Q&A GOVERNANCE

Q.At what point do you need a proper board of directors?
A.If you’re part of a small company that has been steadily growing, you may have started to think about creating a board of directors, which includes more than just yourself and your business partner. But when is the right time to create a professional board for your company? The answer is entirely up to you. It depends on how big you intend your company to grow, but business owners usually know when they want external input. Ashley de Safrin, an advisor at Business Link, says: “In a case like this a board may be appropriate or an alternative might simply be a business mentor. A board will be more structured and, once in place, can be hard to dismantle. Setting up a board is a long term commitment and gives a message that a company is serious about growth.”

Q.What are the advantages and disadvantages of having outside directors in your company?
A.The main advantage of a board with non-executives is the usage of outside input to create long-term plans for the future and to help your company grow. Additionally, a bank may view a company that has a proper board of directors more positively. As De Safrin says: “A bank will look at the track record of the management before granting credit so a board with the right people adds credibility when submitting a business plan.”

Most small companies will have a board that consists of the business owner and a few non-executive directors. The board’s job is to challenge the company’s executives on strategy and policy making. If you have a strong business owner who doesn’t like having his opinions challenged, having a board might lead to a clash of personalities.

Q.What else should you look out for when setting up a board of directors?
A.Choose a board with members who possess skills that complement those of the business owner. If the business owner doesn’t have sufficient marketing skills, appoint a non-executive director with extensive marketing experience. According to the UK corporate governance code, appointment of new directors should follow formal, rigorous and transparent procedures. The code also says that directors of FTSE 350 companies should be re-elected annually.

You should also be aware of the requirements of the Companies Act 2006. Members of the board have to be at least sixteen and cannot consist of entirely corporate entities. The Companies Act 2006 also gives directors a set of legal responsibilities that includes filing annual returns to Companies House. Directors also have a duty not to approve accounts “unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss.” In other words, directors are liable for the company’s financial statements.