Board composition – do you have the right people for your business?

Boards of directors can play a crucial role in building companies. They act as a strategic asset that can help guide management while providing the knowledge and experience necessary to navigate a variety of challenges. In addition to supporting management, boards also help to ensure that the interests of shareholders, whom they represent, are protected, as well as those of employees, customers, and other stakeholders.

I wrote an article a couple of years back about the lack of independence of the so-called independent directors on company boards in Pakistan. While that piece was written with the larger listed corporate entities in mind, in today’s article, I would like to focus on the needs of medium to large-scale family businesses, which may or may not be listed, but are now the mainstay of the country’s business and economic structure.

Many of these family entities don’t see the need for boards, thinking that they ought not to tolerate outside influence. But several family groups, those who have acquired the wisdom to understand the importance of opinions, other than their own, have created corporate structures with functioning boards (or advisory boards) for their businesses. This is a step in the right direction and these companies can benefit from such structures, provided they can define their needs, attract the right talent on their boards and think of the process as a journey rather than an end state.

It is a journey because of the scale and evolution of the business. Think of an entrepreneurial venture which needs the time and space to grow and for this growth, the entrepreneur should be making most of the decisions, with some advice from family and friends, if needed. You would not wish for start-up businesses to be saddled with bureaucratic controls which kill the risk-taking required for scaling up. 

Even if startups need to give board seats to venture capital representatives, these investor directors need to ensure that they allow the founder/entrepreneur to make decisions and remain nimble. Most reasonable Venture Capital firms understand that having too many VC reps on a board isn’t helpful and are willing to accept that.

Coming back to family businesses, once some scale is achieved by the business, it needs to start to think about the next level of growth. This is where I find many family businesses to be stuck – they have a proven business model and have built a profitable business which has the potential to be scaled up, in different directions perhaps using dissimilar ways.

These companies are at a stage where the business needs a broadening of vision, a strategic direction, qualitative enhancement of management capabilities, and technological innovation coupled with some control to ensure better governance. They need all this to grow further and build a sustainable business, continuing for future generations of family members. At least, this is the desire of most current family members. And this is exactly where outside directors can play a vital role.

But this is also where these companies need to carefully evaluate what type of outside board members are required. Businesses which are at the initial stage of board creation and associated governance processes require people who have the time and are willing to support the business in many ways, certainly beyond attending quarterly meetings. This should be one of the first requirements for a business venturing into this area.

The business should also be able to benefit from leadership qualities which support management teams and can hold them accountable. This is a fundamental issue especially where family members are themselves running/controlling businesses. In such cases, the need for independence should be carefully measured against management’s willingness to be challenged.

There has been a push in recent years to ensure greater diversity on boards of directors. Given that our business leaders are very often middle or senior-aged men, the best way to achieve that diversity may well be through your choice of independent directors. 

There are a few common mistakes that I see companies make when building their boards. The first is confusing board members with skills missing in the organization. A company may recognize marketing as a weak point for the business, and conclude that it should add a marketer to the board when in fact what it needs is a new CMO. That does not mean that it does not bring a director with marketing expertise to help support the management. It should certainly do so if they find the right person. However, it is important not to confuse business operating needs with your strategic advisory needs. Remember, board members give advice, while employees produce deliverables.

At the other end of the spectrum, some companies make the mistake of hiring trophy board members. There are organizations whose boards are composed of former CEOs, retired bureaucrats and other seemingly highly desirable board members. As impressive as these people may be, it is unlikely that they meet the first criteria of being able to give the time required and having the energy to understand the organization’s needs deeply. 

Mature organizations tend to have trophy board members who tend to stay for several terms. It’s not unusual to have independent directors stay on for a decade, provided that they can continue to be helpful and provide value at the different stages of the business’s evolution. That said, it is helpful to get fresh perspectives and opinions. Being able to cycle in new directors can be very beneficial, so there is a need to always weigh the pros and cons of keeping existing directors versus bringing on new ones.

 It would be unwise to have trophy directors for a business which is just building these governance and management processes and vying for fast-paced growth. These businesses ought to be looking for a different type of hand-holding from their independent directors.

Most of the requirements for the organizations which have recently inducted themselves in corporate governance processes can be best met by talented senior executives who may have never sat on a corporate board but who would still make incredible board members given their breadth of experience and expertise. More companies just need to be willing to give them the chance to do so. 

Additionally, the relatively younger lot is more connected to the new cultural ground realities. If we wish to change the diversity in the leadership ranks of corporate Pakistan, widening the funnel of director candidates is a good way to start.