The Importance of Board Governance for Entrepreneurial Owners
Entrepreneurial business owners often choose to build their companies without utilizing a qualified Board of Directors. Over the past 40 years of being directly involved with over 60 startup and emerging growth companies as an operator, investment banker, VC/angel investor, Director and consultant, I’ve seen all the missteps that could have been avoided if a proper board of directors was employed. This is particularly important when it comes time to sell the company.
After spending years developing and growing the company, the entrepreneur owner/CEO becomes accustomed to being the sole decision maker, they like being in total control. Sometimes that works out and sometimes it does not! Board governance is designed to provide the CEO with a broader view of the business and strategic landscape and drives accountability for the executive team to all shareholders. Lacking board governance particularly becomes a challenge in Recapitalizations, transactions where the owner decides to sell a portion of the company (“partial cash-out”) and stays on with the new financial partner (often a private equity firm) to reach a higher level of growth. With the term-sheet from the new investor, comes the requirement for one or more board seats on a Board of Directors that does not exist but must be formed at closing.
For the entrepreneur who has never had to relinquish partial or ultimate control of their company to anyone, this is a significant adjustment, one fraught with stress and anxiety. It often takes some handholding and is an important educational contribution by the transaction Advisor in teaching the entrepreneur how to prepare and conduct a professional board meeting and manage the Board members themselves with appropriate communication. This training can involve everything as simple as teaching the basic procedures of using Roberts Rules of Order, to the more challenging issue of how to manage and deal with a troublesome board member when voting on a critical decision.
Based upon my experience, I have found that providing Board Governance training has been viewed by our clients, as a very valuable-added benefit. Anyone contemplating selling a portion of their company to an outside investor that comes with a Board seat and a first-time creation of a Board should make sure they have an Advisor with direct Board experience to properly mentor them.
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Scott Hardman James Thompson Kent Johnson
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