Does your Board have the right culture to lead?

A Board is an agency of shareholders or members of an organisation. A business or a not for profit may have many owners and members. They pool capital towards a shared vision or purpose. These organisations need focused teams to set the strategy and execute. However, the shareholders and members may not be the right people to execute. As a result, these shareholders or members appoint a Board to govern. The Board in turn hires the CEO who hires the management. The Board governs and the management manages.

In most countries, a Board carries and executes regulatory responsibility. But when is a good time to have a Board? Most entrepreneurs with revenues less than $2Mn can function with advisors. You can meet these advisors regularly for advice, depending on their specialty. For organisations from $2Mn to $20Mn, a Board of Advisors is an ideal structure. In both the cases, having quarterly meetings with a pre-defined agenda can be helpful. This is to ensure that the organisational needs and key items are covered.

Businesses with more than $20Mn in revenue should consider a formal Board of Directors. This can have a combination of specialist skills, balanced with experienced business operators depending on the stage of the business. For example, a fast-growing technology business of this size will need Directors who have built high growth tech businesses before, someone who is strong technically and one or two Directors with financial and legal experience.

The same business, closer to listing on a stock exchange may bring Directors with experience of being on listed Boards and someone with a strong understanding of managing risks and compliance. Board composition can change based on the stage of the business, their needs, manage listings, etc.

It is worth noting that a Board of Advisors and Board of Directors are very different when it comes to accountability, liability and reward. This is not to say a formal Board may not be effective and larger businesses cannot grow with a Board of Advisors. I have seen very large businesses built without Boards and very small businesses have an effective Board. This is merely a guideline.

3 to 5 people for an Advisory Board; 5 to 9 for a Board of Directors; and 7 to 9 for a not-for-profit Board are my recommended numbers. You can often encounter people who seek a Board member for their contacts. That is usually not a great reason to have someone on your Board – contacts almost always dry up in a two-to-six-year relationship.

A good Board will have a mix of skills and experience including strategy, finance, compliance, been-there-done-that and credibility. It is important to reflect on the needs of the organisation and its shareholders – short term and long term. Additionally, director-specific skills are often different from personal qualities you may seek.

An Executive Board member is an employee of the organisation. They may be conflicted as they are holding a governance role while executing strategy. There should be really good reasons for having an Executive member on the Board. The Board should have at least half or more of members who are Non-Executive or independent. For clarity, Non-Executive directors may have a relationship with the organisation, example own shares, but are not employed by the organisation. Independent directors are completely independent from the organisation.

The Chairperson of the Board is first amongst equals. They create an effective environment for robust discussions. They focus the discussions and help make decisions on contentious issues. The Chairperson can be the key liaison between the Board and the CEO and sometimes the management – however this comes down to the culture of that Board. They are often the mentor and the sounding board for the CEO. Again, different Boards have different members take a lead role. You can find that a good Chairperson can create a healthy Board culture.

Board fees depend on the stage of your business. In company boards, a stipend and expense coverage is normal. Vesting of shares overtime is also common. For larger organisations, a remuneration committee can help benchmark Board fees.

A planned agenda is crucial to operating an effective Board. It is important to distribute prepared papers in advance. The papers should also be read in advance. The meeting must remain high level and discuss items that have the biggest impact on the future of the organisation. A good Board will track action items between meetings and report back at the next meeting.

In larger organisations, committees are useful to delegate deliberations in key areas. A Board can never 100% delegate responsibility, committees only recommend – Board can choose to adopt the recommendations. Example committees include audit and risk, investment, infrastructure, governance, nominations and remunerations amongst others. Committees are an opportunity to seek and leverage specific expertise. It is best practice that most members of committees be independent.

Board recruitment does not need to be an overnight affair. It is ok to start incrementally and only make offers when you are sure about the Director. It is more important to get the Board culture right. Bringing Directors on as observers is a good way to test their fit with the Board.

Much like the organisation itself, Boards have their own culture. Their constitution and dynamics are unique. Boards are very important for every organisation. And it is never too late to consider setting one up, even if small, to help your organisation become the best version of itself.

Key takeaway

• It is more important to get the Board culture right.
• Bringing Directors on as observers is a good way to test their fit with the Board.
• It is worth noting that Board of Advisors and Board of Directors are different when it comes to accountability.
• A good Board will have a mix of skills and experience including strategy, finance, compliance.
• It is important to reflect on the needs of the organisation and its shareholders – short term and long term.
• Director-specific skills are often different from personal qualities you may seek.

Board recruitment does not need to be an overnight affair and it is okay to start incrementally only making offers when you are sure about the Director.

Ruchir Punjabi, Co-founder of Distributed Energy and Member of Entrepreneurs’ Organisation UAE.