Kiwi SME boards: Making the most of your board

Small business owners often don't understand the need for, or value of, an independent director, says Kare Johnstone.

Partner at independent advisory firm McGrathNicol, Kare Johnstone offers seven tips for SME board appointments and governance

The eternal challenge for founders of small-to-medium enterprises in New Zealand - those who wear the hat of CEO-owner-manager-shareholder, who manage the day-to-day running of the business while striving to maintain enough oversight to identify opportunities and put out fires - is that they don't know what they don't know.

Often, I have observed founders making key board appointments, such as the appointment of an independent director, because they have been told they should. However, they don't seem to really understand the need for, or the value of, an independent director, nor the purpose they serve and the skills required. When that's the case, how can the appointee expect their advice to be valued, let alone acted on?

Based on my experience in corporate insolvency and restructuring, I have seven tips to offer SME business leaders involved in board appointments and governance:

• Diversity is essential. Not in ethnicity or gender, though that can be beneficial for some businesses, but predominantly in ensuring you have a full complement of people with the necessary well-rounded business experience and competencies. Just as you don't want a group of accountants or lawyers on a board, you don't want a board that is versed only in operational matters.

A group of accountants on the board of a company I worked with made a financial decision that led to the production of faulty goods purely because of a lack of understanding of the operational side of the business. These actions resulted in the company incurring substantial losses it could not afford.

While it is crucial to appoint people who can understand the company's financial obligations it is just as crucial a Board comprises people who understand the business and how it is being run at an operational level. Industry expertise is very important.

• Independence and objectivity are fundamental. This goes not only to the willingness of board members to speak up, but also to the level of scrutiny they are prepared to apply. In both SMEs and larger corporations, it's not unusual to find a good corporate structure and timely release of information; however, a lack of detailed KPI analysis, or taking financial information to the next level, means to figure out what they're missing and illuminate dark corners. A good board digs deeper and works on the business without bias.

• Be prepared to listen. The value of an independent director is that they push the limits, challenge the CEO to think differently, add value to the business. This value, and cost, is wasted if the CEO is a dominant individual who is reluctant to take advice. If you've surrounded yourself with good people on your board and in quality senior management, take advantage of your investment by listening to what they have to say.

• Take recommendations. Companies often fail because owners don't take good advice. This is a particular risk in an advisory board situation for a smaller business, if the CEO is resistant to change or the influence of others. Don't just listen, be willing to action and implement.

• Establish accountability. In many insolvency or restructuring cases, we often find accountability is weak. Thoroughly read the board papers and financial information - what is the information telling you? Ask questions. Go the extra step. When you look at the board papers, the evidence is usually there.

Blind spots can be identified and eliminated if the board chair is meticulous about calling people to action on outstanding items from the previous meeting, and refuses to allow anything to be swept under the rug. Accountability extends to ensuring that each of the board members has an identifiable role that is understood and respected by the others. Also identify management, who may not be a member of a Board, which should be accountable for certain actions (eg profitability of a separate business unit or division). Make them accountable.

• Don't get hung-up on length of tenure. I have seen board members maintain their objectivity and value after a number of years in the role, and others who have lost their objectivity after just six months. Don't put good people out to pasture just because they have served a certain amount of time. Critically assess the overall make-up of your board and what each member has to offer on a six-monthly or annual basis

• Succession planning. Many SMEs in New Zealand do not have a succession plan. It is imperative to have a longer term plan to ensure your business survives your retirement. Are your children really the right people to take the business forward? Who is the right person or people to ensure your business can continue to successfully grow in your absence? It is a real strength of a leader for a business to continue to operate successfully in their absence.

Many CEOs get their businesses into a tight spot by waiting too long to seek advice, and they pay the price. If you've brought people in to offer that advice, let them lead according to their skill sets. If those people are missing from your organisation, consider that there are a number of professional independent directors in the market who have a strong record of excellence in various sectors and can provide the guidance needed.

Kare Johnstone is a Partner at McGrathNicol, focusing on corporate advisory and recovery. The views expressed in this article are the views of Kare Johnstone and may not necessarily reflect those of McGrathNicol or its affiliates.