Moving from the Kitchen Cabinet to a Fiduciary Board

Your company has been operating well for years with an informal group (or board) of advisors. You call this your “kitchen cabinet,” comprised of trusted friends and business associates. It might include the company or family’s banker, attorney, or other people well-versed in the history of the company.

But winter is coming…  

It could be the transition of ownership from one generation to the next, or the hiring of the first non-family CEO. Or perhaps a family member is about to step into their first CEO role and would benefit from the counsel of experienced chief executives. Maybe the business is now of a size and level of complexity that additional skills are needed to support the next stage of growth—or to face the challenges ahead.

If, after much reflection, you decide that the company would benefit from a fiduciary board (and before you pick up the phone and activate your network), ask yourself the following questions:

• Are you really ready to share decision rights (and abide by those decisions) in such matters as succession planning, strategy, dividend/distribution policies, and executive compensation practices? After all, advisory boards are just that — advisory; ownership is free to pick/choose whatever advice is given. Fiduciary boards, on the other hand, have clear duties of loyalty and care to all shareholders — both to majority and minority shareholders. With those duties should come clear operating guidelines and decision rights (not to mention the potential legal exposure for failure to discharge those duties).

• Are you ready to invite, if not welcome, best practices in corporate governance? Among other practices, this includes creating audit, nominating and governance, and human resources and compensation committees that have clear charters with responsibilities. This also includes adding key talent to the board based on the need for diverse experiences and backgrounds—even though this may lead at times to differences of opinion if not the occasional conflict in the board room.

• Are you committed to a high-performing (and high-functioning) board, one that actively seeks to improve itself over time through continuous education and assessment? Like any new group, new boards go through the “forming-storming-norming” process before they get to performing. Are you willing to make the time and investment in onboarding, regular informational meetings (in addition to board meetings), and provide a steady flow of relevant information? Are you willing to undertake annual board and committee surveys to measure performance and target opportunities for improvement? Most new board members take at least a year to become well-versed enough in a company’s business to provide meaningful contributions.

If you’ve answered yes to all of the above (and still before you pick up the phone and activate your network), answer this next set of questions:

• Do you ultimately want a majority of the board to be independent, or will they always be in the minority? Based on this answer, how many directors do you want to add and over what time frame?

• What skill sets do you need? Developing an objective skills matrix is essential to creating a high-performing board. Continue to resist the urge to call your ten best friends for names until you’ve developed a rudimentary skills matrix. Start with the skill sets you currently have and those you consider core. Most boards include financial expertise running a like-size or larger company as a core skill set. Then there are the specialized skill sets to consider. What about particular industry expertise (being careful not to create competitive conflicts)? Is family or private company governance experience desired? Public company experience? On the specialized skills front, do you need a technologist? Someone with experience running a diversified portfolio of businesses? Private equity expertise? Someone who has taken a company public?

This last bullet point bears emphasis. While there is certainly nothing wrong with reaching out to your network for qualified and relevant candidates, there is great value in pushing yourself out of your comfort zone for candidates with diverse or non-traditional backgrounds. Consider tapping into resources within NACD, the Private Directors’ Association, or any number of specialized retained search firms for new board members. Over time you may find that some of your most valued board members have backgrounds that at first blush might not have been an obvious fit. 

Convening your first fiduciary board is one of the most important decisions a company will make as it matures and grows. Make sure you take the time to understand the implications of taking this next step and objectively identify the skill sets and backgrounds needed to take your company to the next level.