One of the key differentiators between high-growth companies and listed businesses, and SMEs that do not grow beyond a certain ceiling, is whether or not the business has a formalized board structure in place.
Sirdar Group, Africa’s leading educator, appointer and guide to high-performance boards of privately-held companies and family businesses, has long held the belief that in order to truly scale, businesses need high-performance boards.
A new study conducted by Sirdar Group has focused on the value that high-performance boards offer companies in a bid to encourage SMEs and family-run businesses to follow best-practice in order to realise their growth potential.
Carl Bates, founder and CEO of Sirdar Group unpacks the key lessons from the study, and how SMEs can use these to drive growth.
1. What value do independent directors bring to boards? Why is this particularly important for privately-held companies and family businesses?
Ensuring you have an independent board member on your board is tantamount to ensuring your company makes use of an independent auditor. It’s imperative to have an independent perspective of the current performance, strategic direction and operational strategies of the business, not one that could be swayed by power, being a family member, job status or seniority on the board.
Let’s define what independent means in this scenario. An independent board member is not a director, shareholder, or employee, nor do they have any capital invested in the business. They are essentially paid consultants that are intellectually involved in the success and growth of the business.
Based on our recent survey, statistically it is shown that boards that comprise of at least one independent board member outperform those that do not have any. It therefore goes without saying that the more independent board members on a board, the higher the impact the board will have on the company performance.
When asked about the various directors and the value they add to the board, Independent Board Members were the least likely to be removed as the contribution they add is vital. Along with higher performance, the survey showed that boards with Independent Board members are more likely to implement a performance evaluation process, which is strongly recommended in most African governance codes.
2. Boards with independent directors are more likely to result in improved business results. Why is this the case?
Boards with independent directors tend to be those who have embraced the value of a third-party independent perspective. Whether they be family-owned or privately-held, they recognize the fact that they hold a shareholding in the company does not mean they have all the answers.
In turn, independent directors tend to have engaged in understanding what a high-performance board is, more so than where the only directors are also shareholders (and therefore not independent). Independent directors therefore understand the value of self-evaluation and taking time to consider how the board is actually performing.
The old adage ‘you manage what you measure’ comes to mind here. If a board is not measuring its own performance, what is its driver to improve? An annual board evaluation ensures this focus on a board being, as we would say at the Sirdar Group, ‘exceptionally critical’ of its own performance.
3. Do strong performing boards lead to businesses that perform well? Why?
Both the research and our own anecdotal evidence suggests that businesses with high-performance boards performance better. Internationally, the research also reinforces this. First, it is about understanding that a high-performance board is not one that is driven by compliance to codes and standards, it is one driven by ensuring increased performance for shareholders and other stakeholders. An effective methodology enables this to happen.
The reason businesses with a high-performance board perform better, in our view, is because they are being truly challenged by an independent party about the performance of the company. People who are removed enough to stay objective, yet involved enough to understand the business and its true indicators of performance, can add huge value to high-level strategic discussions and decisions.
4. Why did you conduct research into non-listed African board practices, particularly relating to privately-held company and family business board fees?
Remuneration and performance of boards of directors has been the subject of extensive conceptualisation and empirical research over many years. Internationally, most of this research has dealt with European and American-based companies. Alternatively, and particularly in Africa, it has focused on listed companies and public entities. We decided to fill this gap. Specifically, we want to support the achievement of meaningful economic impact by companies across the continent by supporting their ability to have truly high-performance boards. This research is one aspect of enabling this to happen.