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How Should A Director Board Operate?

Situation of Directors and Board of Directors

Many small and medium businesses that are registered as a Private Limited Company or Public Limited Company have Directors who are not functioning effectively or productively in Kerala.

Many companies see it as a statutory formality and hence do not take it seriously from a management point of view. Many give directorship positions to shareholders who invested a specific amount in the company, without considering what “value” they can add to the business. These directors may or may not be involved in the management or leading the firm. Some even give directorship to all its shareholders!

So when the very purpose of the Board is neglected or misunderstood, it is obvious that the Board of Directors won’t be adding a good value to the business. 

AASC can play a key role in professionalizing boards of companies

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The real role of a Director Board

Ideally, the Board of Directors will have a Chairman, the Directors and a Managing Director.

The role of the Directors is to lead the company, not essentially managing it. The management is done by the CEO, and may be under the direct leadership of the Managing Director.

The role of the Board of Directors can be briefly listed as,

  1. Ensuring legal compliance 
  2. Ensuring the company and its management does not do anything that harms the shareholder interest
  3. Planning and monitoring the growth of the company
  4. Ensuring the company is operating as per its vision and mission. Creation of the vision.
  5. Assisting the management in problems that they find it difficult to solve. This requires technical knowledge and expertise from the director’s side.
  6. Designing or Approving Organization Structures, Systems, Policies, etc. Either the board has to do it, or engage consultants to do it, and then approve it
  7. Recruitment of senior employees (who will be recruiting the rest of the team). This includes the creation of the organization hierarchy, job descriptions, remuneration packages, and work culture principles.  Either the board does it, or appoints a consultant to do it, and finalize the selection. 
  8. Approve important financial transactions be it related to investment, buying of assets, or creation of liabilities, that the company management suggests
  9. Approve suggestions of the management with regards to the creation of reserves or payment of dividends
  10. The Board has to engage external agencies and consultants, to audit not just the financial performance of the business, but also do management audits to ensure that management is managing the business well. It will involve doing studies and surveys on employees (for employee satisfaction) and customers (for customer satisfaction). This will empower the Board with data, beyond the information provided by the Management

So as you can see, the role of the directors is not to do daily operations. But to be the guiding and monitoring force. It is part of the process of separating management from ownership.

What is wrong with our Director Boards?

But unfortunately, instead of the above-mentioned roles, most small and medium companies have managers who are given the title of directors, because they are also shareholders of the company.

This means the real function of the leading and direction does not happen. This is not an issue if the company does not have shareholders beyond the directors working as managers. 

But in companies, where there are several shareholders, this system can mean a lack of accountability and be a cause of direction loss. 

How Management Consultants Can Assist the Board of Directors?

 

Sometimes, the board of directors will require the assistance of external consultants (like AASC). Some of these situations can be,

  1. When the board of directors has an important decision to take and needs an external expert to give an opinion on the topic. This expert opinion is very useful to convince the shareholders
  2. When there is a crisis between the Board Members and important decisions are not possible, external consultants can help in resolving the matter 
  3. As part of reviewing the performance of the management in terms of management, employee satisfaction, and customer satisfaction, the board of directors can employ management consultants  to do the review and submit reports on the same  
  4. If it’s a new venture, the Board of Directors can engage business consultants to prepare the detailed strategy plan or detailed project report with feasibility studies and organization structuring

If you have any points, experiences to add, or if you don’t agree to the post, please comment below. 

Explore how AASC can help transform your business. Call now +91-7558-900-800

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/

To know more about AASC services for businesses, please visit https://aascglobal.com/consulting-for-business-growth-and-expansion/

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Who Should Be In Your Board of Directors?

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?

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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
  6. 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. 

  1. “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
  2. 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?
  3. 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/

To know more about AASC services for businesses, please visit https://aascglobal.com/consulting-for-business-growth-and-expansion/

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Share Holder Value Creation Is Not Everything

Most businesses, that have shareholders tend to focus on satisfying the investors only. And investors love profits. This means to improve profitability, return on investment and pay back periods- the management many a times have to compromise on their commitments to the employees, customers and environment.

Make no mistake, shareholders are very important. Without them, there is no capital and without capital there is no business. But the management strategy should not be entirely focused on them. Because many a times, the shareholders may not know what is good for them in the long run.

Shareholders usually invest in a commercial business for two reason. Immediate profitability or long term profitability / appreciation. For businesses with a vision, it is essential not to have investors who are short term focused. This will prevent business from investing in itself, its people and its relationship with the customers. As all these can be construed as “unnecessary expenses” that should otherwise have been shareholder’s profit.

But without investing in people, the organisation will not have the capable team to fight the competition nor grow. Without investing in building a relationship with the customers, the future customers will diminish. Without investing in the brand, will mean no value to the firm even after years of operation. Without investing into growth, diversification and research, the

business may not survive long.

Who does all this affect? The shareholders.

So the management has the difficult of job of ensuring that the right balance is maintained while creating value for all the stakeholders (and not just the shareholders).

This situation can be made easy, if the investors are rightly chosen in the first place. Choose investors who are long term, and who believe the firm should have a good brand value.

Promoters before targeting the “right customer segments” have to target the “right investor segment”.