There is a general tendency among entrepreneurs to include those who invest ‘the most’ as directors. While this might look logical, it has many dangers for both the business and the shareholder himself.
It has been found that, becoming the Director of a business, is seen as a special attraction to most investors. In fact, it is so popular that entrepreneurs promote it during their capital raising campaigns. But this is not a good method for businesses that have long-term plans and vision.
So what are the reasons why it’s a bad idea to have Directors who are there by virtue of the amount they invested?
- Directors are the people to lead the business to achieve its goals and vision. This requires good leadership skills, exposure, and vision. These qualities may not necessarily exist in the person who invests the highest. So having him on the board is not going to help. Instead, there are chances of his interference negatively affecting the business
- Directors are the people who should guide the business during bad times. They should have the maturity and capacity to guide the company’s top and middle management, to come out of the storm. On the other hand, a shareholder may not necessarily possess these skills and knowledge and may not be able to contribute, or his contribution can have a negative impact
- Directors are part of the vision. And visions demand focusing on not just profitability or Return on Investment. It might involve investing in long-term assets, or low-income investments, or diversion of company profits to new expansions, or a substantial investment into branding, etc. But an investor need not always share that kind of vision. They are mostly in, to get a good return now, or a faster ROI. Hence, if they are on the board, they won’t be supporting such moves, hindering the progress of the company towards its goals
- Inability to take tactical or strategic decisions. As the saying goes, “Empty Kettle Rattles More”, investors who are on the board, whose only qualification is the investment they made, can make brainstorming a major headache as they come with suggestions and objections that are not qualified
- Some companies make the mistake of making every single investor a Director. Thereby having a ‘huge’ Director Board. Most often these board members are not active. What is the use of having such a big board? It’s quite childish and should be avoided
- Some companies have NRI investors as Board members. Unless the investor has significant value to add it’s better to avoid such placements. As at times, when all directors have to sign certain legal compliance documents, it becomes a pain
It’s not just for the company, even investors should be careful before becoming a director.
- “Sleeping Directors” or directors who are not really active in the company, and are just Directors for the “prestige” matter, should be careful. If the company does anything illegal, they can also get into trouble
- If the company has many directors, most of whom are outside the country, know that the company can have issues in smooth operations. Would an investor want to be in a company that will be having such issues?
- A company with several unqualified directors means that the company is not professional, does not have a vision, and is not going to last long or win big. A celebrity director does not qualify as a capable director.
So ideally, when businesses are looking forward to new investments, they should not offer Directorship as an offer to investors. Instead, Directors should be handpicked from among the shareholders, who can really add value in the Board Meetings. Such capable people can be invited to be shareholders of the company. In fact, it always helps, if such people are made shareholders and directors first so that using their profile they can canvas the rest of the shareholders.
Investors should opt to become a director, only if they feel safe and that they can offer real value in terms of ideas, management, and leadership to the company. Else it’s better to be safe as a shareholder.
Investors can also form investment companies, and these investment companies can invest in other companies. In such situations, the Investment company’s representatives (who should be qualified) can also be board members of the companies in which they invest.
Action
So is your company having a strong Board? If not, it’s time to repair it. Because the first cause of business not growing can be a weak Board. “Repairing” the Board will involve reshuffling the Board, drafting new agreements and Corporate Governance, etc.
It can be a sensitive matter. And has to be handled with care. It is a good idea to engage professional Management Consultants, to ensure no ego issues develop between Directors. And that the new change is in the right direction. At AASC we provide this service.
If you have any points, experiences to add, or if you don’t agree to the post, please comment below.
AASC is a Business Strategy & Management Consulting (aascglobal.com) firm that serves Promoters to study, plan and set up new ventures, and Entrepreneurs to manage and grow their business, in a professional manner.
To know more about AASC services for new ventures, please visit https://aascglobal.com/consulting-for-new-ventures-and-startups/
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