Partner Article

The Shape and Structure of a Good Board at SME Level

Andrew Marsh, chair of Vistage for the North East and Northumberland, NED for numerous businesses and charities; and successful entrepreneur, has committed to imparting his knowledge throughout 2021 to help business leaders come out of the last year with a solid view for the future. Here, in his latest article, the last of the year, Andrew looks at what the shape and structure of a good board should look like for a SME.

“As an SME enjoying success or ready for change or a pivot, you are at a point as a leader where you should be aware you need a board now, or if you already have one, that it needs evaluating and refreshing. You may also have been directed to appoint a board due to an investment process, so it is important that the board is right for your company’s future.

“A board at this stage needs to be effective in terms of its inputs, insights, diversity of perspectives and bring strong experience that allows for strong discussions and strategic decision making. It must be good for the company in the present but more so for the future; and needs to be composed of positively challenging, supportive, guiding and insightful individuals. It must not be operational in its activity, so looking at say monthly cash flows should not be part of their agenda, only cash projections.

“A board of directors is in essence a panel of people brought together to legally represent the best interests of shareholders and stakeholders. Every public company is required to have a board of at least two people, and in a limited company (where there must be at least one company director) all company directors make up the board with external parties brought in with relevant skills so the organisation can reap the future benefits.

“It is also advisable to consider whether all the members need to be fiduciary and have legal responsibility. There is often a case for appointing board advisors, who you pay for their skills and introductions but have no legal responsibility. A great example of this is if you want someone’s involvement as they have a great black book of contacts, and can give structured advice and introductions, but doesn’t need to have any fiduciary control. You could just pay this advisor on the doors they open rather than creating a long term financial commitment.

“So ,what should your board look like? What shape and structure will suit your company and why? It is key that this next move you make is a good one as it will shape the future of your company, so it is likely you will need support in realising what you need and who can bring what you need. Most importantly to get this right you need to look at the needs of the business in you next three-year business cycle, not what is needed today.

“Firstly, there is no right or wrong to the size of a board. If you only need 3 key people and their skills, then that is right for you. If you have several different needs, then your board needs to be larger, but it is advisable to keep numbers tight as possible to avoid too much difficulty in reaching decisions.

“Plan out on paper what your ideal support network would look like – from legal brains, to finance whizz, to marketing gurus. Is there a specialist niche trait your future business plan would benefit from? Is there a geographical, franchising or export potential? Do you need specific diversity to make sure your governance is robust? Do you need a governance expert? Do you need to attract new or further funding, investment, or new partnerships?

“You need to take this into consideration and map out personalities that are in line with your culture, or that will help you achieve a cultural change if needed. Do you need a more or a less corporate approach, do you need to be more proactive, do you need to be more customer or employee focused? People from all backgrounds come with these extra skills and often the change can be brought by their personality and in the influence they bring. But do beware of creating a board with too many similar skills, personalities and experience - variety and diversity is the key to great boards, so always look beyond these initial skills!

“This board is going to be responsible for protecting your shareholders’ interests, for overseeing the general wellbeing and future resilience of the organisation. The role of each fiduciary non-executive director (NED) includes dividend allocation, creating of policies, management of senior executives, setting company goals and ensuring executives have the tools to succeed. They are not there to work in the day-to-day operations but should be more focused on strategy and growth. The FRC released an illuminating paper a few years ago that is worth a visit, on the Guidance of Board Effectiveness, that covers this off.

“A board should always have a chair, and if made up of four or more NEDs, a vice chair. You can have multiple vice chairs if you have a larger board, particularly if you have a need for sub committees to cover finance, strategy, sales, governance etc although it is important that each one is appropriately independent so they can provide a variety of views.

“Beyond that, your own company governance, which should be formed prior to the inception of your board or newly imagined board, needs to include what is expected from the board, its structure, the appointment of NEDs, and what internal employees from the leadership team also sit on the board. A minimum of one operational leader, usually the CEO or MD, is expected to sit on the board but it is often sensible to include FD’s or perhaps the senior executive responsible for people, stakeholders and policies.

“Your governance should ensure that your company articles are adhered to, and set out how decisions are made in the company, how to keep the executive team accountable and clearly separate out any conflicts that could get in the way of decision making.

“From an administrative structure point the governance should also lay out how often the board meets, guidelines on minutes and reporting, policies for board members to adhere to, company structure, sub committees’ authority, resolutions to disputes, agenda setting, AGMs, locations, timings, expectations, service terms and notice periods. The Institute of Directors has some great guidance on their website for this.

“When appointing people to your board you must ensure they are legally able to do the role and have not been previously disqualified, and that they can dedicate the time to attend the board meetings / carry out any additional responsibilities. Look for people who are honest and trustworthy and who can help in a mentoring capacity where necessary.

“Finally, wherever possible, look for professional assistance when building a board, shaping its governance and looking for board members. Unless you are a charity, NEDs are a substantial financial commitment, and you want to make sure your organisation gets the best out of its investment!”

This was posted in Bdaily's Members' News section by Anna Toms .