What is a board?
A board is:
- a group who meet regularly to look at the performance and strategic progress of the company
- at least one independent director and other owner-operator directors (executive directors)
- a group who can separate themselves from the day-to-day operations and take a birds-eye view of the business
- a group who can debate the difficult issues and come out with a clear decision for the future of the company
- ultimately, a group who guides, and is committed to, the company.
There are two types of boards:
- advisory boards
- formal boards of directors.
Benefits of having a board
A board can help grow and develop at a pace that suits the owner, staying inside the speed limits, or accelerating to full throttle.
Governance applies to all companies, but not all in the same way. There is no set route to follow, but most companies face similar issues, such as:
- the need for capital injections
- maintaining and expanding market share
- innovation and risk management
- managing debt and stakeholders.
Both advisory boards and boards of directors should have a similar structure – a chairman to facilitate, and formal procedures for conducting meetings.
- executive directors (those who work in the business) are often in a better position to evaluate the performance of the organisation because of their vast experience and inside knowledge
- non-executive and independent directors are more likely to be objective, and look at the company without business-owner emotions
- being able to successfully navigate the shoals of company law, whilst keeping an eye on the horizon – big picture thinking – is part of an experienced director's DNA! For busy start-up or high growth business owners, it's easy to lose sight of anything other than the demands of the day
- setting up a board or appointing non-executive directors will ensure the company performs and grows, with no curved legal balls tossed your way.
Positioning for growth
Since the late 1990s, management and IT consulting business Maven has grown to 37 consultants across New Zealand – and now they're setting their sights on new opportunities offshore. Maven used good governance to get ahead.
Find out more about their story
Board vs management
An effective company must ensure the relationship between the board and management is complimentary rather than adversarial. This is one of the most important relationships within a company, so make sure it is well managed.
Separating ownership from control
It's easy to get confused with the difference between governance and management. The board is in charge of governance of a company which seeks to ensure the smooth running of a business by making accountability and oversight the core of their workings. Governance also ensures that the business has a future-facing strategic plan.
This is where management comes in. They take the strategic plan and work to implement it into the day-to-day operations of the company.
Both roles are vital and complementary
The difference can get blurred with start-ups and high growth businesses when:
- there are only one or two directors
- the same directors are founders
- these directors also manage the day-to-day operations.
Which hat to wear?
Executive directors need to think about the hat they have on:
- for operational aspects an executive director wears the management hat
- for board meetings, an executive director will need to switch to the more strategic cap (ie governance).
This is where an independent director can help guide your board discussion, and make this delineation clearer.
An advisory board is a committee of people selected by a business (or a board in the case of larger companies) to provide defined advice and information in an informal and flexible manner.
Advisory board members are not directors, have no powers and owe no duties as directors of the company. The key differentiator is that an advisory board advises only. It has no power of decision making and cannot instruct the company to act.
Effective advisory boards provide strategic and compliance guidance and know-how that is contextualised to the needs of a business in a range of business settings.
Why have an advisory board?
There are a number of reasons why you might have an advisory board.
- Others can help your success by providing valuable business insight and oversight.
- A specific area of interest, eg entry into new market requires specialist advice.
- You are looking for early stage market validation.
- The flexibility of engagement appeals to you.
- You need help with succession planning and/or to become investment ready.
- You want your business to become more professional.
Start-ups and businesses in the high growth sector can particularly benefit from the guidance of an advisory board which can be used as a business development tool and adjunct to strategic planning.
Larger companies that already have a board of directors may also set up advisory boards for a number of reasons – whether it’s to work on a particular project or deal, bring a fresh perspective to an issue, or provide particular expertise in a specific field relevant to the company.
An advisory board is different because it:
- does not represent shareholders
- is not bound by fiduciary responsibility
- provides advice and support to the CEO
- is less formal than a statutory board of directors
- is more flexible
- is not a substitute for a formal board of directors
- has no power to veto, instruct or direct
- deals purely with strategic aspects of the business
- is a source of valuable business insight and oversight based on years of collective experience
- is usually appointed by the managing director.
To take the next step towards setting up an advisory board, see the Advisory board toolkit.
A formal board of directors has major responsibilities and legal obligations. They are:
- appointed by shareholders
- manage, direct and supervise the company
- liable for their actions
- may direct management
- passes company resolutions
- required legally to act in the best interests of the company
- are ultimately responsible for the success of the company.