How to Know When a Small Company Should Build a Board

Posted in Board Development by Jim
06 Mar
How to Know When a Small Company Should Build a Board

During his time as CEO of Hollywood Fashion Secret, Matthew Goldberg tripled his company’s revenue in five years, “The reason I wanted a board for our company is it gave me an instant access to 80-100 years of experience around the table in specific functional areas to accelerate our business through our learning curve.”

Small companies, or companies with less than $50M in revenue, can benefit greatly by having a board. A combination of two or three of the following issues drive the formation of a board:

1. Owner or operator turns investor

The founder of the company would like to retire, but does not want to sell. They want to focus on other activities, collect dividends rather than cash out, and recognize it’s time for new leadership. Building a board keeps the company on track as they step away.

2. Growth stimulation

Growth has stalled and senior management does not have the answers on how to break through. Strategic thinking and input from outside perspectives can help get back on a growth trajectory.

3. Talent development

The company is not ready for the owner or operator to retire because talent is not developed enough to take over. There may be a management team member or family member that is 3-7 years away from being able to run the company.

The owner or operator needs a board to assist in evaluating talent, mentoring executives, and assisting in the selection of the next generation leadership.

4. President or CEO in waiting

Board members are often recruited based on their experience and potential to run the company. The board is used as a testing ground to determine the fit between the board member, the company, and the owner or operator.

5. Part-time executives

Companies sometimes need more help than they can afford on their senior leadership team. They may ask a board member to act on behalf of the company to assist with fundraising, new customer acquisition, or a very specific skillset. This reason can be challenging once you consider conflicts of interest, compensation, and other potential pitfalls of this driver.

Whatever the reasons are for a small company to form a board, if the process is taken seriously and thoughtfully, the benefits can be substantial. To get the full value from a small company board, both the company and the board members have to be committed. The company must invest ample time and money in board formation, bylaws, and member selection. The chosen board members must bring strategic value, and a willingness to roll up their sleeves and get to work.