Too small for independent advice?

24 August 2017

Many small business owners in the construction sector assume that company boards are for the big boys – yet the fact is that the benefits of independent directors or advisors apply to all businesses, irrespective of size or structure.

Owner-run building businesses can be averse to appointing outside directors, driven by a mix of ‘she’ll be right’ mentality and a desire to keep everything in the family - which can stall maximising potential – if not leading to serious conflict.

It’s a belief that is likely to be holding back many owner-run building businesses.  Looking at family businesses in New Zealand in general, most do not have a functioning board of directors.  Many only have a single director, or one or two directors who only meet formally to sign the annual report. Have a look at your board minutes – when did your board last meet to plan strategically?

My concern is there is a major structural weakness relating to the governance of private and family owned companies in the building sector – and New Zealand in general. Daily operations tend to take over at the expense of taking time to stand back, look at the big picture and make important strategic decisions setting the course for the company’s future and protect the small margins under which most of the industry operates.

An important responsibility of any board of directors is to ensure the sustainable future of the business enterprise. It is not feasible for the directors of a family business to do that without taking time out to consider the big picture, the economic environment, the competition, the threats and opportunities.

This is likely to mean that many businesses are not implementing sound corporate governance practices because of an over-emphasis on the operational matters and a neglect of big picture, strategic issues. I have mentioned strategic planning but issues like risk management and regulatory compliance are even more important in the construction industry and are often neglected without a properly functioning board of directors.

Even where an owner-run/family business operator believes they have all the skills required, an external, non-family and non-executive director or advisor will provide access to a broader base of skills or experience – as well as becoming ambassadors for the business across new networks of influence.

They are also able to provide support and provide guidance to business owners and even valuable mentoring to possible successors. The objectivity and professionalism they bring can also enhance family or shareholder harmony.

The risks of being a director may be high due to potential personal liability.  Where that is the case, it is still worthwhile having an external person and that person will be an advisor to the board and still participate in the discussions but will not be a formal director and they will carefully define the boundary over which they will not cross so that they do not become deemed directors.

A good external director or advisor will start thinking and planning in a multitude of areas you had not previously considered.  Because they are external to the daily operations of the business, they will be particularly useful in the identification of risks to your business then assisting devise appropriate strategies to deal with those risks.

In the current competitive building environment, companies need to take extra steps to gain market share or improved margin.  A person from a different background will bring a fresh perspective as well as objectively challenging the status quo.

There are many opportunities and risks that we think about but do not have the time or discipline to prioritise.  The external director will provide the disciplined focus to make progress in these areas. 

Most building business owners have technical skills and qualifications in their particular area of construction, but not formal training or strong skills in all aspects of managing and growing their business.  Sometimes the missing skill sets are covered by employees but at a governance level, the right person will bring a further range of skills and experience which may not currently exist in your business.

How do you find the right person to serve on your board of directors? The local Institute of Directors can assist. Look for someone whose personality, values and culture you respect and believe will be a good fit with you and your company. Speak to your business advisers – accountants and lawyers – they are likely to have people in their network who might be a good fit for your business.

It can be a dilemma whether to get somebody from within the industry or outside.  Experienced and possibly retired industry veterans will understand best practice and the risk management but conflicts of interest need to be managed.

Once you have found the appropriate person they need to be properly briefed and given sufficient material to properly understand your business, your part of the industry and the market environment.  They need to know what the problems and challenges are so that these matters can be addressed rather than ignored and allowed to fester further. 

A good person will add structure and rigour to directors meetings and will challenge you.  This is likely to be a significant change from the way you have previously operated and should result in a significant improvement to the way the business operates and its performance.