on your list, but as your business grows, having an active board can provide significant advantages. It’s also something you may not have a choice about; every corporation is required by law to have a board of directors. You should, of course, be working with your attorney on matters such as these. But whatever the legal requirements, satisfying the laws of incorporation is only the beginning for this vastly underutilized small business resource.

What Kind Of Board Is Right For Your Business?

There are two basic kinds of boards: advisory or fully mandated. An advisory board does just what it says: it’s a board that provides feedback and advice, but nothing is binding. The second type, a fully mandated board has real power and accepts fiduciary responsibility for the company.

The kind of board you choose depends on your needs. Go with the advisory board if you just want advice but don’t want decisions mandated by a majority. A fully mandated board is a good option if you’re ready to take a step back from ultimate decision making. Either way a board is a great way to bring in expert, trustworthy advisers to help you make the big decisions.

Why You Need A Board

With a board of directors, your business immediately gains legitimacy and a panel of expertise you may not otherwise have "in house". Directors with specialized expertise such as law, finance and marketing become a valued resource providing guidance and much needed advice in critical centers of the business. Your board can help develop business plans, handle policy issues and also help focus overall business strategy. Directors monitor a company's financial strength and the success of its product and services. Selecting board members from your business community can also bring greater awareness from the community at large.

Typically, a board will focus on protecting the company’s unique values and culture — a necessity in our fast changing business environment. They’ll also assist with recruitment, bringing in new people for both the management team and other director’s seats, especially ones who can help further the company’s business objectives and secure sources of capital. A board can also help with succession planning and your overall exit strategy.

The most effective boards are comprised of diverse, strong-willed people with their own viewpoints. You want board members who are fearless about offering advice, guidance, feedback or argument. An open forum for ideas and opinions is a board’s most valuable asset — don’t squander it by setting up a board with a bunch of drone-like “yes” people.

Now maybe you’re thinking that your business is just a small family affair and your partners are already working in the business with you. But we would say that your business is the perfect candidate for a board. In fact, nobody needs a board more than you! Why? A board will help you set aside your tactical perspective, get outside the organizational boundaries of your day-to-day perspective and force you to work on the business!

A board allows you the unique opportunity to look at the business objectively and from every angle. It forces you to work on strategy instead of tactics. It allows time to develop new ways to improve the entire business enterprise. Don't underestimate the impact formalizing a board can have on a family or small partnership business.

The Final Analysis

As with all entrepreneurial decisions, it’s up to you whether to invest your energy and resources in a board of directors. There are many advantages to consider; the only real disadvantage is investing your time and resources in a structure which may not serve your current objectives. At the least, an advisory board can increase your community outreach, while a fully mandated board can give you just the expertise and legitimacy you need to grow to the next level of your business organism’s natural development.

Tell Us Your Story

Have you formed a board of directors? What advice would you give others based on your experience?

Comments

  1. .Mary F. says:

    When you form an advisory board is it customary to pay them some type of compensation for their efforts? 

    Submitted Jul 29, 2009 11:44 AM

  2. .Thomas W. says:

    We have had an advisory board for many years. The result has been a pre-2009 twenty year annual sales growth rate in excess of 20%.

    Our board started with three advsiors; accountant, attorney and banker.  It now has eleven.  All are consultants to our company and available to our teams on an as needed basis.  They are paid a consulting fee for the time spent with our teams.

    In September and October, all teams draft an annual report including goals accomplished and new goals for the next year.  They are compiled in a bound document and sent to each advisor.  The team scribe places their e-mail address on their report.  The advisors then read them and contact the team scribe if they need further information.

    In November, we host our annual advisor meeting.  This is a very elegant dinner party held in our facility.  After dinner, each advisor has 5 minutes to point out areas that need improvement.  No praise is allowed.  If praise is given, a bell is sounded and their time is up. Notes are taken by our leadership team on the advisor's remarks.  We do not pay a fee for this meeting, but give the advisors gifts.

    The result last year, was a twelve page document sent to the advisors two weeks after the meeting, explaining how the specific problem areas would be corrected.

    Over the years, we have replaced advisors that have been outgrown. All advisors share the same morals and ethics that are stated in our core values.  They are all principals or high level officers of their companies. 

    It is my opinion, that successful entrepreneurs have a product and a market.  Successful sustainable entrepreneurs also have a great culture driven by their staff and excellent advisors.

    Submitted Jul 29, 2009 12:05 PM

  3. .Chuck G. says:

    An easy way to get all the benefits of an advisory board is to become a member of a group such as The Althernative Board (tabboards.com), which organizes boards comprised of owners of non-competing businesses. A Facilitator handles the administrative issues and finds candidates for vacancies if they occur. You also get the benefit of business coaching between board meetings to add to the accountability factor and keep you moving forward.

    I've owned seven small businesses in my career and am now a Facilitator for The Alternative Board because I saw so clearly that, if I had an advisory board to help me with my own businesses, what a difference it would have made. I know firsthand that feeling of "being alone" when it comes to tough decisions, and how easily an owner can get sucked into daily operations and away from strategic planning and thinking. An advisory board forces you to step out of your comfort zone and look back into your business to take steps required to have a company that delivers on the vision that you had when you opened the doors.

    Submitted Jul 29, 2009 1:03 PM

  4. .E-Myth Business Coach says:

    According to Forbes magazine, about 20% of small businesses offer some kind of compensation, if just enough to cover traveling costs to and from meetings. We would suggest that all advisors be paid the same flat sum for their service on the board. This makes it fair for all participants, and assumes that all members are making roughly equal contributions to the board. It's also customary to pay committee chairs an additional stipend to compensate for the increased duties of setting the agenda and coordinating the activities of the committee members.

    Submitted Jul 29, 2009 1:58 PM

  5. .David R. says:

    I have been on several non-profit boards and started my own non-profit 2 years ago. The key to effective boards for me is finding people as convinced of your vision as you are. Then be strategic about what areas of your business need strength to offset your weaknesses. My board consists of (2) accountant types, 1 of which is a tax specialist, (1) financial investor, (1) computer expert, and several friends who are hard working individuals. You should be selective and know what you want ahead of time. Also take the time to write down the requirements to be a part of the board. Most effective board members are already busy individuals and would like to know the level of commitment. My board has been invaluable and are not compensated in any way financially. They are obviously as committed to the vision as I.

    Submitted Jul 29, 2009 2:43 PM

  6. .David G. says:

    Can anyone suggest a book / audiobook to read more on this topic?

    Submitted Jul 29, 2009 4:40 PM

  7. .Jes H. says:

    Thanks for the great information, Thomas! I can see the impact of having an advisory board.

    Submitted Jul 29, 2009 10:39 PM

  8. .Emem A. says:

    Can board members, whatever type also bring in business for the enterprise or is their role strictly confined to offering advice?

    Submitted Jul 30, 2009 3:35 AM

  9. .E-Myth Business Coach says:

    David G.,

    Some of the more popular books that have been written about Boards of Directors include:

    The Board Book:  An Insider's Guide for Directors and Trustees by William Bowen; Boards That Deliver:  Advancing Corporate Governance From Compliance to Competitive Advantage by Ram Charan; Building Better Boards:  A Blueprint for Effective Governance by David A. Nadler, Beverly Behan, Mark Nadler, and Jay W. Lorsch; The Imperfect Board Member:  Discovering the Seven Disciplines of Governance Excellence by Jim Brown; and Boards of Directors and the Privately Owned Firm:  A Guide for Owners, Officers, and Directors by Roger H. Ford.

    For conducting meetings, Robert's Rules of Order Newly Revised, 10th Edition is often recommended as the go-to tool, but for those of us who need a more digestible overview, we might recommend Robert's Rules Of Order Newly Revised In Brief by Henry M. Robert III, William J. Evans, Daniel H. Honemann, and Thomas J. Balch, or even Robert’s Rules for Dummies.

    Submitted Jul 30, 2009 9:14 AM

  10. .Ryan M. says:

    as a small construction company would I try to choose board members in my business, say a mason, carpenter, electritian, plumber?  or would it be better for me to choose professional trades, such as the accountant lawyer marketing professional? 

    Submitted Jul 30, 2009 1:35 PM

  11. .Reza M. says:

    Respondent to item #6 by: David G.:

    Read The Board Book: Making Your Corporate Board a Strategic Force in Your Company's Success by Susan F Shultz--available at amazon.ca

    Thanks and good luck!

     

    Submitted Jul 30, 2009 5:56 PM

  12. .Frank K. says:

    Reply to #10

    Ryan, I think having someone with construction knowledge would certainly be helpful, but you definitely want to cover the other "non-technician" areas of your business: e.g. sales/marketing, accounting/finance, technology, etc.

    When it comes down to it, every business aims to sell a product and make a profit. There are likely a lot of people across all sectors that could help you.

    Submitted Jul 31, 2009 9:40 AM

  13. .E-Myth Business Coach says:

    Reply to #10

    Ryan, I agree with Frank K.

    The first step would be to ask yourself another question: "What do I hope to accomplish by assembling a board of directors?  Is it to improve the technical work I do or is it to improve the work of the business?"  My guess is that, as a construction company, you have around you all of the resources you need to calibrate your technical expertise -- either by increasing the engagement of your current employees or by closer regular collaboration and communication with your subs.  Where most small businesses need the extra help is in the areas of expertise they don't have in the course of their own field -- the business of business.  Where are the gaps for you?  Finances?  Marketing and Public Relations? Legal (Contracts / permits / liens)? These are the areas where outside professional advisors can most effectively serve you and your business.  It might also be useful to see if you could recruit a board member with an overview of your industry (though not necessarily a specific trade).  Maybe you can include a representative or officer from your local Builders' Exchange or Chamber of Commerce -- to help keep everything else you're doing in context with the larger contracting or business community.

    Submitted Jul 31, 2009 11:58 AM

  14. .Eileen C. says:

    I am not in business yet but in the planning stage; although the business plan is completed. When I am ready I will begin seeking financing for $150,000.

    At what point in time would you suggest I actually (assuming I have found the proper persons and they have agreed to be on my Board) have the first meeting?

    Also, could you give me some idea of what I would have to pay each of them, and for what period of time? Should the money to pay them be earmarked and identified in the business plan?

    Thanks.

    Submitted Jul 31, 2009 2:05 PM

  15. .Victor O. says:

    Thank you guys. I have learnt a lot from all your advices. Does anyone know what the board for fitness industry should include other than attorneys, accountants, and fitness experts?

    Submitted Jul 31, 2009 6:10 PM

  16. .Jack P. says:

    What is the down side, if any, to having people who perform services for you on your board?  Jack

    Submitted Aug 1, 2009 10:02 AM

  17. .Susan N. says:

    I am in the baby stages of working on my business plan.  My business is very complex and I am having difficulty with the business plan.  Due to its complexity I am seeking help through a 3-day workshop on marketing the business.  I have an accountant, a financial advisor and a video person on my current team.  My accountant has advised me that I should ask for a capital investment of $2000.00 each to accomplish two things: to keep my team accountable in case they decide to walk in the middle of the planning stages and the second to use the money to my advantage to pay for upcoming expenses such as incorporating, web design etc.

    My question is,  if there is a capital investment from the aforementioned people would they automatically be on my board?  They are already part of my team but the video person doesn't necessarily have to be on my board; therefore if I create a board and have some as capital investors and some not, how will that affect my board of directors overall if that information becomes public?

    Submitted Aug 3, 2009 10:15 AM

  18. .E-Myth Business Coach says:

    Susan N:

    Nothing necessarily says who should or should not be on your board of directors other than your sense of who will support your vision and add to your strategic direction. Often boards consist of both investors and non-investors. I don't see how knowing this would necessarily affect the contributions that your board members would make to the overall sucess of your organization.

    Jack P:

    As you can see from some of the comments above, other businses owners have people on their boards who provide services to the organization. The only down side I perceive, is if you become disatisfied with their services and need to change vendors, you might also lose a board member. Be intentional about what you want from your board members and communicate this to them precisely.

    Victor O:

    Fitness experts, attorneys and accountants all sound fine, but don't limit yourself. What you mostly want is other professionals who get excited by your vision and goals and want to support you in your entrepreneurial endeavor.

    Ellen C:

    You can read #4 relative to compensation. When to begin recruiting your board and when to have your first meeting? I'd say why not sooner rather than later; having a small board involved during this essential planning stage of your business would make excellent strategic sense and provide you with a sounding board and advice for how to proceed in the early days when things are just being formed.

    Emem A:

    Board members can certainly bring in new business and sometimes key figures in the community are brought aboard just for this purpose.

    Submitted Aug 3, 2009 1:54 PM

  19. .Reza M. says:

    Before you hire a consultant as a board member remember to ask yourself:  What is it that I want from this individual?  Many of us feel that by getting an advisor we are getting someone's support.  Often it is the other way around.  Advisors and consultants, particularly, incent themselves to stay on much longer than they are actually needed.  Most of all you need to have faith in yourself and apply your intellect....As Michael Gerber says" What is your primary aim?" Then stay true to yourself on your way there.

    Don't forget to read "The Board Book" by Susan Shultz.

    Submitted Aug 3, 2009 6:57 PM

  20. .Sylvia G. says:

    Take a broad perspective when establishing your board, especially if you are considering going public in the foreseeable future.  At the smaller business stages it is great to fill in the knowledge gaps, but it is also important for at least some of your board to have a very good understanding of the business you are in - perhaps a retired CEO of a company in a similar line of business.  As you move forward, another great tool is to determine a list of skills that your board, as a whole should have, then look at your current members and determine what skill set you should be on the look out for to supplement your board. 

    If you would like to chat with me about this, I am on twitter at @SylviaGroves.

    Submitted Aug 12, 2009 3:16 PM

  21. .Karen T. says:

    This article is timely, I think having a board would provide fabulous support and direction, and networking. I am currently on a non-profit board for a ballet group - if it had not been for our collective expertise, firm handle on the finances and the connections we have brought the dance group would not have been as successful or even been around.

    I have an incorporated company Canada 1 Property Pages and am sole shareholder here in Canada -  I had not thought to apply this idea of an advisory board to my business - thank you for the article!

    Submitted Aug 13, 2009 9:36 AM

  22. .M. CLAUDIA R. says:

    I'm the only owner of an "S" corp and I have several questions:

    1. Should I be a member of my own board?

    2. Should the members of the board be local people or can they live in another city or country? With tecnology nowadays are over the phone meetings or internet meetings allowed?

    3. How important is it to get the board organized when a business is not making enough money to have employees on a regular basis?

    Submitted Aug 17, 2009 11:10 AM

  23. .E-Myth Business Coach says:

    #22 M. Claudia R.

    These are all good questions. I'll offer my opinion but any coach's or consultant's opinion should always be tempored by your own entrepreneurial perspective.

    1. Yes; you should be on the board, most definetely. Sometimes the owner and/or CEO operates also as the Chairman of the Board and sometimes you give this designation to someone else.

    2. Typically, members of one's board are locals and part of the overall constituency of the business trading area; but this idea is rather 'old school' now with businesses operating with clients and employees all over the country and the world. So I'd say it depends on your business and what kind of cross section you want your board to represent.

    And of course, with technology today, virutal board meetings are easy to facilitate. But check with the state laws of the state in which you're incorporated, since the requirements vary from state to state. Some require that all participants be able to communicate, some say just hear, and some states have voting requriements.

    3. This one can really only be answered by you, and your specitic situation. Having a board during the start up phase, even before having employees, can add a critical strategic planning component to your corporation that you could never have otherwise. In other cases, it might make sense to wait until you've grown some and can attract a higher level board member who not only agrees with the vision but also resonates with the actual structure and employees in place to realize it.
     

    Submitted Aug 17, 2009 2:34 PM

  24. .David M. says:

    I'm fascinated by this idea, and it's very relevant to my current situation.  However, I seem to be missing something relating to compensation.  In #4 you imply that 80% of board members are uncompensated, and that many of the other 20% are given a relatively meager sum.  Assuming these board members aren't relatives (who always seem to be willing to give free advice), why would the rest of the members want to be on the board?  It doesn't sound very win-win.

    Thanks.

    Submitted Aug 19, 2009 4:57 PM

  25. .Keith M. says:

    I guess the answers above did not clear it up for me regarding what should a board member get for..... being on the board?

    1.  money
    2.  dinner
    3.  stock
    4.  nothing
    5.  other?

    Submitted Aug 19, 2009 9:18 PM

  26. .E-Myth Business Coach says:

    David M and Keith M are wondering about the question of paying board members; and if they're not paid why would anyone want to do this and how would it be a win-win relationship?

    Well first off, many of us sit on the boards of non-profits and receive no compenstation because we believe in the mission of the organization. Simliarly, there are plenty of business people who put themselves into mentoring relationships and except no monetary return. Those who believe in you and your business may be happy to serve, and if you do grow eventually they will be rewarded.  

    For a small business, board members are often other business people in the community who have a similar constituency and they will receive plenty of compensation through the mutal strategizing that can also help them in their business. Contacts are made. Ideas shared. Plans created. And think about this: you can sit on somebody else's board too.

    If more small business owners realized the power of creating mutually supportive relationships like this, their success rate would be far greater. I really think it's not difficult to conceive of this being a win-win for everyone involved.

    Submitted Aug 20, 2009 2:32 PM

  27. .bob m. says:

    24, 25, 26 - another way to phrase this idea is that it is a way to build your resume.

    As an entrepreneur you may not think you need a resume ever again, but you probably will, and more importantly, you need to keep building one. When you are looking for a loan from the bank, line of credit from a vendor, introduce yourself to a new customer, run for government office, leadership in a community organization a resume is a great way to summarize your hard won wisdom and show you can share that wisdom with others.

    Being on board of directors is a way to state to others that you know how to help others, and some leadership skills and can add the results of what the organization accomplishes as part of your accomplishments. This is based on having others who know you choose you to help lead them towards success.

    These reasons and more are why many want to be able to learn and grow from working with other companies and help them to success. In essence you get to 'brag' about the success of the company without having to do 'ALL' the work of running the business on a day to day basis.

    Submitted Sep 9, 2009 1:44 PM


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