How to choose board members for your business
Worried about your boardroom tactics? Scottish Equity Partners explains how to build a high-calibre board that will perform well
Scottish Equity Partners (SEP) is an award-winning private equity group that has invested in over 150 high growth companies, many of which have gone on to achieve global renown. Each month, SEP will be sharing advice and insights on the ins and outs of raising finance and dealing with investors. In SEP’s first column for Growing Business, partner David Sneddon sheds light on building the perfect board for your business…
A strong board can help ambitious companies build solid foundations and achieve a quantum leap in scale and success. However, a dysfunctional board can prove a major handicap, leading to shareholder dissent and time-wasting distractions.
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So, how do you build a well-balanced board with the optimum blend of skills and expertise?
Board recruitment is not all about hiring high-profile people with enviable contacts. Demands made on boards today in terms of the range and complexity of subjects they must master – and the level of accountability and scrutiny to which they are subject – are greater than ever, so a disciplined and professional approach is essential.
With businesses going global faster (facilitated by e-commerce and SaaS business models), executives generally welcome guidance and support from an experienced board.
A board’s prime concern is to ensure the business is well run, rather than to run the business.
What does a board of directors do?
It fulfills important functions including:
- Safeguarding shareholders’ interests
- Ensuring regulatory compliance
- Maintaining high ethical and governance standards
- Fostering robust and constructive debate
- Scrutinising and influencing strategy
- Ensuring effective decision-making
- Supporting and challenging the executive team as required
- Helping the business ‘look round corners’
Investors on the board
Sometimes board composition will be influenced by shareholders. Non-executives need not be shareholders, but it is common practice for certain types of shareholder to join the board.
At Scottish Equity Partners (SEP), we typically take a minority stake in companies and we always take a seat on the board: it is a core part of our philosophy as active, engaged and hands-on investors. We have made around 130 investments, mostly involving the appointment of one or more non-executive directors (often including a chairman).
Being well-networked and having a large pool of very experienced non-executives means that we can make suggestions and introductions to portfolio companies seeking fresh board talent.
People sometimes ask what the optimum size for a board is. Studies have investigated links between effective decision-making and group size, with some suggesting that the optimum size is between five and 12. The most honest answer though is ‘it depends’ – on considerations such as the age and stage of the business, as for example a larger board may be appropriate if preparing for IPO (initial public offering).
Similarly, there are no hard and fast rules on tenure or on remuneration, options and share ownership. Opinions vary on the relative merits of directors with no shares versus those with ‘skin in the game’ – integrity is more important.
To build your ideal board you might start by listing specific challenges (they could be technical, commercial, legal, regulatory or HR) and identifying people with knowledge and experience in those areas. For example, you may need someone with knowledge of international accounting standards or someone with experience in global supply chains or preparing for IPO.
A person with a portfolio of non-executive directorships (check potential conflicts of interest) is likely to have acquired broad knowledge and experience of situations that may be directly applicable to your business. An executive team facing certain challenges for the first time will benefit from support from non-executives who have tackled similar situations successfully.
It can be useful to create a matrix identifying skills and experience deficits in the executive team that can be offset by recruiting non-executives with complementary skills. Use this to compile detailed job descriptions. Sites such as LinkedIn can be useful for identifying potential NXD candidates, as well as headhunters or specialist non-executive recruitment firms.
There can be a fine line between recruiting a person with a growing NXD portfolio and hiring someone who may be over-committed – be clear about time commitments upfront. Non-executives must be diligent about reading board papers so they can add value to discussions.
Better to recruit wisely than quickly. A stellar board can deliver enormous credibility with customers and staff, but never underestimate the importance of personal chemistry and cultural fit.
The chair is a pivotal role – requiring an independent mindset, superb people skills and an ability to act as coach, confidante and mentor as situations demand. The chair must act as a go-between on sensitive issues and have an ability to read the room as well as the board report.
SEP has participated in and helped build boards for more than 130 high-growth companies over the last 15 years, including several which achieved very successful exits. These include, in December 2016, travel search engine Skyscanner which was acquired by Ctrip for £1.4bn and digital health company Exco InTouch which was acquired by ERT.
Our experience has taught us that the best boardroom relationships are based on mutual trust and that the value a business can derive from them is enormous.
Visit www.sep.co.uk to find out more about Scottish Equity Partners.