The function and expectations of a board of directors can change significantly when a company decides to bring in external investors, for example through venture capital or an initial public offering (IPO).
For many companies, it can be a considerable culture change for boards to start acting independently from individual major shareholders and the executive management.
There are a number of considerations for companies seeking to restructure their board in order to become "investor-ready". These include:
- The size and composition of the board should be sufficient to provide a variety of perspectives and skills, as well as continuing to represent the best interests of the company and its shareholders. At the same time, the board should not be so large that its effectiveness as a decision-making body is reduced.
- The expertise, capabilities and independence of existing directors need to be assessed objectively. Their abilities and skills should be reviewed in light of the company’s future needs, not the historical reasons for their appointment. If necessary, changes should be made to bring in the required expertise.
- If the decision is taken to appoint non-executive directors, start by clearly identifying the skills and competencies required. These could include both general attributes and specific skills, such as industry expertise, public profile, experience in the listed company environment, or ability to assist the company in achieving its strategic objectives – for example, entering a new geographic market. Also consider using professional advisers to help source non-executive directors – they may know of suitable candidates and could approach them on a confidential basis.
- For companies pursuing an IPO, the Australian Stock Exchange (ASX) publication "Principles of Good Corporate Governance and Best Practice Recommendations" outlines key corporate governance principles. Whilst smaller companies may be unable to comply in full, it is nonetheless important to adopt appropriate structures, policies and procedures.
- Under the ASX guidelines, a majority of the board – including the chairperson – should be independent, ie. not hold management positions in the company, represent substantial shareholders, or hold any business or other relationship which may interfere with their independent judgment. In practice, many smaller listed companies do not always comply; however, the appointment of suitably qualified independent directors can significantly increase the confidence of investors in the board and the rigour with which it conducts its supervisory role.
- Ensure that proposed non-executive directors can devote the necessary time and commitment. Expectations should be made clear. Ensure that any other commitments do not give rise to conflicts of interest – this is frequently an issue with candidates from within the same industry.
- Don’t forget chemistry. A potential director may have a high public profile, strong investor appeal and outstanding industry credentials, but unless they can work effectively with the other members of the board and management, the appointment is unlikely to be successful.
This process should be undertaken well before external capital is sought.
Not only does this allow new directors to gain a good understanding of the business and enable the board to establish an effective working relationship, but they will also be better placed to make an effective contribution to the process if appointed at an early stage.