“I am trying to hire a CEO for my manufacturing business. If I give him equity, what should I do for my existing GMs?” One of my early-morning jogging partners shot this at me recently. Mine was a group of men, all in their early- to mid-forties. Many members of the walking (some ambling) group run their own businesses. Many a morning, we end up discussing the challenges someone in the group faces that week.
It surprises me to see that many firms lack a truly functional board of directors or, at the very least, an active board of advisors, though they have become reasonably successful. Each of these firms fulfils the mandatory requirements for the appropriate number of directors and periodic board meetings and minutes—often honoured more in the breach than in the observance. Ironically, this state is probably truest in entrepreneurial firms that would benefit the most in having such a functional board of directors or advisors.
Many entrepreneurial firms start off as proprietorships. They do so for a number of reasons, which range from the simplicity of the business to a founder feeling uncomfortable having partners or other equity owners. As the business grows, the more successful ones—even while staying private and closely held—end up having additional partners, external investors or employee shareholders. The ones that go public are beholden to a new set of statutory and practical rules of operations. However, proprietorships, partnerships and most limited companies are run far too long with little external help or advice, let alone oversight, that a well-constituted board of advisors or directors can provide.
Company Law and the law of the land recognise, empower and hold responsible the members of a company’s board of directors, to stringent legal and statutory criteria; for all intent and purposes, it doesn’t recognise any locus standi for a member of the board of advisors. For this very reason, people who don’t want to deal with the legal liabilities of being board members may be open to being a member of a company’s board of advisors.
The reason why am I so bullish on a board of directors or advisors is that I see a board playing the same role for a company that a good mentor would play for an individual. In other words, it acts as a sounding board, an experienced hand to guide through the shoals of business and someone to keep honesty intact.
In the case of my friend who wondered whether to give his CEO-candidate equity in the company; and if so, how to structure the vesting or earn-out of the equity, and how to handle equity to his current general managers, he sought help from us, his peers, as well as an HR consultant from the local management institute. Consultants can bring value with their external viewpoint, domain expertise and articulate the options available. But they do this with little context about the business.
On the other hand, a board member would have the larger context of a business, the history of the key staff and the challenges the business faces. So, when they bring their expertise of having seen and handled equity structuring in other companies and make recommendations, they do so within the specific context of your business.
Such a context may include constraints that one has, commitments one has already made, and contributions other long time employees have made. They may also understand the blind spots, prejudices and weaknesses, and be in a position to champion a course of action in a far more an effective manner than a consultant.
As business operational heads, most of us don’t think twice about seeking external expertise, like hiring an IT or a PR consultant or an intellectual property lawyer. We would be better off constituting an operational board of advisors, who can not only bring in such subject-matter experts, but can also provide a sustained, steadying hand over time to our businesses and ourselves as leaders.
This article first appeared in Outlook Business in August 2008.