Does Your Business Need an Outside Board of Directors?
Originally published: 08.01.11 by Mike Coyne
An advisory board might be a better option.
At least a few times a year, a business client will want to discuss whether to expand his company’s board of directors to include individuals from outside the business. Usually, the client has just been exposed to this topic via an article in a business magazine or a seminar. Our response is typically a resounding “maybe” or “probably not a good idea.” Here’s our thinking.
Admittedly, there are plenty of good reasons for an outside board of directors. If a company has a number of minority owner who are not actively engaged in the business, an outside board is almost a necessity. The primary function of an outside director is to look out for the interests of the shareholders as opposed to the interests of management. Many business executives appreciate that a good outside board of directors can effectively “insulate” management from meddling by minority owners.
An outside board of directors can be invaluable to an individual who is the sole owner of his or her own business. In this case, the outside board of directors becomes a de facto management team. An outside board is particularly advantageous for an owner who does not have family members who can assist in running the business if the business owner were to become disabled or die. On more than one occasion, we have seen a business rescued by an outside board when the business owner became incapacitated.
Aron Pervin, president of Canadianbased Family Business Advisers Inc., cites three primary advantages of an outside board. “First, properly chosen outsiders on a board raise the business owner’s aspirations and confidence.
They help to shape and inspire vision, and they increase commitment. Second, effective boards open communications and stimulate effective action on sensitive but normal family business issues. Third, an excellent board raises expectations and makes conduct more efficient and effective for all members of the organization.” (If you’re interested in reading the balance of his article, it can be found at http://pervinfamilybusiness.com/library/ articles/creating-board-directors.asp.)
In some circumstances, an outside board of directors can be quite advantageous. However, in our experience, most business owners don’t fully appreciate that management is supposed to answer to the board of directors, not the other way around. Unless an individual is fully prepared to have his conduct and management skills critically evaluated by outsiders, an outside board of directors is not a good idea.
An outside board of directors must be given fairly wide access to financial and other proprietary or otherwise private information of the company. We have found few business owners are really comfortable in providing the level of disclosure typically demanded by an outside board.
Finally, a business owner who is looking for a different perspective and a fresh set of eyes can achieve this by creating an advisory board. Unlike a board of directors, an advisory board has no legal standing under state corporate law. Therefore, there are no statutory rules for the frequency of meetings and no fiduciary obligations on those serving on the advisory board. With an advisory board, the business owner can convene as seldom or as frequently as he would like and can limit discussion to specific items of the business owner’s choosing. For many business owners, this is the best way of obtaining outside advice.
Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: www.healthlaw.com or call 440-835-0600.