Editor’s Note: An extended version of this article was previously published in ABF Journal.
An outside director is a member of the board of directors or advisers who is not part of the executive management team. These professionals are sometimes referred to as independent or non-executive directors. They are not employees of the company and are differentiated from inside directors, who do serve as executive managers and/or corporate officers.
Outside directors are advantageous because they rarely have conflicts of interest and they often see the big picture differently than insiders. While corporate governance standards of public companies require a certain number or percentage of outside directors because they are more likely to provide unbiased opinions, private companies are normally left alone — but, that unbiased advice is highly recommended.
In today’s business environment, smart organizations frequently seek outside expertise. Traditionally, companies invited advisers to join their board of directors. There is now, however, more risk to these directors based upon recent legislation (Sarbanes-Oxley). While there is formality (shareholder reporting, responsibility, risk), liability and expense to a board of directors, there is a budget-friendly alternative in the form of a “board of advisers” that is beholden to management. The main difference is in where the fiduciary duty lies: to the shareholders or to management. Regardless of which vehicle used, there is great value to be obtained by hiring an outside director.
Why add outsiders to your board of directors or advisers?
- Outside directors can be a low-risk, low-cost, but valuable resource. They bring a new set of skills that will produce benefit for your company.
- Outside directors are on your side. Unlike other outsiders to whom even a private company must answer — like banks and insurance companies, the IRS, OSHA, EPA, etc. — these advisers answer to you.
- Outside directors add credibility. When it comes time for a liquidity seeking event, like new financing, selling the company or IPO, outside directors send the message that you are a serious professional organization with serious guidance.
With a board of directors, your company immediately gains legitimacy, as well as a panel with expertise that you probably don’t have in-house.
Independent Perspective
The day-to-day events in a business often distract the CEO’s time and energy. It is easy to get wrapped up in the ways and means of running the operation while losing track of the bigger picture. The sounding board provided by an outside adviser can certainly help ground the CEO in real leadership duties. Typically, a board will focus on protecting the unique value of the company, but they often add much more.
CEOs need advice from outside directors who care about the company’s success and can view things from a distance and a different perspective. CEOs will be well served by adding board members who can challenge them and the decisions they are about to make.
Outside directors should constructively challenge and contribute to strategy development, implementation and infrastructure. The board is the perfect way to help set aside your tactical perspective and force you to work on the strategic business issues.
Experience & Objectivity
The very nature of growth implies that a company is going where it has not been before. Take that journey to new opportunities with the help of advisers who have been there and done that. Their objectivity can help you through the obstacles.
When independent observers scrutinize the performance of management in meeting goals and objectives and monitoring results compared to long-term valuation goals, there is real value in their participation. Outside directors should satisfy themselves that financial information is accurate, that financial controls are in place, that internal reporting is at the right levels and prepared often and that risk management systems are in place. Compliance with laws and regulations must be monitored.
While most companies follow a well-understood life cycle, it is extremely helpful to distinguish between crises that are normal based upon their stage in that life cycle versus crises that are troublesome because they are unexpected. Look for business advice from experts who have experience in these situations.
When transitioning into new markets, it helps to have someone on your team that has both gone through transitions before and understands the idiosyncrasies of the new market. For instance, doing business with the federal government is quite different than doing business in commercial and international markets. Having team members with diverse experiences helps guide the way.
Contacts
Every company needs help when it wants to grow, prosper or turn around. Your contact book doesn’t include everyone. Outside directors can extend the company’s reach by using their own contact network of colleagues that can get involved to provide guidance and resources.
Rely on these contact introductions to bring in new customers, which will drive sales revenue. New suppliers can favorably impact cost-cutting of materials, which drive a better bottom line. Strive for strategic teaming relationships to promote growth.
Contacts can be influential in bringing resources not previously available. They can attract new talent into the company at all levels and provide a new set of eyes and ears during the interview process. Locate other independent directors. Improve the management team. Grow the sales force and distribution channels. Introduce and improve marketing, penetration and Internet presence strategies. Entice operational experts to produce product and services. Lure innovative people who can embellish research and development.
Financial Matters
Outside directors often have a database of contacts who can supply capital, both in the form of debt (lenders) and/or equity (investors). This means that you can get in front of many financing resources quickly once an expression of interest or offering package is ready.
If a turnaround is in process the task is more complex. While there is an overabundance of capital available, you will have to demonstrate that you have indeed made changes at the company. Changes in management, control systems, strategy, etc., are a must. A board of directors demonstrates that you are up to the task of reporting to an outside financing entity.
Like with raising capital, outside directors often have a database of contacts who both have deals for acquisition and who are looking for opportunities to buy. This means that you can get in front of mergers and acquisitions dealmaker resources quickly.
Outside directors are often adept at introductions and negotiating deals. They then elevate you (management and the board) to the decision-making role.
John M. Collard, CTP, CITM, is chairman of Strategic Management Partners Inc., in Annapolis. He can be reached at 410-263-9100 or [email protected].