The term "board of directors" conjures up high rise, roundtable meetings of humorless suits discussing fourth-quarter shareholder reports for the largest corporations in the world. Boards are for big business, not small business. Right?
Susan F. Shultz, founder of SSA Executive Search International (www.ssaexec.com) wrote The Board Book to dispute such notions. Boards are for every business, asserts Shultz, and in her book, she explains why both statutory and advisory boards can have a positive impact on all business and what the most common mistakes of board management are. We've asked Shultz to give us a quick primer on the world of boards.
Entrepreneur.com: What's the basic definition of a board of directors?
Susan F. Shultz: Essentially, the purpose of a board is to address the big issues and avoid the big mistakes. Legally, the statutory board is responsible for the fiduciary operations of an organization, making sure a succession plan is in place, and-the most important responsibility-the hiring and firing of the CEO. Recently, the responsibilities of a board have expanded very dramatically to involve strategic input. Boards also serve as tremendous multipliers by providing [small-businesses with] access to all the key resources: partners, the financial community, and IPO, distribution, marketing and personnel experience, resources and valuable expertise they wouldn't otherwise be able to afford or reach if [those experienced people] weren't sitting on their board.
|"A board is a pivotal success factor, and I don't understand why every company of every size, public and private, doesn't have a board of directors to help them-especially small companies that don't have the resources of large corporations."|
A board is a pivotal success factor, and I don't understand why every company of every size, public and private, doesn't have a board of directors to help them-especially small companies that don't have the resources of large corporations. If you don't have a strategic board as a small company, you're already in trouble and you don't even know it.
Entrepreneur.com: What's the difference between a statutory and advisory board?
Shultz: All incorporated companies are required by state law to have a statutory board. And [since] it's a state law, [the specifics] depend on which state you're incorporated in. Statutory boards do indeed have fiduciary responsibility and because of that, they have the ability to hire and fire the CEO. And they have full liability.
Advisory boards, [which are not legally mandated,] are a wonderful way for smaller companies to test drive a board because so often, company founders, presidents and CEOs are [hesitant] to have a board. With an advisory board, the CEO fires and hires the directors instead of other way around. An advisory board also allows a company to focus on strategy, without being diverted by the minutiae of financial matters and regulatory matters. Plus, advisory boards have diminished liability.
Entrepreneur.com: Why do you find entrepreneurs are apprehensive about creating a strategic board?
Shultz: Boards are tremendously underused and underappreciated by small companies, and I think the reason is that founders and CEOs are afraid to have somebody second-guessing their decisions. Too often, boards become little more than cheering sections for whatever management wants to do. CEOs tend to see a board as a necessary evil; they want their friends on the board and they see the board as a nuisance. So boards tend to be loaded with way too many insiders, paid consultants, family members and cronies with interlocking directorships. The net result is the allegiance of these directors is compromised and they just don't ask the hard questions.
The other big mistake is a lack of diversity. If you have eight or 10 people just like you sitting around the board table, you may as well be talking to yourself. You really can't be responsive to your constituencies and more important, you won't have the strategic discussion that fast-forwards your business to success.
Entrepreneur.com: How often should boards meet?
Shultz: Most boards meet on a very regular basis. More and more is being demanded of directors, and it's estimated that a board director spends 100 to 150 hours a year [with board tasks.] The director is responsible not only at the time of the meetings but 365 days a year. Smaller companies' boards will typically meet quarterly. However, the founder and CEO should be in touch regularly in the interim to keep the director kept informed between board meetings.