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The Board In The Closely Held Corporation

November 25, 2009

Is your company run like a private preserve, operated by the lone hunter so he can roam for private enjoyment and self satisfaction? Another view of the closely held corporation is that it is an independent creation with a life of it’s own. Much like a child that you have created and nurtured into maturity, it now must continue to develop and establish a life of it’s own.

In the privately owned company, the board of directors has commonly served a variety of extraneous functions including providing protection from the outside world, meeting statutory requirements, rewarding friends and placating relatives. For the the closely held corporation, adopting the discipline of the publicly owned corporation, including a functioning board of directors, can be a great competitive advantage. But first the owner-manager of the closely held firm must decide if he wants his company to remain a private preserve or if it should develop as an independent entity.

Because of their tendency to remain as private preserves, the closely held company is often defined as the close minded company. For our purposes we will define the closely held company as one in which there are a small number of stockholders and the controlling shares are owned by one family or individual who generally represent the management control in addition to the ownership control.

What firms have sufficient size or critical mass that would enable a board of directors to make a meaningful contribution? Businesses that are under one million dollars in annual sales volume are most dependent on the operating skills of the owners and not management skills. As a business grows beyond two million in sales and definitely by the time it reaches five million, the need for management, administrative and organizational skills is present. Those businesses that have grown in size to exceed thirty million in sales have generally developed more sophisticated organizations that include a contributing board. It is for those businesses in the area of five to thirty million in sales that the development of an outside board of directors would have the greatest impact.

As the founder or owner-manager of a successful business, you are an unquestionably strong, powerful and competent individual. But regardless how smart you are, you have limitations, we all do. This is why the outside board can have such a great impact. They can broaden your knowledge base and balance your unchecked power.

The basic responsibilities of the board can be defined in four areas. First, the board should concern itself with monitoring the overall performance of the company and the management. Secondly, the board should assist the management in the development of long range plans for the business. It is in this area that the additional expertise of a properly selected board will be invaluable. Next, the board should concern itself with the continuity of management. The objectivity of the board will aid in the development of managers and the presence of the board will establish a base of authority if something happens to you. Finally, in the face of a crisis, the board can be a major resource.

After the establishment of a strong outside board, where does the owner-manager fit in. Running the business, of course. Concentrating on being a leader and not just an omnipotent and benevolent boss. In addition to being a leader, the company’s founder should concentrate on doing those things that he does best. Tasks that no one else in the closely held firm can do, such as new product development and acquisitions.

Who should be on the board and how should they be paid? First, keep the usual board members, the family, friends and loyal employees off. Set up a family advisory board to keep them advised of what’s going on. Your board members should be dictated by the strategic focus of your business. Determine where the opportunities are for your business and recruit board members that know something about how to get there.

You want board members that are your peers so pay them what you get paid. Figure your total compensation and pay your directors the same amount on a pro-rata basis. If you have a directors meeting every other month, your directors will probably be spending four hours preparing for a meeting and four hours at the meeting. In addition they will be monitoring your business for about four additional hours a month. If you have a $120,000 compensation package and you started out with four outside directors, that would amount to a total annual expenditure of about $25,000. Would four hundred hours with four knowledgeable specialists in your business be worth it? You bet!

There are a number of factors, including liability, that can make it seem difficult to get started. They can all be overcome. Because it’s your business, you will want your company to be strong and independent, created and nurtured by you, but with a life of its own.

Joe Driscoll is a management consultant and was the founder and former chief executive of several manufacturing companies. His column appears regularly in the Monday edition of the Herald.

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