Nuances of governing in a privately owned business
There are two spheres that help a business run smoothly: Governance and management. Whether you’re running a large corporate business or a small nonprofit, governance is about thinking long-term. It’s high-level, strategic planning that supports management and holds them accountable, while also interfacing between management and shareholders. The management team, on the other hand, focusses on day-to-day operations. It puts out the fires and gets its hands into the weeds of finances, hiring and customers.
In a privately owned business, it can be difficult to separate the two, says Simon Telfer, managing director of Stimulus NZ, board specialists, and founder of Appoint Better Boards, New Zealand’s largest governance community.
“Often the people who are around the board table have had their management hat on all day, then they come to the board meeting and suddenly have to put a director hat on,” said Telfer. “As soon as they leave that board meeting, they go and put the management hat back on.”
This often leads to the muddling of management and governance issues, which makes for a less efficient business. In order to avoid such sticky situations, Telfer gave us some insights into the nuances of governing in a privately owned business.
Have an independent chair to elevate the conversation above operations talk
Delegation of duties is really important when making governance decisions, so instating an independent chair is key to keeping the conversation away from management topics and on higher level thinking.
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Whether your directors come from within the company or without, it’s important for them to take professional development courses so they understand the theory of “noses in, but fingers out,” says Telfer.
“When you’re a director, you’re inquiring, you’re asking questions, as opposed to telling executives, ‘This is how we should do it,’” said Telfer. “It’s a lot more about the ‘Why?’ and the ‘What if?’ questions as opposed to the ‘How?’ questions.”
Keep a tight agenda
One way to ensure management talk doesn’t creep into boardroom discussions is to stick to a really tight agenda that keeps things at a high level.
Understanding how board decisions affect management and how management decisions affect the board is a good way to learn how to build an agenda, and also how to rein it in when the discussion goes off course.
For example, the board sets the overall framework and the boundaries within which the organisation operates. It then appoints the CEO, who will take that strategy and actually implement it.
“On the operational side of things, the management team has to put up management reports and tell the board what’s happening on a month-to-month or quarterly basis, where the challenges are, how they’re doing operationally and financially,” said Telfer. “The board is using that to keep abreast of how things are going and then to ask deeper questions and provide guidance.”
That guidance might look like asking management if they’ve tried such-and-such strategy or connected with so-and-so. It might look like offering to invest more money in a particular area or suggesting solutions directors might have seen work in other companies.
“There is a flow of information that goes two ways, and the board meeting tends to be the conduit,” said Telfer.
Find the balance between structured governance and small company agility
Larger, publicly listed companies will have very structured, formal board meetings that assess risks and report to shareholders. The strategy is more entrenched, and the board papers are thick with information, so making decisions usually doesn’t happen too quickly.
In privately owned businesses, you might find the owner is more accustomed to making spontaneous decisions and not consulting anyone. That all changes when there’s a board, but you want to find the right balance there. If you suddenly impose too much structure, that could just kill the business.
“It could possibly kill the culture and disillusion people,” said Telfer. “So it’s about that balance, about bringing in a little bit more structure, being ok with pushing pause and making the decision the next meeting, without it then just squashing someone’s enthusiasm or the entrepreneurial spirit that got the company to where it is. It’s about keeping agile but not being so agile to the point of being reactive.”
Shareholder executive directors have to find discipline and bring decisions to the board
Let’s say you founded a company and have been making all the decisions on your own for years, when suddenly, the company grows to over 30 people. You hire a management team, but they still tend to defer to you to make decisions, so you find yourself spinning too many plates. That’s when you recognize it’s in the best interest of the company to put a board in place and give the company some more structure, as well as a crew to steer the ship should you ever decide to leave.
But how do you get out of the habit of doing it all yourself?
A strong will and constant mental reminders. Consider a mantra: Rather than making a decision instantly, instead say: ‘Hang on, I need to take that to the board,’ or ‘We need to discuss that with the other directors and get a sign off.’
“That can be a challenge and sometimes there's a bit of a mind shift and behavioural change that's required to remove yourself from that position of making decisions instantly and by yourself,” said Telfer.
A way to enforce the practice of taking big decisions to the board is to create a delegated authority, where the board puts limitations on the decisions the management team can make.
“Anything that involves, for example, buying a company or opening a new bank account or spending over $50,000 on a capital item or something like that, that needs to go to the board,” said Telfer. “There's typically a document that outlines how the board is ultimately responsible for every decision the company makes, but they are delegating a certain amount of responsibility to the management team. And if the management team steps outside those delegated authorities, there will be implications for that".
Shareholders at the board table ultimately have the final say
In a privately owned business, the owner/manager might own all or a large portion of the business, so at the end of the day, that person will be the one making final decisions. This is not so with larger companies that have hundreds of shareholders with directors representing different shareholder interests.
It’s important to remember this tidbit as an independent director serving at the invitation of the owner, says Telfer. You were voted in to act in the company’s best interest, but if you disagree too harshly or strongly with whoever’s making the ultimate decision, you might be asked to leave the board.
“That's a real challenge – How far do you push back?” said Telfer. “If you don’t disagree so strongly that you have to resign, you could just say, ‘I wouldn’t do it this way, and I strongly don’t think we should, but it’s your company and you make the ultimate decision.’”
Some people don’t like working in privately owned businesses because there’s too much fluidity around what the board says and what the main shareholder says, but others love it because decisions can be made and acted upon quickly, according to Telfer.
Smaller businesses need directors who are generalists
Smaller, privately owned businesses will likely have smaller boards, which doesn’t really allow for specialists. On a board of six, it makes the most sense to find directors who have a broader understanding of governance, private businesses, the commercial side of things, as well as industry knowledge. They can have really deep knowledge on a specific topic, but you don’t want to be too narrow and deep.
Remember to factor in emotions and personalities
Many privately owned businesses are family businesses or are run by the person whose name is on the letterhead. Governance decisions can get personal fast.
“That’s what makes it interesting but sometimes challenging is that it’s not just purely a commercial decision,” said Telfer. “You have to think about how decisions affect the identity and the motivation of individuals and their families. It’s a little bit more human.”
That means it’s also more important to take the time to get to know executives and other board members. Telfer says making sure the board builds strong relationships comes down to the appointment process.
“Just make sure that you spend enough time having lunch or having dinner to ensure that there's a human connection, as well, and not just based on an interview and a CV,” he said. “Have they been involved in privately owned businesses or have they just come out of the corporate world and this is their first foray into small or medium-sized business?”
Don’t try to take on too many tasks at once
Smaller businesses tend to be a little more resource-constrained, so maybe monthly board meetings aren’t the best option. Or if you do have them monthly, don’t pile too much onto the collective plate.
“Rather than just requesting information all the time, instead consider how important it is to get that information,” said Telfer. “Is it the best use of the CEO’s time spending two hours on this board paper, or two hours running the business?”
Telfer says board members should remember to be respectful of the CEO’s time, especially when asking for governance information. Of course, you want to bring that discipline into the business, but the CEO probably doesn’t have 15 direct reports onto whom they could just offload tasks.
“It’s good to have that relationship with the CEO where they can feel confident and not see it as a sign of weakness to say, ‘Hang on, let’s pause here. There’s a lot of pressure and a lot happening,’” said Telfer. “As a director, that's a real trait that you need to have. When can I push a bit harder and really expand the mind with what's possible? And when do I need to read the signs and say, ‘Actually, I need to push pause here and give them time’? You don’t want them to burn out.”