When is the right time for your Advisory Board to go formal, members become Company Directors?

By Troy Trewin
Owner at Grow a Small Business

After writing about when should a growing small business have a Board of Directors or Advisors, it became clear a lot of owners aren’t sure when their Board of Advisors should graduate to a formal Board of Company Directors.

Members on a Board of Directors are on the ASIC register as an official Company Director, and therefore have greater responsibilities and personal risks (as well as being remunerated more).

It is common for the Founder(s) and some shareholders to be the only formal Company Directors in a small business. Here we are talking about Independent Company Directors – they don’t own any shares in the business. 

The timing of when you could transition from an Advisory Board, to one with formal Company Directors as Independents for your business, depends on a few things – but these two are probably the main ones:

  1. Size of your business: sales, profit and even number of team members. It doesn’t make sense for a very small business to add this cost burden to the bottom line. If your business has a healthy profit, say 10% EBITDA or more, and sales over the $2m mark this could be a good point to consider formalising your Board; and
  2. Health of your ego: if you aren’t open to listening to strong opinions, and change, then this is not for you. 

Like any recruitment, you need to follow a solid process to get the right Independent Directors. Formal Boards work and add a lot of value, but as with hiring a B or C-player, you are responsible for getting an A-team at Board level. 

Start with the right Chairperson, they will help you find the right people around the table. Having an effective and independent Chairperson will add more value, than if a shareholder Chaired – especially if they have no experience in that role. 

At this time, also review the Board and whether the current Advisors fit the business’ needs. Do you need to replace some with more relevant skills and experience, and / or add more Board members?

Some benefits of having Independent Directors on your Board, include:

  • There is a change in dynamic when sitting on an Advisory Board, as opposed to a formal Board of Directors. The Independent Director has more on the line, if the business gets into trouble. So they will have stronger opinions, and have greater influence over the decisions-makers – let alone one formal Director vote (often, this is two if they are the Chair);
  • They bring greater accountability to the Founder(s) working in the business, as opposed to just listening to Advisors who have little influence over you; and
  • This improved corporate governance is attractive to lenders, like banks. Better separation of duties and an independent voice on the Board is seen as a good control for the management of the business.

Especially if your business is in a riskier industry, like manufacturing, where there is a greater chance of a workplace accident occurring. Having more Independent Company Directors could help reduce risk in the business. As Independent Directors will be liable for incidents in the workplace, they will have a greater focus on Work, Health & Safety than if they were just an Advisor. 

In early 2022, at a national distilling conference in Melbourne, I heard a co-founder of a distillery speak of a workplace accident a year earlier. It was not only a horrible experience for the employee who caused the accident and suffered severe burns, but also for the business – the main shed and all their equipment blew up. They had good policies, procedures, controls and insurance in place so the business survived.

But the co-founder also shared with the audience the huge personal toll the explosion had on him. He said they still didn’t know if, as Company Directors, they were going to serve jail time. They were responsible for the safety of their team, even if the accident was caused by the employee. WorkSafe are investigating whether there was adequate training and controls in place, if not, they will receive a jail sentence.

A lot of small business owners don’t understand or recognise the risk they are taking by being a formal Company Director, and often the sole Director. Having more Directors, especially Independents Directors, increases the focus on managing risks in the business, along with opportunities for growth and supporting the day-to-day leader of the business execute the strategic plan.

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