The Board You Actually Need, and the specific people most SMEs are installing instead

A founder I was advising a few years ago, running a business of perhaps thirty five people that was growing at a pace which was starting to produce the specific category of strategic question she was no longer confident making alone, had decided, after some months of consideration and some weeks of specific recommendations from her advisors, that she needed a board, and had begun the process of recruiting one, which she described to me one afternoon with the particular combination of satisfaction and nervousness that founders tend to produce when they are about to make a decision whose implications they have not yet fully understood. The board she was recruiting consisted of three independent directors with impressive professional biographies, each of whom had been chair or chief executive of a considerably larger business than hers, each of whom had been introduced to her by a corporate advisor who had reasonable commercial reasons for making the introductions, and each of whom would, in the following months, join the board of her business and begin providing the specific category of oversight that boards are designed to provide, which turned out, in her case, to be almost completely unrelated to the specific category of help she actually required, which produced the specific category of expensive misalignment that I have come to recognise as one of the more consistent commercial errors in Australian SMEs of this size range.

The honest version of what the founder actually needed, if I had been more direct with her at the time, which I was not for reasons I will come to shortly, was not a board of impressive independent directors who would hold her accountable to formal governance standards. The honest version was a small group of people who had operated businesses of roughly the size she was moving into, who would be willing to sit with her for a few hours a month and work through the specific strategic questions she was wrestling with, who would challenge her thinking without the specific formality that comes with a legal board structure, and who would be interested in her as a person and in her business as a specific case rather than being interested in her business primarily as an item on the agenda of a formal meeting that happens on a schedule. The board she was installing was going to do the first version. The second version was what she actually needed. And the specific confusion between the two is one that most SME founders are producing continuously at the moment of installing their first board, which is a confusion that is being enabled by essentially every piece of advice she was being given and which is producing the specific commercial losses I am about to describe.

The confusion operates at several levels, and it is worth describing each of them separately because the correction for each is slightly different. The first level is the specific language problem, which is that the word board has come to mean, in Australian commercial culture, the specific formal governance structure that larger businesses have, with its specific legal responsibilities and its specific procedural expectations and its specific category of director who serves on it. The word has essentially no useful variation for describing the different kinds of advisory structure that SMEs could install, which means that when an SME founder decides she needs a board, she is almost always deciding, without quite realising this is what she is deciding, that she needs the specific formal structure that the word refers to, when what she actually needs is almost always a different structure that does not have a common name in the language and that she would therefore have to describe through phrases rather than through a single word, which is a cognitive effort most founders are not inclined to undertake because the formal board structure is available as a ready-made solution and the alternative requires custom specification.

The second level of the confusion is that the specific people who are available to serve on the formal board structure are usually not the specific people who would be most useful to the founder in the capacity she actually needs. The impressive independent directors who are available for appointment to Australian SME boards are usually people with careers in considerably larger businesses than the SME in question, which means they bring the specific experience of operating at scale and the specific experience of working within the formal governance structures that larger businesses require, both of which are useful in some respects but neither of which is the specific experience the SME founder most needs access to. The specific experience she most needs access to is the experience of operating a business of roughly her size, with roughly her range of pressures, which is the experience held by other SME founders at various stages of their journey, and which is almost never represented on formal SME boards because other SME founders are usually too busy with their own businesses to serve on anybody else’s board, which is one of the structural problems of the SME board market that nobody has quite worked out how to solve.

The third level of the confusion is that the specific format of the formal board meeting is almost completely wrong for the specific kind of help the SME founder needs. The formal board meeting operates on a specific schedule, usually monthly or quarterly, with a specific agenda prepared in advance and with specific materials distributed to the directors before the meeting, which produces a specific category of discussion that is informed, structured, and systematic. The specific kind of discussion the SME founder actually needs is almost always unstructured, iterative, and responsive to the specific situation she is in on the particular day of the conversation, which is a kind of discussion that does not fit well inside the formal board meeting structure and that is almost always squeezed into the any other business section at the end of the meeting, by which point the directors have exhausted their attention on the formal agenda and are not in the specific cognitive state required to engage substantively with the unstructured question the founder most needs their input on. The specific help the founder needs is being systematically underprovided by the specific structure she has installed, which is a loss she is not registering because she has been told that this is what boards do, and the version she has got looks essentially like the version other SMEs have got, which has become the version everybody has agreed to call a board.

What I would describe as the kind of board that SMEs at this stage actually need, in my own working vocabulary and based on watching enough of them get installed and un-installed over the years, is a small group of three to five people, at least two of whom have operated businesses of roughly the size the SME is moving into, who are available for unscheduled contact in addition to the scheduled meetings, who are interested enough in the founder as a person to continue thinking about her business between meetings, and who are willing to challenge her thinking substantively without the formal hedging that board directors have been trained to deploy. This group does not have a formal name in Australian commercial language, which is part of the problem, and the closest existing term is probably advisory board, which has specific disadvantages I will come to shortly but which is at least closer to the kind of structure I am describing than the formal board is.

The advisory board, as the term is commonly used, is a specific arrangement in which the SME founder gathers a small group of experienced people who meet with her periodically to provide advice without the specific legal responsibilities of a formal board. The advantages of this structure are considerable, in that it allows the founder to access specific experience without the specific overhead and formality of the full board structure. The disadvantages, in my experience, are that the specific designation of advisory tends to produce a specific category of commitment from the people involved that is slightly less than the commitment a formal board would produce, which means the advisory board directors are often slightly less willing to put in the specific effort required to understand the business deeply, and the specific depth of engagement that would make the advisory board valuable is usually not quite achieved, which produces a specific category of advice that is helpful but not as helpful as it could be if the engagement were deeper.

What I have come to recommend to SME founders at this stage, if I am being asked, which I usually am by the time the question is being asked, is a hybrid structure that does not have a formal name and that I would describe as a committed advisory group, which is essentially an advisory board whose members have agreed to a higher level of engagement than most advisory boards achieve, which they are compensated for appropriately, and which operates with the specific understanding that the engagement is intended to be substantive rather than ceremonial. The specific commitment required of the members includes availability for unscheduled contact within reasonable limits, a willingness to put the thinking in to understand the business between meetings, and a willingness to challenge the founder substantively on strategic questions without the formal hedging that formal directors have been trained to use. The specific recruitment required to assemble such a group is considerably more difficult than the recruitment required to assemble a formal board, which is why so few founders actually assemble one and why so many of them install the formal board instead, which is the specific commercial error I have been describing.

The specific stage at which the committed advisory group becomes the right structure for an SME is roughly when the founder is producing the specific category of strategic question that she cannot resolve alone and that no single advisor can resolve for her because the questions require multiple perspectives to be addressed properly, which is roughly the stage at which the business has crossed somewhere between twenty and forty employees and at which the strategic complexity has started to exceed what the founder’s instinct can reliably process. The specific stage at which the formal board becomes necessary is considerably later than most founders think it is, and usually arrives either when the business has taken outside investment that requires formal governance or when the business has grown to the specific size at which the formal governance structure provides real commercial value, which is usually somewhere above a hundred employees and above a particular revenue threshold that varies by industry. Between the committed advisory group stage and the formal board stage, there is a period of several years in most SMEs during which the committed advisory group is the right structure, and during which most SMEs are instead installing the formal board, which is a specific category of expensive mistake that is being made across hundreds of SMEs in Australia at any given moment.

The specific reason the mistake is being made so consistently, if I am being accurate about the structural dynamics, is that the specific people advising SMEs on their governance arrangements have commercial interests that are better served by the formal board structure than by the committed advisory group structure, and the specific people available to serve on the formal board structure are easier to recruit than the specific people required for the committed advisory group structure, and the specific language we have available to describe these structures makes the formal board the default option that founders arrive at when they are told they need a board. The combination of these three structural features produces, essentially continuously, the specific commercial error I have been describing, which produces the specific category of commercial loss that is almost impossible to measure and that most SMEs are therefore comfortable continuing to produce, because the alternative would be to acknowledge that the governance arrangements they have been installing are not well-suited to their actual needs, which is an uncomfortable acknowledgment and one that most founders are not willing to make voluntarily.

I should admit, before closing, that I have been the specific advisor who did not steer the founder I described at the opening of this piece toward the committed advisory group structure she actually needed, and that I have been complicit in several similar installations of formal boards that turned out to be the wrong structure for the SME in question, for reasons that I have come to recognise as being partly about my own inability to describe the better alternative clearly at the moment it needed to be described and partly about the specific social pressure that comes with recommending something unconventional to a founder who is already receiving conventional advice from several other sources. The specific professional honesty required to recommend the committed advisory group over the formal board is considerably harder than it sounds, because the recommendation requires explaining a structure that does not have a common name to a founder who is already receiving advice to install the structure that does, which is uphill work and which I have been less willing to do than I should have been, which is one of the small professional regrets I continue to carry and one of the reasons I have been thinking about this question more carefully in recent years than I used to.