TTitle: Choosing and establishing a board

Sub-title: Effective boards can bring SMEs huge benefits. But for that to happen, you need the right people.

The increasing popularity of boards of directors and advisory boards among SMEs has changed the debate surrounding them.  Entrepreneurs used to ask why they should bother with what many regarded as just another management structure. These days the increasing recognition of the benefits that effective boards provide, means that questions about them now focus more on the best ways of setting up and staffing them.

“Effective boards can bring huge benefits to SMEs,” says Donald Riendeau, co-owner of IVA Solutions & Conseils, a consultancy that specializes in corporate governance. “But for that to happen, you need the right people.” Riendeau has extensive experience with corporate boards and has overseen effectiveness audits on close to three dozen of them. During that time, he has built up strong ideas regarding how to best set them up.

“You can’t just cut and paste best practices from big businesses and apply them directly to SMEs,” says Riendeau. “For example most SMEs start by first implementing informal advisory boards, as opposed to formal statutory boards similar to those which oversee public companies.”

Staffing your board

According to Riendeau, SME advisory boards exist primarily to add value to the business. That means ideally, they should be staffed to complement the abilities of the CEO/entrepreneur(s) who runs it. “Before seeking out potential candidates, we advise businesses to do a quick “SWOT” analysis, which highlights the company’s strengths and weaknesses, as well as the opportunities and threats it faces.” says Riendeau. “That makes it easier for companies to identify areas in which complementary skill sets are needed.”

Trust is also a key factor says Riendeau. “To provide valuable input, advisory board members need to know as much as possible about what is going on in the business,” says Riendeau. “However as private mostly companies, there is a lot of information that SMEs do not make public, ranging from financial statements to corporate strategies. The more a CEO/owner trusts his advisory board members, the more open he is likely to be with them. They will thus be in a far better position to provide constructive advice.”

But what’s in it for the directors?

While listing the ideal qualities that SMEs want in their advisory board members, attracting qualified candidates is much harder, says another expert. “Small businesses don’t generally have the same budgets to pay director fees that larger companies do,” says John Grant, a long-time director on many boards and Executive in Residence, at the Institute of Corporate Directors Small and Medium Sized Enterprise program. “As a result, companies are best off trying to recruit candidates who are not just in it for the money, but rather those with a genuine desire to see the owner do well.”

Grant notes that family members often seem like perfect advisory board candidates, especially if they bring specialized skill sets to the table. However if a family member does join, independence could be a casualty. This would however be less true if the advisory board member was from the CEO’s extended family, such as a cousin, an in-law or an uncle. Grant also adds that while small businesses may not have the war chests to finance expensive advisory boards, an alternative would be to grant board members stock options.

Formal boards of directors

According to Charles Cazabon, Vice-President, Venture Capital at the Business Development Bank of Canada, the stakes rise considerably when businesses shift from using advisory boards to statutory boards. This usually occurs when businesses either transform into public companies, or they take on investors, -- such as pension plans or venture capital funds -- who want board representation.

“Members of statutory boards will generally have slightly different profiles than advisory board members, says Cazabon, who has had considerable experience with boards of directors during his extensive career. “You will generally favour someone with “C” - level management experience. That means either a Chief Executive Officer, Chief Information Officer, Chief Financial Officer or someone with equivalent experience.”

In addition not all skills sets are as easily obtained warns Cazabon. “Because of the influence that complex Sarbanes-Oxley corporate governance legislation guidelines have had on Canadian reporting standards, audit committee members are increasingly in demand,” says Cazabon.

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