External directors boost startups

Why do so many people think having a board applies to public companies only? Having one is actually more important for a startup. External directors could be the difference between make or break for a new company.

board, external directors, startups, Bill Gates, Microsoft

You don’t have to be Bill Gates or Microsoft to have a board of directors. In fact new companies need external directors more than Fortune 500 companies do.

Nowadays when as many companies are set up as go bankrupt it’s essential to be surrounded by competent people that can steer you in the right direction. Let’s face it, nobody is an expert on all areas essential to successfully run a company. An entrepreneur may for instance not be the ideal person to handle finance and accounting.

Behave like a Fortune 500 company

Why should only listed companies have boards of directors? Time to go against the flow and behave like your company was a Fortune 500 company. There are no rules that prohibit a startup from appointing a board of external directors. Even if you are the only investor in the company, a board will benefit you tremendously.

You can’t do everything yourself

Frequently someone who just started a company has it all in their head and feel confident they know what they are doing. Well, do they? Reality is that some do and some do not. So it’s definitely worth while looking at the benefits of having a board of directors to make the company develop as intended.

Advantages of appointing external directors to your board

  • Larger network giving you access to competent people you don’t yet know
  • Different perspectives
  • Wider knowledge base facilitating decisions
  • External know-how is a huge asset

If you invite a lawyer to sit on your board, you have a legal expert with knowledge of and interest in your company succeeding. Far better than hiring a lawyer charging per hour for his services.

How to carry out board meetings

To begin with, having 4-6 board meetings a year should be sufficient. Make sure you let the members of the board know which issues will be discussed well in advance. That way they are prepared, which facilitate constructive discussions and enable appropriate decisions to be taken. Take notes of everything said and decisions taken, write protocols and distribute to all members. That will make people think before they venture an opinion and also facilitate follow up of decisions taken.

What’s wrong with being unconventional? Doing things the conventional way may result in failure. So like a Fortune 500 company, get the advantage of external directors that will be assets to your company. The difference between doing things on your own and having a board will be huge. Provided of course that you chose people that are able to and interested in contributing to developing your business. What will motivate them? Well, I leave that question up to you. If you can’t come up with an answer, maybe you should think twice about setting up a company?

Photo: Titanas – Flickr

84 responses

  1. An excellent post, Catarina. In fact, there is a strong push for companies to appoint independent Non-Executive Directors (or, external directors, as you put it). The latest UK Corporate Governance Code, for example, suggests that larger companies have a preponderance of independent NEDs (including a Non-Executive Chairman) and that even small companies have at least 2 independent NEDs on their board – for all the reasons you give. It's not just starts-ups: but all companies…

    Apart from anything else, as a business owner/CEO you're able to draw upon the extensive skills and experience of your NEDs, you will have mentors available to you and, very importantly, somebody independent to talk to (alleviating the loneliness of being at the top).

    A key point to remember, too, is that as company directors – even Non-Executive ones – these people have a statutory duty to act in the best interests of the company, whereas outside consultants have a duty to their own company first.

    • Agree with you Guy. Just wish more startups appointed Non Executive Directors, to put it your way. They often need them more than large companies do.

      Good point about external directors having a statutory duty to act in the best interest of the company.

  2. Nice post Catarina. I totaly agree that small companies have to behave like a big company . By having worked for international companies, I can see the gap between both type of companies, for instance the lack of controlling and budgeting processes in small companies. One year ago, I joined the board of directors of a small non-profit organization as financial expert. There were a lot of things to do in financial and legal area, but sometimes, your advices are not always welcome. People are reluctant to change, and think that I want to apply processes as in the private sectors. I just try to make them understant that even a non-profit organization has to be manager in order to reach his goal successfuly.
    My recent post Change- responsibility and self-confidence

    • Glad you agree with me Eric. At least the non profit organisation you are on the board of have the sense to, like a large company, have a board.

      But I do believe non profit companies can be difficult when it comes to finance. You are right, but many of them probably only care about the fact that they do not have to make a profit.

      • Thanks for your reply Catarina. Indeed, people in a non-profit organization are less concerned by the profit. The argument beginning to convince them is to say that the goal is to ensure the sustainability of the organization, the project. The goal is probably not to earn money, but certainly not to lose money too. This argument seems to be accepted as they are concerned by the sustainability of the organization,and of their jobs.

  3. To me more important is the blend in mgmt and board. Many startups fail because external directors have same tech. belief structure as the founders. Engineer does not need another engineer to the board

  4. Excellent suggestion Catarina. Bringing in people who have a fresh perspective is excellent advice. As you point out, not only do you benefit from their expertise but you also potentially have access to everyone in their contact sphere.
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  5. I often think about this when meeting with clients who have boards. For example, I met with a chamber of commerce who is retooling it's efforts and has cleaned out it's board and replaced some heads. Their reason was that the original board was not working towards the same board, and even though the chamber is young is should conduct business as professionals and not amateurs. I was very impressed.

  6. Interesting post with your excellent idea. I have been active on many boards myself but never had one when I started my sole proprietership. Well, I didn't have a formal one. I did solicit the ideas and feedback from those nearest and dearest to me. They had various expertise that helped me in many ways.

    • Agree with you Susan. Not sure why since for startups it's essential to have imput from external experts in order to make sure their company develops the best ways possible.

  7. Great article Catarina. Not only does bringing in external directors bring in new perspectives, it also brings in unbiased & more neutral perspectives. Sometimes being too closely involved in a business inhibits a business owner from seeing the forest through the trees.

  8. Great article! I'm in agreement with Keyuri. While I also have sought outside advice with my start up, I never thought about putting together a more formal "board." It's a great idea for advice and input and to share expertise. Thanks!

  9. It would apply more to a company of a size above a certain level. Most small scale companies would have a prime mover in the form of owner who would have his own ideas and he would then add professionals once he has created a fund mass. Once, he has the need to grow, he would certainly need another head to take responsibility. Most times, middle level companies would not work if the external director and the principal body do not have ideas flowing in the same path.

    • Taral, that may be true for some startups. However, many of them never get above a certain level due to the fact that the owner doesn't command all the expertise needed to get it there. That's why so many startups go bancrupt.

  10. I understand the "direction" the post is pointed to but NED/INED is not key to it.
    The key is having a vested interest in the success of company and skill sets to contribute positively.
    The start-up individually has that but can be held back by two issues. One is the arrogance to assume no help is needed (difficult to work around that) the other is fear of the expense of getting help (most fears can be addressed).
    Help can come in various forms and be rewarded likewise. I would seek out an Angel investor as a primary source of help (suitably qualified of course). Such individuals contribute much more than a formal Board. This does two things.
    1. Makes you realise you need to share the business (emotional decision).
    2 .Makes you have to explain the business (never easy if you find a good Angel).

    So I submit external advice is essential but there are many sources available (Angel/ mentor/ interim manager / serial entrpreneur etc). There is also a focused way to cover the cost (don't use scarce cash resources). Shares in future profits or equity are excellent ways to reward good advice.

    NED/INED legislation has failed to live up to its purpose,. Too many high profile names are "given" positions (marketing approach to a compliance need?). Worse, too many NED's have taken on more appointments (often in addition to Executive positions) than they can possibly carry out with appropriate dilligence (demonstration of greed rather than savy advisory skills?). They attend a few Board meetings but rarely visit the "operations" of the business so have no hope of understanding first hand the needs and risks of the entity. The legislation ecourages a Western sickness = tick the box and I do not see the proposed legislation review curing the ailment.

  11. Hi Catarina,

    I couldn't agree more with you. Entrepreneurial success is all about team work. We can't make it alone.

    Thanks for sharing your insights.

    Take care

    My recent post Freedom Or Security – What Do You Value More

  12. Excellent Post, Catarina. You're sharing here some great points. I love the point #2 "Different perspectives". Great…

    Thanks for sharing this excellent info.

    My recent post How to add Google Plus one button to WordPress &amp Thesis

  13. Very cool idea! I'm a firm believer in getting outside help and guidance. As a freelance writer, a board of directors isn't practical for my operation, but I certainly have an unofficial guidance committee that helps me in both my writing, and in my project in starting up a new Toastmasters club.
    My recent post take heed and listen to the signs

  14. This is a very good suggestion. I have done this in the past but had not thought about it for my blog. By having a board for my LLC, I could gain value brainpower over all to help me grow my business. I do have people in mind to do this and I know that would love to participate in what I'm trying to grow. :-)
    My recent post Makulu Iswithi Pinotage: Wine

  15. Great post Catarina. I have done this in the past, and have avoided major headaches, by having the right people on the BOD. Hope those who read this article take heed, and apply these suggestions accordingly. Blessings.

  16. I think this is a great idea! I suspect most don't do it because they are too busy running their companies, at least that's the excuse I would bet most give.

  17. Any corporation large or small should have a board. The key thing that you mention at the end is how to motivate people to actually take the time to come to meetings and give valuable input. The benefits are absolute. A lot of new businesses have trouble delegating and/or thinking they can afford to do without . Thanks for the post.

  18. I can see how this would be very helpful for a larger company. I have a solo enterprise, I'm a ghostwriter. However I do find help from different directions. I cannot operate as an island, nor would I want to. I have advisers, assistants and people who help me with different functions. Maybe one day I'll have a board!

  19. Two heads are better than one! Collaboration is the best way to brainstorm and get some new ideas, and that is essential in the business world. No matter how small or large a company is, I feel like a board would always prove to be beneficial.
    My recent post What to Eat Pre-Workout to Help Burn Fat and Build Muscle

  20. I think this is a great idea Catarina, but as a start up, wouldn't money be tight? I assume if you seek out investors, this would not be an issue. I would love for my husband to have a board, but it would be difficult to get people interested unless you were paying them and there is no way at this point in time that could happen.
    My recent post Celebrate Good Times, Come On!

    • Good point – money is always tight. yet if the Non Exec is committed to the future, rather than relying on their apparent, past endeavours, they can be afforded. My services have just been invited by a start up and I have offered a lower day rate plus a sales based rate upon company target achievement or more importantly over achievement. This says I have faith in myself, the strategy and the endeavours of those working in the business. And I do.

    • A startup can get a board consisting of either executives who do it pro bono or for a low rate. If your husbands company is a startup he can try. But if he has been in business for some time payment will be essential.

  21. These all seem like really good tips. Of course an entrepreneur who started their own company will want to have control and feel like they need to do everything, but thats just not possible. Delegating tasks and accepting helps seems like it would be beneficial.
    My recent post Why You Should Consider Unplugging from Technology for a Day

  22. Catarina, it is a great article and fully correct. I agree with you. This is organizational innovation. So that you are hiring board of directors from different industrial or services fields that will bring their experience, know-how and personal skills. This will create right strategic planning, execution, competitive advantage and sustainable growth and profitability to survive in competing global economy. This is a change management and change leadership also.

  23. That is a great point Catarina. New companies NEED the board and I am sure such a board serves the purpose. There is nothing wrong in being unconventional. Trying to follow conventions is boring and does not give room for creativity.

  24. This is so wise Catarina. When I first went out on my own in 1990ish, for about 2 years I informally had a board of directors. A group of just 4 or 6 of us would meet monthly and we would rotate which of us was the focus of "board talk." We all started something at about the same time. I'm not really sure why we abandoned, but I suspect being soloprenuers, but my guess is we just got busy. Makes me wonder if our meetings were helping.
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  25. Fresh eyes, and new perspectives on old problems…can't beat that mix! I think it's also important to see that the board is a mixture of different industries.

  26. Having managed a charity, I naturally had a Board of Directors and it was wonderful if I came up against a stumbling block to be able to contact one of them for clarification, their opinion and in some cases, direction. To me a startup company having access to Board members skilled in different areas would be of tremendous help and would greatly increase the odds of a business succeeding- I think the hardest part would be finding professionals willing to participate in a start-up.

  27. This is an excellent idea, but it could be difficult to implement for a small cash strapped start-up. However, this concept works even outside the business model. My husband is a research physician and for major projects funded by the government, they are required to have an external advisory board and the rule is that members cannot be compensated in any way. Research scientists are willing to participate because they know that they will also need external board members for their own projects—-and as we know—"what goes around, comes around".

    • Good example of how having a "board" works in your husbands line of work, Suzanne. That's mainly how it's done with start-ups as well. Professionals who have started companies in different fields sit on each others boards.

  28. This is such an interesting perspective. I've never thought of small companies having boards. As you point out, you can really only benefit from doing so. It really is impossible for a person to be an expert in all aspects of their business. Additionally, there is something to be said for setting yourself up as a big company, so you are already prepared as you grow.

    • Thanks AK. it's not ready yet, but good enough for now since it is mobile-friendly. Have more work to do on it but it's ok to display it for now. Don't worry about the slider blocking some text. Just click on the picture and you will get to the article. Yes, we do need a board of directors even more when we are start-ups.

  29. What would motivate talented people to participate on the board of a startup? Most startups are not going to have resources to pay outside directors so unless you are calling in favors or bringing in personal friends I think you have to offer some interest in the company. Otherwise you may be able to attract directors who see the growth of the startup as offering some potential business advantage for them. I have served as a director of a relatively new company for that reason. It was a tech company and their technology was such that it would possibly benefit the organization I was a part of at the time.

    • Other qualified people that have just started a new company frequently help each other out by forming informal boards, Ken. Needless to say top board members who earn millions and millions of dollars a year don't have the time. Unless of course it's someone near and dear to them.

  30. I think having a board comprised of external members is a good idea. Perhaps the catch would be if those members want compensation for those positions before the fledgling company is profitable.

    • Professional board directors that earn millions of dollars simply don't have the time, Cheryl. Unless of course it's someone they know. But you have really qualified people who start new companies. They frequently help each other out by organising informal boards.

  31. So smart Catarina! I don’t think I was half way through this article before I stopped and sent a friend with a new technology start up an email saying, “Have you thought about getting a board of directors?”

    As always good thinking.

    • Thank you, Debra. Most likely it would be a good idea to suggest to your friend to find other people with different skills that have just started a new company as well. They can then help each other out.

  32. Hello Catarina
    When I read this post, first thing that came to my mind was, what will motivate others to join and be part of board of directors. Will they be paid or friends or as you said, people of like mind, with same interests???

    I think as the world is changing and with globalization, there is a need to be unconventional for success. As there is no particular formula of success but we have to try things out to check what clicks.
    Normally when I see around then I see that many people in business normally have their family members on board and lawyers and etc. are paid employees. But this is great idea to have them on board and get some help.

    Giving the agenda of meeting before hand is very necessary, otherwise, half of the meeting time will be waste in introducing people and I think all of sudden a better feedback can not be given, when the thing is not clear.

    I think, this is good suggestion for business people and I hope they will think about having a board.

    • Andleeb, the reason the first thing that came to mind is payment is most likely because you associate board of directors with huge multinational companies. Glad you agree with me that it's a great idea for start-ups to have boards. It's just a question of "you scratch my back and i'll scratch yours". This kind of cooperation can usually be organized through startup organisations.

  33. Catarina, I think a board of directors for a new company is a win-win situation. The non-profit organization probably would have an easier time getting board members than a public start-up company. But, if a start-up company had difficulty finding members a resource for them to consider would be local universities or colleges. Doctoral students in specialized fields could sit on a local board for school credit. I’m sure Master candidates working on their thesis would also be a good resource for an up and coming company.

    • Yes, it definitely is a win-win situation. Of course it's easier for NGOs. Good idea of finding senior people at universities to sit on startup boards. Mind you the students can't be too junior because that may turn out to be fatal:-)

  34. I like the point you make that you cannot do everything yourself. Too many people start a project or a business, and build it up. The hardest part they have is when they need to rely on someone else, even for information. It seems like they cannot relinquish any form of power that they have obtained.
    Also, your paragraph on how to carry out board meetings was very useful, even though you could dedicate an entire series of blogs to that topic.

  35. Catarina — many nonprofits have Boards of Directors, but they will also form advisory boards of volunteers who are personally interested, even passionate, about the organization's mission. I sit on one of those advisory boards. No one is paid but we get the satisfaction of helping the organization with new ideas and they benefit from the added brainpower.
    My recent post Use Images to Inspire Your Readers

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