The evidence is in and the overarching conclusion is this: Entrepreneurial companies are flying solo, with little in the way of best practices for their boards. The Entrepreneurial Boards Composition Survey reports a wide variance in board practices, such as a broad range in the frequency of board meetings (from 4 to 12). It is clear that small- to midsized companies must take action to develop and incorporate best of breed practices for their boards of directors in order to derive the maximum benefit from members and to attract world-class talent.
David Thomson, author of “Blueprint to a Billion” analyzed the seven essentials of growing companies from zero to $1 billion in revenues. What he discovered is profound. Tier 1 board members are common to every single company in his research that grew to $1 billion in revenue. He offers some valuable advice for companies looking to revamp their boards, or create them for the first time:
“Blueprint company boards were heavily weighed with alliance partners, customers and CEOs who had scaled a business. Companies with investor-dominated boards tended to struggle. Blueprint company boards were a much valued extension of the company’s business strategy and management team. These external members provide cross-industry experiences that can greatly benefit a company. We thought that smart investors would dominate the most successful boards. While exceptions existed, Blueprint company boards predominantly featured some combination of customers, alliance partners and CEOs.” Whether an entrepreneurial company is seeking to break the billion-dollar revenue mark or not, the Entrepreneurial Boards Composition Survey offers findings in favor of carefully selected boards that draw from a diverse base of industry experience. Selecting a board member needs to be based on company strategy and complementing the existing skill sets of the leadership and governance team. Given the fact that one-third of companies that participated in the survey have at least one board seat open, there seems to be either a lack of recognition of a board’s value, or a lack of understanding that entrepreneurial companies can attract top talent.
In public companies there are fewer empty seats than in private companies. That seems to suggest litigation concerns are not necessarily a large challenge in recruiting talent to the board. It stands to reason that smaller, private companies are not as visible in the marketplace and therefore may have a more difficult time gaining the attention of qualified board members. This can be remedied with an aggressive strategy to seek out veteran board members. Cook and Vernon assert, “The strength of the board’s composition should be regarded as a critical success factor that will affect the quality of incoming investment as well as the quality of decision making.”
While some firms may shy away from taking on the cost of board members – and the time for meetings – the data shows that it doesn’t take a billion dollars to attract a billiondollar mind. In fact, most of the cash outlay is nominal for cash-sensitive companies. The return on the investment is great. The risk is low. The data also shows that entrepreneurial companies do not have to settle for inexperienced board members. The sample of survey participants reveals small companies are consistently attracting veteran executives to their boards.
The high prevalence of option-based rewards is surprising in light of liability concerns at large, public companies adhering to Sarbanes-Oxley. Many larger companies are beginning to move away from distributing stock to directors. However, the lion’s share of the compensation from small technology companies in the survey appears to be optionbased rather than cash stipends. The data offers some guidelines as to remuneration requirements for board members, which may be less than many small companies expected.
To the Sarbanes-Oxley issue, small private companies may not make the front page of The Wall Street Journal if there is an accounting scandal, but the repercussions are still potentially devastating for an entrepreneurial organization and its stakeholders. Boards of directors, and their audit committees, help to establish and maintain proper accounting protocols.
The overarching conclusion from the Entrepreneurial Boards Composition Survey is this: Building and maintaining a strong board of directors is just as important – if not more important – for private companies as it is for public companies. Keep in mind that the underlying reason for corporate governance rules, such as independence of the board directors, is for the company’s general health. Entrepreneurial companies in any industry typically cannot afford to hire the cadre of C-suite executives that make up a dream team. But a board of directors offers a steppingstone that benefits the company today and into the future.
Roger Raber, past president and CEO of the NACD, put it this way: “Today’s engaged director is more committed than ever to providing rigorous analysis and decision making, as well as adding strategic value to the company and shareholders.”