Problem: Too many companies believe there is a universally optimal design for a board of directors and their board must fit it. They seem to think that there is only one model of board structure and it must fit every company. But, boards of directors, like marketing campaigns and strategic plans, need to be customized to fit a company’s unique circumstances.
A board of directors can be a valuable asset for a company. But it requires time and resources to create a useful board. Unfortunately, there is no one formula, no one-size-fits-all approach to board design. Like any other corporate asset, the investment in a board of directors is a function of the company’s individual situation and condition. More specifically, the demands placed on a board will vary with the size of the company and its stage in the corporate life cycle. These company circumstances should then drive the kind of individuals who managers or entrepreneurs recruit to their board. Individual abilities, reputation, availability and experience should be matched with company needs before extending any invitation of board membership.
Smaller companies, or those early in their life cycle such as start-ups or new proprietorships, will require directors with specialized skills. These companies typically need individuals who are highly knowledgeable in the actual operations of the business or industry. These directors will be expected to provide technical advice and counsel to the company’s owners. Often these individuals are subject-matter experts in some aspect of the business’ activities. They should be available to provide highly technical advice on a frequent basis. Consequently, the time commitment of directors in these companies is the highest. Thus, the availability and willingness of individuals to provide this consulting outside of monthly or quarterly board meetings should be a consideration in their selection.
The capital needs of the company are the greatest at this stage, but typically they have little capacity to obtain it. This makes the network connections of directors within the financial community extremely important. Probably more than at any other time, these directors will need to assist the company in gaining access to funding and investment capital. Financial expertise, experience and contacts are another set of critical factors for director selection in these companies.
Mid-sized companies or those past the early stage require a more mixed set of director skills. Technical business skills are less important as managers gain expertise. Less operational business advice is needed from the board. The firm is transitioning from an entrepreneurial start-up to a more established company. There is now the first hint that the board needs to offer critical oversight and review of managerial decisions. The business networks and contacts of directors become more important as the company looks to grow its customer base. Director advice shifts from the operational to increased discussion of finance, marketing and personnel issues. As the company seeks to establish regular policies and procedures, directors with previous business experience or board service will become even more valuable.
Larger companies or those that are well-established benefit from directors who can provide meaningful oversight and monitor management. Their focus is increasingly to ensure that management does not become lax or complacent in the face of market and competitive forces. These companies benefit from directors who are independent in thought and have experience on boards of other companies and a professional reputation that allows them to challenge management when necessary.
Large companies might consider going public or acquiring other companies. Meaningful board guidance on these issues requires specialized knowledge or expertise. If a company anticipates these kinds of events, then directors who have experience with them should be specifically recruited.
As managers and entrepreneurs think about building that perfect board, there are three key considerations that should guide their actions:
• Not too big: There is a tendency to build boards too big in the belief that more is better. Many think that a larger board will produce expanded networks and greater visibility. These advantages must be balanced against the challenges of coordination, commitment and cohesion. There is abundant finance and management research that shows an optimal board size is typically between six and 10 members. Don’t get too big by filling your board with friends and acquaintances.
• Meet current needs: Build your board based on the organization’s current or near-term needs. These needs are usually a function of the company’s size or its stage in the business life cycle. After identifying the skills or perspectives you currently require, recruit individuals for board service who possess them.
• Change as needed: Board appointments are not forever. Both board size and composition can and should change as the company evolves. Do not be reluctant to retire board members whose value has diminished due to changing company conditions. Keep the board relevant to the company’s current circumstances and competitive challenges.
Stephen P. Ferris is the dean of the College of Business at UCCS. His research is in the area of corporate governance, capital markets and international finance. Contact: OPED@uccs.edu