Why Your Young Company Board Needs Independent Directors

I’ve been a writer, editor, speaker, and observer on global corporate governance for 30 years now. I have seen many changes in attitude and expectations on boards and governance over the decades, but also a few constants, beliefs that sustain our views of good governance no matter what.

One of these has been the value of independent members on a corporate board. Large public corporation, family firm, promoter-led, venture company, whether in the US, Asia, Europe, India, or Africa -- the rule remains the same. Non-executive, non-family, unconflicted outside board members bring real value to the enterprise. 

Now usually, as a governance writer, I try to challenge our assumptions on what does and doesn’t make for an effective board, and there are a number of certainties on this we shouldn’t be so certain about. However, when it comes to independent, outside directors, the value connection seems too obvious to argue. Research and experience show having at least a few non-employee board members goes with less fraud, improved shareholder value, better corporate responsiveness and resilience, and stronger revenues. 

No, these benefits are not a governance panacea. As we’ve seen from too many corporate scandals around the world, big global companies (whose boards were well stocked with a majority of first-class independents) have failed badly in their oversight. 

Yet far more common are firms with powerful promoters, founders, and a narrow circle of investors where the board was conflicted, weak, populated with cronies, and overawed by the chief executive. These are often younger, closely-held, private firms, and those in growth economies that are still working to build world-class corporate legal protections. Here, even one or two truly independent, outside board members can make a huge difference. 

Sounds good, but what are the specific benefits that independent board members can bring to your companies? Some may surprise you.

First, they offer true impartiality. With founders, family, promoters, and investors in your boardroom, everyone of necessity will be pushing a particular agenda. Keeping control, tapping revenues, directing resources in their direction, acquiring or divesting… everyone in the room has a personal interest that clouds the overall interests of the corporation, and owners or stakeholders -- the people who aren’t in the room. The independent director, if truly independent, has no equity to game, or interest to protect. They can stand back and deliver an objective, informed view of proposals. And if a promoter objects to an independent, objectively beneficial course of action… what does that tell you about the promoter?

An independent brings expertise. Every company, and especially growing ones, has areas where they lack knowledge and resources that may be vital to the next stage of growth. Target your outside, independent directors to fit these needs as precisely as a key fits a lock. Maybe you want to go public, scale to fast growth, enter a new market, make acquisitions, seek financing, work with regulators. 

Somewhere out there, you can find a seasoned executive who has already been there, done that, and would love to share his or her expertise with you. And for a growing company, you can’t beat the price. Even if you pay your independent sitting fees (and you should), the cost is minor compared to what you would have to pay outside consultants and advisors to gain such professional insights. If nothing else, a good board of directors is the cheapest, highest-value consulting firm you can get.

Independent board members don’t just bring themselves to your company. You add a seasoned, perhaps retired executive who’s spent many years in the business world. Aside from his or her knowledge, you’re also gaining that director’s network, which will be a rich resource. They know many other top talents, often serving on other boards with them. Finance, banking, strategy, law, accounting, government licensing and regulation, investments, taxes, compensation, recruiting. By adding that director, you’ve just opened the door to all the experienced, well-placed people in the director’s contact list. You’ll realize just how valuable this is the first time your board is discussing some quandary that’s stymied management… and one of your independents chimes in with “I know someone who…” Then the networking magic happens.

In our current world economies, companies have been forced to cut back on headcounts, and smaller growth companies find it difficult to secure the talents they need to reach the next level. That independent member of your board is a one-person mentor and head-hunting firm. What talents are lacking in your current management team? Maybe you just can’t find or afford them. But add an independent board member with a strong vitae in those areas, and you have a teacher, mentor, and succession planner who can help train and recruit the skill you’ll need. 

For example, a qualified financial expert who’s retired from a major accounting firm offers the background to build your finance team, and whip them into shape. They also have the industry contacts and experience to sniff out prospects for your team that your in-house executives might never be aware of. Once again, you now have an outsider at your table who can say “I know someone who…” Only this time the “someone” may be just the talent your need at a crucial moment.

An independent director brings respect. Particularly for family, young, or venture firms, I suggest adding an independent board outsider who the company can “grow into.” That means someone who has knowledge and experience at the next-size larger company, the company you’d like to become a few years down the road. This is someone who knows where the hurdles and challenges to growth will be hidden in your path, and who’s already surmounted them. They know what sort of questions you’ll have to answer to gain that next round of funding, and what weaknesses are hiding in your strategic plan. 

This status also means that, if you have boardroom squabbles or battling agendas, there will be a “grownup” in the room. Family members or differing investors may disagree, but they’ll all have to respect the view of a successful leader who’s already helped build a company to the next stage of success. Family firm boards, especially, don’t like to air dirty laundry when an outsider is in the room – an independent on the board tends to put them on their best behavior.

An independent improves board operations. Agendas, board books, online board portals, good minuting, and formal board meetings all may seem like clerical busywork to the startup. In fact, these are the real secrets of corporate board effectiveness. Boards of insiders tend to work like closed societies. Everyone knows each other, everyone knows their power ranking, the big boss keeps secrets close to himself, and the board meets accordingly. Agendas are whatever the chair wants to cover at the moment, usually, some items jotted on the back of an envelope. Minutes cover the barest legal basics (and sometimes not even that). Board info before the meeting is skimpy and uneven because most of the directors are working with this data daily anyway. 

Now, add a respected, outside independent member to the boardroom. This director will expect a sound, informative package of information in advance of the board meeting. He or she will want a formal agenda, to know what to expect and prepare. Certainly the independent will want proper minuting of the meeting, to give legal cover for the board’s actions. Maybe you’ll grumble a bit about needing to do all these housekeeping formalities at first. But soon, you discover they drive up the level of governance and seriousness for all the directors. And you’re doing a much better job.

This tidying up applies to board structure as well. As legal oversight burdens on boards increase worldwide, I find they put more board work onto their committees. This allows the board to do a better job of oversight by specializing. That CFO who you’ve added to the board can shape an effective audit committee, or an executive search firm partner can bring professionalism to your remuneration committee. 

The final bonus of including independent directors in your board (though not by any means the least), could be called legal cover. Suppose the board of your enterprise is making a fraught decision. It may involve dividends, a potential conflict of interest, a majority versus minority ownership issue. Certainly, the board’s vote will be second-guessed by regulators, investors, and hostile attorneys. In such cases, whose board decision will seem most defensible and objective? A vote by a board of cronies and family members? Or the vote of a board that includes some respected independent outsiders?

Ralph Ward is publisher of the Boardroom INSIDER newsletter, and a speaker and writer on board and governance matters.

 

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