Author: Guy Rigby, Head of Entrepreneurs
The following article is an edited extract from Guy Rigby’s book, From Vision to Exit – The Entrepreneur’s Guide to Building and Selling a Business.
There comes a time in the development of a business when it is often beneficial or deemed desirable by the shareholders for a distinction to be made between the role of the management team, which is focused on running the day-to-day activities of the business, and the board, a more strategic grouping which is focused on making sure that the interests of the shareholders and other stakeholders are well served. As businesses grow, this two tier structure, which is an accepted feature of the public company sector, will normally emerge.
A board of directors is elected by and accountable to the shareholders, whereas the management team is chosen and appointed by the board of directors. The board of directors will typically include senior members of the management team, for example the CEO, CFO and COO (the ‘executive directors’), and a number of external directors who are not part of the management team (the ‘non-executive directors’ or NEDs).
An important point to note from this structure is that the board is unlikely to be populated by the management team as a whole. It is only the key members of the management team that are likely to be represented.
The role of the board
There is a clear distinction between the role of the board and the management team. In general, the board works on the business, whilst the management team work in the business.
The board is the most senior committee of the company, the steering group that agrees the vision and values of the business and sets its strategy. It is about adding value.
Those who sit on a company’s board should be able to benefit the business through their collective expertise, experience, knowledge and contacts.
The board’s responsibilities are wide, but key areas include:
– establishing the vision for the business, guiding its operations and communicating its
– culture and values
– evaluating present and future opportunities, as well as identifying threats and
– setting the strategy for the business
– ensuring that the structure of the business will enable it to pursue its strategy
– appointing and reviewing the performance of the company’s CEO
– evaluating the quality and capability of the management team and their performance
– in implementing and executing strategy
– monitoring the performance and liquidity of the business
– approving budgets and keeping proper accounts
– communicating with shareholders and other stakeholders
The board should be proactive rather than reactive. Members should not only have a firm understanding of the core strategy and values, but should also have a good knowledge of the business KPIs, customer base, operating costs, financial and market position so that they can identify and flag up areas of vulnerability or highlight threats and opportunities.
“In the smaller growth business the board should be pretty hands on,” suggests Jonathan Hick, an experienced NED. “They should have met all the employees and maybe know key customers. They should have touched the coalface in the working year, and, at the very least, be aware of and have approved the strategy for the business.”
While the COO/MD (if one exists) should manage the business, it is generally the role of the CEO to manage the bigger picture. The CEO should therefore work on the business, exploring new avenues, evaluating current priorities and focusing on the future direction and growth of the business. As a matter of record, neither the board nor the senior executives should be forced to micro-manage.
“As a board, we put together a strategy document and a budget document every year and, provided that the management team is operating within the strategy and is on budget, we let them get on with it,” says Nick Jenkins, Founder of Moonpig.com.
Individual Board Roles
The role of the chairman
It is the role of the chairman, whether executive or non-executive, to lead the board and advise on direction and strategy to help the business grow. As well as determining the board composition and organisation, the chairman must manage the board meetings and agendas and develop its overall effectiveness. A strong chairman is often invaluable in holding a company and its strategic vision together, aligning the focus of the key board members, chairman, CEO, COO/MD and CFO (or, if the business has no board, the lead managers), who form the heart of the team.
The role of chairman therefore tends to be a blend of advisor, adjudicator, regulator and mentor.
Sir Eric Peacock chairs a number of growth businesses and has his own views on the role of an effective chairman:
A multi-faceted chairman’s role is:
– “to ensure that the board has created a strategic and tactical delivery plan to achieve its objectives”
– “to ensure that the control systems within the business and the key performance indicators are relevant to the plan”
– “to ensure that the board operates within its fiscal and compliance responsibilities”
– “to act as a mentor to the CEO and the other executive directors on the board.”
The role of the CEO/COO
David S. Thompson, author of Blueprint to a Billion, has an interesting observation on the differing roles of CEOs and COOs. He recommends “Inside-Outside Leadership” when it comes to the roles of effective leaders. This involves a “strategic leadership pairing in which one leader (or team) faces outward toward markets, customers, alliances, and the community with the other leader (or team) focusing inward so as to optimise operations.”
This is the approach adopted by many billion dollar companies, from Microsoft and eBay to Yahoo. The CEO often faces outside with the COO (and/or MD) facing inside.
This type of leadership structure also helps to prevent the ‘meddling’ we discussed in the previous chapter.
Seb Bishop, one of the youngest presidents of a NASDAQ-listed company (appointed to the role at the age of 31), echoes the importance of the outward facing CEO.
“A lot of entrepreneurs I speak to don’t like to spend time outside the company,” he says. “Yet, behind every great CEO there’s a great COO, CFO and MD. The truth is that you need a really good COO to help guide the operations of the business. The CEO should hardly be in the office. He should come into the office to inspire, but he should be outside in terms of drumming up business. He should lead from the front, he should be the talisman, your number one salesman; leading by example, talking to all the customers and learning what’s needed.”
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.