Governance

I have a friend in our community who is thinking about making some changes to his business. Big changes. He wants to grow the business, he wants to do a lot more, but he also recognises that this is a big risk. So he’s taking his time to think it through, to try and do it right. He reached out for some advice a while back and we’ve gone back and forth, but I realised this week we really haven’t discussed governance. He’s being careful and making the right moves now, but he’ll need good governance in place to sustain that once he starts making these changes. I was going to email him with my thoughts on this, but it’s a pretty good topic for us all to explore. 

Most people are only vaguely familiar with the idea of corporate governance — they often know it’s important but little more than that. A consequence of this ignorance is that some small businesspeople simply aren’t aware of the benefits that governance could bring to their firm. 
So I’m going to start out this post by explaining the idea of governance, then looking at why it could be valuable for firms (and even some blogs) in our community, and finally how it could be instituted.

The idea of corporate governance comes from large, publicly-listed companies: firms where you have thousands of different shareholders, all of whom own some portion of the company. If the CEO had to report to each of these shareholders and get their permission before implementing a strategy, it would be totally unworkable. Everyone would have different ideas about what the company should be doing and the CEO would have no clear mandate on how to proceed. 

To overcome this problem, such firms have a governance institution: the board of directors. Directors are elected by the shareholders to represent them. They appoint the CEO, review and (hopefully) endorse the CEO’s strategy, oversee its implementation, and generally ensure that the business is being run in a way that fits with the expectations of the shareholders — not taking on excessive risks or creating a culture which enables or condones undesirable behaviour. 

From the outside, life as a director can seem pretty sweet. They attend a  single board meeting each month and are generally very well-compensated, with remuneration that can sometimes reach into six or even seven figures.  A lot of people envy that kind of lifestyle but don’t recognise the responsibilities that directors bear. They have a legal obligation to ensure the business is being run properly. If a business fails, if there is fraud or some kind of criminal activity, a director may be personally liable and can be imprisoned — even if they weren’t personally responsible. Because of that, most directors work hard to know the entire company inside-out: they know the details of what is being worked on and how those details fit into the bigger picture. Their knowledge of the firm is deeper than almost any individual employee, and they additionally have to be aware of what’s going on outside the business: what the competitors are doing and how the marketplace is changing. 

Small businesses rarely have a board of directors. They generally have a handful of shareholders rather than thousands, so it’s much easier for the CEO to report directly to them. Often the CEO is one of the owners, further simplifying things. They don’t have sprawling, complex organisations with hundreds of subsidiaries. So it is easy to see why a small businessperson would think a board is unnecessary. But I think that’s a mistake. Certainly, there’s much less need for supervision and oversight in a small business but there is more need for the other things directors bring to the table. Things like advice, ideas, and a forum for discussion — things that aren’t so important in a large company but can be invaluable to a small business. We’ll explore each of these in turn.

The role of a CEO is incredibly isolating, even lonely It’s not something that many people realise until they get into the roles themselves, but you have to be careful about everything you say. Employees, customers, suppliers, colleagues from other firms — everyone listens to the CEO and takes their comments seriously. An offhand comment might be intended as a joke or thought bubble but can be interpreted very differently. CEOs adapt to this by limiting what they say and to whom. It makes their lives easier by minimising the confusion and misinterpretation but it also makes their lives harder, as they cannot just speak their mind. They cannot throw around random ideas for feedback, they can’t always share problems or help explore solutions, and they often can’t admit to uncertainty or ignorance. They have to be careful about everything they say, which is why leaders often end up so isolated.

Having directors doesn’t solve this problem entirely but it does give a CEO people to talk to, people who have a good understanding of the context, the problems, and the constraints which the CEO faces. Directors can help to explore the problems, separate causes from effects, and canvass possible solutions. By doing so, directors provide CEOs with advice and insights that they may not be able to get elsewhere. 

Directors also tend to have broader experience and expertise than small businesspeople. A small business CEO generally has a set of technical skills in whatever the business does but often lack business skills. They respond to this by putting time and energy into developing specific skills: they learn to deal with customers and suppliers, to understand accounting, to manage staff. This leaves CEOs in a position where their focus is almost exclusively on running their business and developing the skills which they most need. You might describe it as tunnel vision. 

Directors, on the other hand, aren’t just focussed on the one business. They aren’t involved with the business at an operational level, they don’t need to know individual staff members, products, or customers. They don’t need to know the daily issues which bubble up. This means that they are free to focus almost exclusively on the big picture. They can watch what other firms are doing and learn from their successes and failures. They can pay attention to different markets, to see how they are changing. That broader perspective becomes invaluable when the firm is developing strategy or facing a challenge. It complements the CEO’s tunnel vision approach and generally leads to a better understanding of issues and a better approach to resolving them. 

Finally, almost every CEO that I know says that they should put more time into big-picture thinking. Working on the business, instead of just working in the business. The obstacle they face is that big-picture stuff is long-term, and there’s always plenty of issues which need attention right now. You might want to spend the morning thinking through a plan for 2017-2020, but if you have an unhappy customer or a staff issue, that becomes your priority. The long-term stuff can wait. The problem is that it gets interrupted and put off again and again, and often never gets done. At the very least, it doesn’t get the time it deserves. 

A regular board meeting helps to counteract this. It effectively gives CEOs a deadline: they know they have to discuss strategy at the board meeting at the end of the month, so it takes on some urgency. It allows strategic planning to become more urgent, to take precedence over other matters and actually get done.

In many small businesses, strategy moves straight from development to implementation. Having a board means this process is interrupted, and there is a period of review prior to implementation. Directors can ask questions, they can test assumptions, they can challenge the strategy in areas where they feel it is incomplete or suboptimal. By reviewing the strategy, they help the CEO refine the stranger — hopefully making it a richer, more effective plan. 

So whether it is in providing a sounding board to the CEO, new ideas, or a forum for discussion, there are obviously substantial benefits that directors can bring to a business, even a small one. And it’s not necessarily a huge shift to start enjoying those benefits: most businesses already have some kind of semi-regular meeting happening, where the CEO and accountant review how things are going and communicate with any other shareholders. All it takes is a few new faces — depending on the size of the business, one or two would be sufficient — and a broader agenda. 

The tricky thing is finding good directors. They need to have a good understanding of how a business works, of how your business and your industry operates, and they need to bring a perspective and skillset which complements (rather than duplicates) that of the CEO. There also needs to be a healthy working relationship between everyone on the board; at the very minimum, you want people who trust each other and recognise that their goal is to work in the best interests of the business. But you also want people who can manage disagreement in a professional and workable way. 

When these elements are brought together, an effective board can make a CEO’s life easier and improve the performance of the business. This kind of approach could work for businesses in our community but it could also benefit some forums and blogs. Most bloggers enjoy the sense of community they get from blogging but they also find it a bit isolating: it’s hard to get good advice about what you’re doing, or to know what’s working and what’s not. Users aren’t always communicative, and the vocal ones aren’t necessarily the ones you should listen to. 

So it makes sense to bring together a few trusted people — bloggers and readers — with whom you can share the behind-the-scenes stuff: pageviews, subscription counts, costs/revenue, as well as your goals and your plans. Once they have that information, they can start working with you to help build up and improve the site. This community is already very effective at working together, but I think formalising some of those arrangements — sharing information, organising a regular exchange — can help to make the big-picture part of blogging easier. 

If we think about the two biggest recent debacles in our community — the relaunch of Esterbrook and the FP Geeks incident — I think both of them reflect governance failures. That is to say, they might not have happened (or might not have been as severe) had a board been in place. 

The whole Esterbrook thing, to me, is the kind of thing that might have been avoided entirely if the guy behind it had set up a board before he got started. A small, trusted group with whom he could share the strategy and get feedback. People with some experience in business, from inside and outside the FP industry, who could have asked questions and made sure that things had been thought through. Now, maybe all of this advice would have been rejected and nothing would have changed. But you would hope a CEO would listen to the folks he appointed to advise him. And maybe, just maybe, the new Esterbrook would be more in tune with the community and more of a success. 

I think both parts of the FP Geeks situation — Eric’s departure and his, shall we say, disruptive return — could have been helped if there was a board structure in place. When Eric left, there would have been a forum where decisions could be made with some authority and, when he returned, it could have helped to resolve some of the differences without shutting the entire site down. If if the site had been shut down, it certainly could’ve been an avenue for dialogue and (ideally) resolution. As with Esterbrook, I’m not convinced that these situations would have been avoided entirely with a board in place, but I’m certain they would have been better managed. 

Whether we’re in business or running a forum or blog, we tend to have good ideas at the beginning. We tend to seek a lot of advice and include a range of perspectives before we jump into executing those ideas. But once the business or blog is up and running, we often cut back on all of that. The ideas are still there but they aren’t tested as thoroughly, we don’t spend as much time thinking them through or getting advice. I think that’s a mistake and I think there are a few businesses out there and a few blogs that could benefit from bringing together a few trusted people to rebuild that capacity and strengthen their governance.