Why Every Company Needs a Board of Directors

by Brian Hamilton

Companies are prone to making mistakes. Not having a board of directors is one and I'd like to explain why I believe every company should have an active board and how to do it.

Early on in my career, I was fortunate enough to have consulted with hundreds of businesses that ranged from one person operations to 500-person, mid-sized firms. One thing I noticed is that entrepreneurs, founders and CEOs have common characteristics, one of which is that they are, on average, very strong-willed individuals. This makes sense when you think about what kind of person decides to venture out on his or her own. Although a good thing, this strength can also be a weakness because it can morph into a dangerous strand of stubbornness that can negatively impact a business. Even the entrepreneurs who are pleasant and calm on the outside tend to be fairly dogmatic people deep down--and not great listeners. They struggle with the process of obtaining (and then integrating) advice from outside sources. If I had to identify one reason for the failure of entrepreneurs I have known it would be this: stone-headedness.

There's a relatively simple antidote to this problem of inherent entrepreneurial obstinacy--get regular peer reviews from people outside of your company. The big, Fortune 500 companies figured this out a long time ago, and it's called a board of directors. Establishing a board of directors is not inherently going to solve the problems you're hoping to solve. If you fill your board with your golfing buddies or your family, you have not found sources of objective feedback. Look for people whom you trust and know, but who don't necessarily have skin in the game. Look for individuals with strong views, who will challenge you rather than tell you how smart and wonderful you are. There is no point in having an an external board that just goes along for the ride. Here are four guidelines to help you craft an effective board.

1. Invite people who are financially independent from you and your company.

Your board members should not rely on you financially or "need" you in any way. Again, the best board members don’t have any skin in the game. They must be truly independent to be effective.

2. Look for people who aren't afraid to voice their opinions.

The board is not a place for "yes" men and women. I'd look for people who are actually slightly confrontational but who understand the need for teamwork.

3. Find people who agree on the path the company is headed.

Not heeding this guideline can have serious consequences. Remember, you're inviting this person to have a voice in the strategic direction of the company. Regardless of the formal structures you put in place, a single voice on the board can be incredibly powerful (either for good or for bad). If you have one (or several) voices who are singing to a different tune than your own, and by that I mean they fundamentally disagree with you about the direction of the company, you could be headed for problems. You want outspoken board members, who will be candid with you. You do not want board members who don't buy into your vision. If you're shooting for Pluto, you don't want to travel with someone who thinks you should be going to Detroit instead. 

4. Add people that know things you don't.

I've made this mistake personally. About ten years ago, the board of my company Sageworks was loaded with finance people. I began to notice that our board meetings were dominated by finance and accounting topics, which is a great way to get to sleep, but not necessarily a great way to build a company. Not to mention that the executive leadership at the company also had this kind of expertise. We weren't getting the diversity of knowledge and experience from our board that we needed to have a fully formed, effective body.

Even if you follow none of these guidelines, simply establishing a board is a move in the right direction. It's an acknowledgement that you may not be the smartest person on the planet, which can be a difficult notion for many entrepreneurs to come to grips with. 


Brian Hamilton is cofounder and Chairman of SageWorks.

This article originally appeared in Inc. and is republished here with the author's permission. 


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