When we hear talk of “boards” the general belief is they are for public companies only. Not something a startup or SME needs to worry about, right? Not necessarily.
Boards come in different forms with different operating rules. A less formal board of advice or a formalized board of directors both deliver important benefits to SMEs and start-ups, and can evolve over time to match the needs of an SME at different stages of their business journey.
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So what are the key differences between a board of advice and a formal board?
A board of advice
A board of advice generally consists of experienced business people that have business acumen and, more importantly, the contacts that a budding entrepreneur needs during the formative stages of a business.
They also provide a business owner with advice that could be:
- in specific areas a business owner wants to address at that particular phase of the business’ lifecycle,
- tied to the development of business plans and strategies, or
- to help define an action plan to implement those strategies.
Boards of advice are particularly useful when an entrepreneur needs lots of help but does not want to be tied down with the formality and restrictions of a formal board.
A board of advice can act as a sounding board, challenge your thought process and provide alternative points of view. It can also provide contacts, introductions and insights gained from prior experience.
A board of advice should be made up of a cross-section of members and might include non-competing business owners and contacts from within your industry or outside it, as well as clients or service providers.
Whoever you choose, they should be individuals you respect and trust that cover a diverse range of relevant skills and experience.
This provides the ability to tackle issues from all angles and helps to address any gaps between what the business needs and what the business owner can personally deliver to meet those needs.
Members of a board of advice do not have any formal voting powers and their decisions are non-binding on the business owner and the business.
Likewise the members do not have the same obligations nor the potential legal liabilities that formally appointed directors have.
While a board of advice is flexible and less restrictive, there will be a point where a business needs to consider putting in place a formal board.
Formal boards are responsible for:
- maintaining good corporate governance,
- agreeing to the strategic direction of the business and monitoring its performance,
- acting as the guardian of the major business and financial dealings of the company,
- and representing the interests of all investors and the broader stakeholders of the business.
Formal boards are bound by certain rules and statutory requirements enforceable by law that a board of advice is not subject to. The operation, structure and representation on formal boards is governed by the Corporations Act, which addresses issues such as:
- who can be a director, how they are nominated, appointed and what their duties and liabilities are,
- how decisions are formalised and made by a resolution at a board meeting,
- how board meetings are called, conducted and documented,
- the relationship between the board and management team of the business,
- the maintenance of financial records and the format they must be prepared in,
- and a range of other administrative compliance requirements that must be met by the board.
Given the degree of responsibility and compliance required compared to a board of advice, it’s important to understand all this when considering implementing a formal board.
So when should you implement a formal board? Here are a couple of milestones in the evolution of a business that will result in the need for greater formality:
Businesses that seek investors will find the board needs to evolve to a more formalized arrangement. Venture capital investors for instance commonly require an investor director position on the board of companies they invest in.
This condition is usually covered in the Shareholders Agreement they negotiate with companies at the time of investing.
When this happens it doesn’t mean the business owner loses control of the board. If they are still the majority shareholder, they can maintain control of a higher proportion of seats on the board, as well as nominate and elect the other directors they want on the board.
Investor controlled businesses
This changes if a business owner or founding shareholder sells some of their shares in the company, moving it from founder controlled to investor controlled.
In these circumstances, independent directors are appointed to the board. Independent directors are directors that provide an independent contribution without the vested interests that founders or investors come with.
They are important to a company where the founding shareholder sells their majority stake to investors. Investors are motivated by their return on investment over a certain period of time.
While this benefits the business, it doesn’t adequately ensure this is balanced against its longer term interests or those of its other stakeholders such as employees or customers.
The boards of public companies evolve again, as Shareholder Agreements are replaced by public company governance standards that dictate how directors are nominated and elected; their length or term of service on the board; and how the board itself should operate.
While boards operate and can evolve in these different ways, they all serve the purpose of providing advice, counsel, relationships, experience and accountability to pursue and achieve the goals and objectives of the business. Every business can benefit from that.
Marc Peskett is a director of MPR Group a Melbourne based business that provides finance lending, grants advisory and capital raising services as well as business advisory, tax, outsourced accounting, and wealth management to fast growing small to medium enterprises. MPR Group is a member of the Proactive Accountants Network.
You can follow Marc on Twitter @mpeskett