As most know, only corporations require a board of directors and their rules can vary state to state, but what's the purpose for one in the first place? Governance.
For small and medium-sized businesses (SMBs), establishing an effective board of directors is crucial for strategic decision-making and sustainable growth. However, determining the appropriate size for a board can be a challenging task. While large corporations often have extensive boards with multiple members, SMBs have to balance gaining an experienced board to oversee their company's high-level objectives while generally being financially savvy not to overspend.
Before making the decision to create or enhance your board, let PFA walk through some of the points to consider for developing a Board of Directors at your company:
What is the Purpose?
The primary purpose of a board of directors is to provide oversight and guidance to the management team, representing the interests of the stakeholders. This involves setting strategic goals, monitoring performance, mitigating risks, and ensuring compliance with legal and ethical standards. An effective board should possess the necessary skills, expertise, and diversity to enhance decision-making processes and contribute to the long-term success of the business.
Considerations for Determining Board Size:
Business Complexity: The complexity of the business operations and industry should be a key factor in determining board size. As a general rule, the more intricate and diverse the business activities, the larger the board should be. This ensures that the board members possess the requisite knowledge and expertise to address the unique challenges and opportunities faced by the company.
Resource Availability: SMBs often have limited resources compared to larger corporations. Consequently, a leaner board may be more appropriate for cost-effective decision-making. Balancing the need for expertise and experience with the availability of resources is crucial to avoid excessive costs while benefiting from the diversity and skills of board members. This is why we recommend our service where you can bring on an experienced CFO to help guide your company without breaking the bank.
Skills and Expertise: A board should consist of individuals who bring diverse skills and expertise that align with the strategic goals of the business. While some members may have industry-specific knowledge, others may bring valuable experience in areas such as finance, marketing, legal, or technology. By evaluating the skills required to address key challenges, the board can identify the ideal size and composition.
External Perspective: Incorporating external perspectives can be valuable for SMBs. Including independent directors who are not directly affiliated with the business can bring fresh insights, objectivity, and industry knowledge. Consider Robb McLarty's perspective at Yale Insights,
"In those cases, the role of the directors really is mostly to act as a sounding board, to provide different perspectives, to have a conversation about strategy and deliverables."
Their impartiality can help challenge assumptions and avoid groupthink, enhancing strategic decision-making.
Board Dynamics and Collaboration: The effectiveness of a board depends on its ability to function cohesively and make well-informed decisions. A larger board may face challenges related to effective communication, consensus-building, and fostering constructive debates. Striking a balance between inclusivity and agility is crucial for maintaining an efficient decision-making process.
Conclusion:
Determining the appropriate size for a small or medium-sized business board of directors requires careful consideration of various factors. While there is no one-size-fits-all solution, the board's size should be driven by the complexity of the business, the availability of resources, the required skills and expertise, and the dynamics necessary for effective decision-making. Striking the right balance ensures that the board can provide valuable guidance, oversight, and strategic direction, supporting the long-term success of the SMB.
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