Is This Any Way To Run Your Business?

Chapter 16 DIRECTORS

Most, if not all, business owners and executives are missing out on a fantastic opportunity to get free or nearly free advice. During my years of corporate finance consulting, I've discovered that most closely held companies' Boards of Directors are made up entirely of their owners. And usually just one person.

There's not much you can learn from talking to yourself or the one or two coworkers with whom you speak every day.Instead, consider forming a true Board of Directors for your business, with members from both inside and outside who can contribute to your operations.

Consider one or two non-owner executives or a representative of your company's hourly workers as inside members. Select inside directors with a broad understanding of the company's operations and the ability to address problems and questions that extend beyond their own department.In terms of outside Directors, being asked to serve as a Director is an honor for many business people, and it is a service they will gladly provide.

I've served on a number of client boards over the years, most recently two for companies that I found particularly interesting. On a quarterly basis, I'm happy to devote that time to the development of those companies. I've been given modest stock options and stipend as a way of rewarding my contribution as a Director on a few occasions, but I've mostly served because I wanted to see that company succeed and thought I could help.

A number of business people can and would serve on your Board of Directors and provide advice. These individuals can also assist you in resolving issues, reviewing expansion plans, and making other contributions to your company's success. They should, however, be carefully selected and, most difficult of all, replaced if they fail to contribute or attend regular meetings.

We met every quarter on the majority of the small company boards on which I've served, but we were also given monthly financial statements and a periodic note from the President informing us of any significant developments. (See also Chapter 8.)

Furthermore, the President always prepared an agenda for Board meetings in advance, listing specific topics, questions, and issues that he or she wanted to discuss. The meetings were usually a half-day or less in length, with very little wasted time or idle discussion. Furthermore, we always conducted our meetings as if they were formal Board meetings, with motions being voted on and minutes being kept as a record of our discussions and decisions.

In this regard, one of the standard due diligence requests if or when you decide to sell your company is a review of your Board minutes. Although few private companies have them, demonstrating that level of organization and discipline can be beneficial and contribute to a smoother transaction and transition.

Three obvious candidates for potential Directors who can usually provide valuable insight are an accountant, an attorney, and a banker. These professionals often may have limited understanding about business. My preference is other business owners, especially retired ones. If any of those people you're considering has an existing relationship with your or a competing company and thus feels conflicted, ask someone in a similar position who doesn't have such a relationship. An accountant as a member of one of the Boards who is not a member of the firm that reviewed the company's financial statements, for example.

Others who might be good candidates for a Board position include someone from your industry who isn't a direct competitor, one of your main suppliers, or any other businessperson with relevant experience (although usually not a customer).I've found that five members on the Board of Directors is a good number for most businesses. The odd number prevents deadlocks in the voting process, and five people waste less time than seven. Nine is far too many; three does not provide enough variety to be useful.

I recommend that the company reimburse all Directors for any expenses incurred as a result of their attendance at Board meetings, and proved appropriate Officer and Director (D&O) Insurance. Atlanta is home to one of the boards on which I recently served. Because attending those meetings required a flight from Orlando, we usually held two meetings per year, one via conference call and the other in person, to keep costs down.If your company can afford it, a small stipend/fee for each meeting attendance may be appropriate. In the past, director's fees have ranged from $250 to $500 per meeting, with one large corporation paying $1,000.

Incentivized stock options to Board members is another good way to reward them. Stock options, of course, necessitate that the company provide a mechanism for converting the options into cash at a future date. Options may be especially appealing if the company is planning another "liquidating event," such as a sale, within a certain time frame. I'm currently working on a growth strategy for a company that the owner wants to sell in five to six years. Incentive stock options can be a lucrative form of compensation for Directors if they help with the planned expansion and then share in the subsequent growth.

Don't miss out on a great opportunity to learn from others as you lead your company, solve problems, and work to expand it. Meeting with outside directors four times a year to discuss your company and operations is one of the best ways to get advice that can't be bought but is extremely valuable. If a board is not viable or unattractive consider a less formal option — joining my Mastermind.