When should a small business add a Board of Directors or advisors and what and how many roles should it containMar 24, 2020
Putting aside the compliance needs to be called ‘Directors’ per Australian Securities and Investment Commission (ASIC) – or the equivalent in your country – it is good to have a value-adding and active Board of Directors or Advisors. A passive ‘Board’ is not a ‘real’ Board, they just have the Directors (usually all the owners in a small business) listed as a Director at ASIC. But you can get a lot of value by meeting on a regular basis with people with more, or different, business experience to yourself. And who are detached from the day-to-day hustle and emotions that comes with dealing with customers, suppliers and managing staff.
Generally, we feel once you get to 10 team members or $1m in annual revenue you should consider putting a Board together and meeting regularly.
What are the advantages of having a ‘real’ Board in a small business
The advantages of having a Board, and meeting regularly (monthly, every two months or at the least quarterly), include:
- Diversity: A multiple of experienced minds checking key decisions in the business and changes in the market, so the strategy can be adapted;
- A Leader: The day-to-day leader of the business (CEO, Managing Director or GM) who reports to the Board is held to account;
- Expertise: The Board can provide support to the leader in specific areas they may be lacking, like finance or marketing;
- Credibility: A Board can add credibility to your business for funding (banks or investors); and
- A network: A Board provides a valuable network of people to tap into when you hit roadblocks in your business.
The focus of a Board, and Board meetings, is strategy – looking at matters that impact the medium and long-term success of the business. This is akin to working ON the business not IN it.
For a small business owner, a Board forces you to stop, take a breath, revisit the strategy you have set and see if you are off-track or need to change course in any way. You also have people challenge your ego and any set ways of thinking.
What is the difference between a Board of Advisors and a Board of Directors?
A Board Advisor is a less formal role. They do not take on the more serious legal responsibilities a Director does, see below. They can be key consultants or advisors and good practice is to meet regularly and talk through an agenda.
Usually a Board of Advisors has the small business owner sitting on it. We recommend a Chairperson is appointed that is not an owner.
A Board of Directors is when the people sitting on the Board have more formal responsibilities by law. They are registered as Director through the ASIC. Board Directors have greater legal responsibility to represent the best interests of the business, the shareholders really, and ensure the business is always solvent (i.e. not close to going under due to cash flow or poor trading).
In some instances they can be financially responsible for the failure of a business, and even face jail time. When thinking about your company set up you must take advice from a professional about aspects relating to structure and in relation to taxes and finance.
What are the roles on the Board?
A Board should be made up of people with differing backgrounds and skills to the other members. Work backwards – answer the question ‘what functional areas is the business weak on?’ Typical functional areas or experience that a Board member may bring includes:
- Strategic planning
- Industry knowledge
The Chairperson has extra responsibility to the other members of the Board, including:
- Agendas: Ensure the right agenda is included in the Board pack
- Minutes: Ensure accurate minutes of the meeting are issued within a week of the meeting
- Time management: In the meeting ensures the Board sticks to the time and agenda, and moves topics on if too much times is spent in any one area
- Voting: Calls for a formal vote on matters that require it
- Represent the Board outside the Board meeting. If the leader of the business, or stakeholder, needs to raise a serious matter with the Board in between Board meetings, they approach and discuss with the Chair. They Chair will then decide if an interim Board meeting needs to be called to discuss and potentially decide something, canvass other Board members and then respond/make a decision on the matter.
The Chairperson should be experienced and skilled in dealing with difficult situations and people, and know how to navigate personalities and complex topics to get the best result for the business.
An Executive Director is someone who sits on the Board as well as holding a job within the company (part or full-time).
Conversely, a Non-executive Director just sits on the Board – they don’t have a job in the company.
Typically, an Independent is a Board member who does not own shares in the business, and is also non-executive. They are deemed independent as they have no financial interest in the company – shares or employment – other than the Board fees they are paid.
How big should my Board be?
At least three members are advised, and you could go as high as seven but an optimal number is five. If you have an odd number of Directors then usually in your Constitution you will dictate how a voting deadline is broken. Often this is by the Chairperson getting an extra, or the casting, vote.
If you end up with an informal Board of Advisors three is ideal – with a good spread of skills and strategic thinking.
What should Board members be paid?
Depending on the size of your business and its stage of growth you can pay anything from nothing to $20,000 per annum per Director. The latter is for larger, more established small businesses.
You can start discussions around $6k – $10k per annum per Director. This depends on the workload of the Board, frequency of meetings and calibre and experience you need in your Directors. Scope of the Board could also include some members sitting on sub-committees to save time in Board meetings. These sub-committees could cover areas in the business like:
- Business expansion: if the business is coming up to a chapter of growth and expansion and funding is needed, then it is sometimes good to have a few Directors plus key management work together to get the expansion proposal drafted. Once signed-off by the Board this proposal can then be used to discuss funding with the bank or investors;
- Finance: especially if accurate financial reporting is not yet the norm, it can be good to have a sub-committee formed to help management get this up-to-scratch;
- Remuneration: meet to discuss and recommend to the Board what the leader of the business, and sometimes other senior managers of the business, should be paid; and
- Work, Health & Safety (WHS): ensuring the team and the public are safe in the workplace is becoming increasingly important, as is the legal risk to the Board. A Board can be deemed negligent if they have not ensured a safe workplace has been provided, and the controls and focus needed to ensure safety are not active.
For those smaller businesses starting out often remuneration can be in the way of free or discounted product, and even shares or options over shares. If the business hits certain targets then their shares vest (becomes owned by them). It is a good way to conserve cash while also fairly remunerating (and sharing some of the risk) with good people on your Board.
If you aren’t in a position to pay your ‘Advisors’ then it is important to be upfront with them from the outset, find other ways of rewarding and thanking them for their contribution to your vision and success.
The Chair will often get paid a little more than other Directors as they have more work and responsibilities.
Executive Directors are often not paid to sit on the Board, it falls under the scope of their employment with the business. Same can be said for shareholders – if they own a decent chunk of the business often they are not paid as a Director.