The-Accountant-Jan-Feb-2018

Work Place
to protect their interests. This is why those
companies that have strong and effective
boards are much more capable of raising
private capital, because the presence of an
effective board is a strong motivation tool
for interested investors.
As the purpose of this article is to
provide an ideological road map to
create an effective board of directors; let
us get started; when seeking to create a
board that will be advantageous to the
shareholders and the company you must
concentrate on:
Experience – When I say experience
I don’t mean it as it relates to industry
experience, executive experience, or
management experience, I mean your
board should have people on it who
are experienced in being on a board of
directors. The board does not serve as
an offshoot of management, they don’t
serve as the superior to the management
team, the board is an ancillary body that
provides oversight and represents the will
of the shareholders. Having executive and
management experience is important, but
you have to have people who understand
the duties and responsibilities of the
board of directors (especially at the head
of the board). If the board overestimates
its power then you are creating an
atmosphere of conflict that may end up
being extremely counterproductive. If the
board is too tentative then the executive
team is likely to run over them and thereby
squash the will of the shareholders,
which is what the board is supposed to
emphasize. While it is important to have
industry experience on the board, it is also
important to have members who are fully
aware of their collective responsibilities as
the board of directors.
Expertise – As stated above, you want
people with board experience, but you
also want industry experts on the board
of directors. These executives and
managers (generally retired) are the ones
who have run similar businesses in the
past and have a keen understanding as
to the market landscape and how to best
advise the company as it moves forward.
Furthermore, these experts can provide
sound advice to the shareholders as it
relates to their financial interests, while
simultaneously providing strong insight to
the executive team as it relates to how the
company can grow and develop. Finally,
these industry experts bring along the
type of credentials that must be respected
by management, therefore they will be less
apt to be weak in the face of conflict and
they will likely be more diligent in their
representation of the board of directors.
Diversification – It is important to have
industry experts on the board of directors
for the aforementioned reasons, but
another key to developing a successful
board of directors is diversification. To
provide the necessary oversight to protect
the shareholders’ investments the board
must be able to address numerous issues
simultaneously. Whether those issues
relate to financial health, management
direction, emerging opportunities, human
resources, etc. you want the board to be
able to dissect and advise on all of these
different issues. This is why we advise
trying to bring in board members who
have diverse skill sets, as it is the best
way to make sure that the board is well
rounded and capable of meeting the full
needs of shareholders.
Policies – Perhaps no other issue is
as important to the development of a
board of directors as the development
of the policies which govern the board.
When the board is formed, its power and
limitations are illustrated in the policies
ratified by the executive team and the
initial shareholders (who in many cases are
one and the same) in the initial corporate
charter. Policies can make the board
both effective and ineffective, by giving it
too much control the board can actually
limit (in some cases drastically) the
effectiveness of the executive team, and by
giving it too little control, the board can
be rendered useless and will not be able
to effectively represent the shareholders.
When developing policies which govern
the board of directors it is vital that the
original framers of the policies understand
the importance of an effective board, and
it is important that they ratify policies
that reflect that.
An effective board of directors is
central to the development of private
companies that have external investors.
If a company wants a real shot at raising
the capital necessary for them to grow
and develop in emerging markets then
they must have the type of board in place
that will protect those investments. To
get to this point a company needs to first
build a strong board of directors and by
focusing on the above topics that process
can become much easier.
vijay@rentadirector.com
42 JANUARY - FEBRUARY 2018