Entrepreneurs are typically strong willed people and for many, the thought of having to answer to similarly strong willed independent board members about the decisions they make for their businesses is not particularly appealing. They may also believe the cost, time, and effort required for a board with independent members could be put to better use elsewhere in their businesses.
Despite that, a growing number of privately-owned companies have opted to have boards with independent board members, believing that the perspectives and insights that they can bring to the company far outweigh any constraints.
However, independent board members should be much more than just a sounding board for the CEO.
Independent board members can bring knowledge and expertise in areas where the CEO’s and management team’s knowledge may be lacking, such as internal controls, finance, human resources, marketing, tax, and other areas.
Independent board members may also have important industry expertise and first-hand experience gained from working with other organisations facing difficult challenges, such as a cyber attack or managing a crisis.
A board’s role in start-ups
As a private company grows, the owner’s role will change, as will its management processes. In smaller start-up companies, owners usually take a hands-on role. Processes throughout the organisation are informal; since the owner is involved in most activities, he or she has a first-hand knowledge of almost every aspect of the business.
Deloitte Private Partner, Mike Curtis, says that often growing businesses are consumed with growing pains, and this is a management responsibility.
"An independent director on the board can help develop and drive strategy from an overview position."
As the company grows, new people are added to the team and the owner’s role becomes more of a manager and the need for more formal processes, knowledge sharing and delegation increases. Experienced board members can guide CEOs as their role changes and new processes are implemented, and can also offer assistance in developing a shorter and longer term strategic direction for the company.
Easing the issues in family owned businesses
Independent boards can also help family-owned businesses manage one of their biggest challenges: succession. This is one area many family-owned businesses avoid addressing since it involves a complicated mix of family and business concerns. Owners want to do what is best for the business while also treating all family members fairly and avoiding family infighting. Family members may have conflicting expectations about the roles they feel they should play in the family and the business, which they may perceive as a right.
The presence of a board simplifies the succession process. When the board is responsible for identifying a successor, it removes many of the personal issues from the process; the successor will be selected based on merit, rather than family position. The owner, meanwhile, can address family issues without them becoming mixed with succession.
Mike adds that having an independent board member, either on the board of directors or on an advisory board, can add independent thinking to the governance process when it comes to family run businesses.
"For succession, particularly, in family run or controlled businesses, an independent view can be made based on merit not emotion. Family dynamics need to be removed from governance and this is where an independent director is invaluable."
This article was written by by Daniel Aguinaga, Partner in Corporate Governance and Sustainability at Deloitte Mexico; Marcelo Rivero who sits on several private company boards in Mexico; and Dan Adam Konigsburg, Managing Director, Center for Corporate Governance at Deloitte New York.