All public companies, and many private companies, have a board of directors. A board of directors, from a legal perspective, is a group of individuals elected by the shareholders of a company to oversee the company on their behalf. They, in turn, delegate much of their authority to management. This delegation gives management the legal authority to perform many of its essential functions (signing contracts, for instance).
While publicly traded companies must have a board of directors, in many cases private companies can benefit from putting a board in place. And, in many cases, outside investors in private companies will insist on the creation of a board of directors as a mechanism for overseeing their investment.
Shareholders of smaller, private companies may be wondering what benefit there might be to having a board of directors. Some of them are:
1. A strong board of directors can add substantial value through their relationships.
A board will usually be comprised of senior executives with substantive experience, and many years of relationships with a wide variety of contacts. These relationships, if brought to bear on behalf of the companies they serve, can add a lot of value in many ways. Typical examples might be board members bringing manufacturing capacity, market opportunities and financing sources to the companies they support.
2. A board composed of qualified outsiders can bring a very useful perspective to bear on behalf of the company.
A strong board of directors brings a valuable perspective to the table. It often can spot problems that are not immediately obvious to management, and can point to solutions that are not easily seen by the folks in the trenches at the company. It can be helpful, perhaps critical, to have an experienced hand providing high-level guidance at certain key junctures in a company’s life.
3. Management is held accountable to an outside party.
While this may not always be pleasant for management, this accountability can provide motivation for management to prioritize appropriately. The board has a fiduciary duty to the shareholders to ensure that the company is being managed to the shareholders’ benefit. This means that they will be highly motivated to ensure that management keeps moving the company in the correct direction, as mandated by the board. The prospect of an imminent board meeting to report progress on the sales plan, for example, can have a wonderful impact on the sales team’s focus.
4. Having professional “best of breed” governance practices in place can only add value to the company.
With appropriate board governance in place, management must provide justification for its actions. Because a board of directors has the fiduciary duty to oversee the activities of the company, there is less chance of a “skeleton in the closet” since company initiatives have been justified before a board, and approved by them. There is an intangible benefit to being able to point to doing things the “right way,” which can make a prospective investor much more comfortable with the company.
These are a few benefits of putting in place appropriate governance structures such as a board of directors. If done correctly, the result will be a more effectively run company, and a more profitable company, with management’s efforts being more tightly focused on those matters that will propel the company to the next level.