Why Business Owners Need Boards

Source: Michael Jacobs, Jacobs Capital and professor at UNC’s Kenan-Flagler Business School

The old adage “it’s lonely at the top” applies nowhere better than to running a private company, where CEOs make daily decisions about disciplines in which they have no background.

Having worked with more than 200 private-company owners over the past 25 years, it is my observation that the most-underutilized resource for private companies is a “real” board of directors. Owners who want to maximize the potential of a company and fully enjoy the experience of running a business need to surround themselves with a seasoned, diverse complement of business minds that meet on a regular basis.

Most business owners have complete autonomy. In fact, the primary reason many started their own company is that they don’t want anyone looking over their shoulder. However, not only is running a business too complex for any single individual, it is no fun to make decisions in a vacuum over an extended time period.

Business owners succeed because they are really good at something. It might be science, medicine, manufacturing or sales. But that “something” is rarely business itself. The Achilles heel of most business owners is that they don’t know what they don’t know.

It is not an admission of failure to acknowledge that you need help making key business decisions. In the 1980s the board of Coca-Cola, one of America’s most successful companies, was comprised mostly of marketing experts, with a sprinkling of lawyers and doctors who were buddies of the CEO. Coke’s stock had been dormant for years. Roberto Goizueta emerged from an unlikely background – head of the R&D department – to take the helm at Coke. The chemist questioned everything about the business despite its great success, and he reconstituted Coke’s board with experts who knew what he didn’t know. Over the next decade Coke stock grew 10-fold, dwarfing the S&P 500, largely the result of implementing new financial strategies his prior board had never considered. Today Emory University’s business school is named after Mr. Goizueta, because he knew what he didn’t know and built a board to supplement his skill set.

What should your board look like?

The key to constructing a successful board is to assemble a diverse set of business skills that are complementary, not redundant. You need at least one person who has significant knowledge of corporate governance. Unless there are people in the room who know what a board is supposed to do and how boards function most effectively, you will have the blind leading the blind.

You also need someone with knowledge of the specific industry and its competitive landscape.

You need an expert in finance. Most private-company CFOs are really controllers. You should have a board member that knows all aspects of the capital markets and has worked on transactions. Even if you don’t immediately need to raise equity, borrow money, make an acquisition or sell your business, some day you will.

The backgrounds of the other board members depend on your business and your personal skill set. Recruit directors whose competencies are in areas where yours are the weakest.

Except in rare instances, employees should not serve on the board. They can attend board meetings to present and discuss, but there should be times when the directors are free to discuss management issues without management (except the owner) present.

Likewise, every company should have a competent lawyer and accountant, but they should not be on the board. Public companies are prohibited from selecting their accountant and lawyer to serve on the board for a reason. They have a different role as paid advisers.

Your board should meet at least four times a year. Otherwise, directors can’t get to know the company and its management team, limiting their ability to offer insightful advice.

While it may be counter-intuitive, the best boards have even numbers of members. A board decision should never be determined by a single vote. If a solid majority of the board is not convinced a path is the right one, you shouldn’t go down it.

Your directors should receive some compensation. The amount and form depends on the size of your business, its financial resources and its stage of development. If you have the right directors, their sage advice is probably worth many times what you pay them.

Consult your board between board meetings. Directors are a resource 365 days a year.

Studies show that private companies with true boards outperform those without. What is not commonly known, though, is that business owners who have true boards of directors enjoy their jobs more—it is not so lonely at the top.

Source: Michael Jacobs is CEO of Jacobs Capital and a professor at UNC’s Kenan-Flagler Business School. He served as director of corporate finance and corporate governance policy at the U.S. Treasury Department and is the author of Short-Term America.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.