Is a functional board of directors always necessary?

This muse is the second in an occasional series: to ask some potentially provocative questions about the prevailing assumptions that surround boards and corporate governance. (The case for diversity was the first.)​

The concept of a board of directors, and the practice of (typically absentee) company owners nominating representatives to look after their interests is not new. Indeed, the motivation for the concept—to protect and represent owners when ownership and control were separated—is well over a century old. However, an underlying assumption has developed alongside the core motivation, whereby a functional board (i.e., one meeting regularly and conducting 'corporate governance') is considered to be necessary if company is to grow and develop. Many consultants have successfully traded on this assumption in recent years; making a lot of money helping owners set up boards and governance practices—even though many of the boards and related practices they helped establish add little except cost.

The statutes of most Western countries require companies to have at least two directors (although only one is needed in New Zealand). A collective of directors is called a board. A board is a necessary requirement. But what of the practices of corporate governance? What if the owners work in the business on a day-to-day business? Is the formality of board meetings, reporting and and associated practices—and the administrative overhead—actually required? What value does it add? Is a functional board of directors always needed, let alone desirable?

When no separation exists between ownership and control, the underlying basis for formalised governance practices is not apparent: the shareholder (the owner, if you will) is directly present making decisions. Some of the tasks often associated with the board (setting direction, making major decisions, fiduciary responsibilities) are still required for sure, but these activities can readily be undertaken by the owner-manager. If an owner works directly in the business they own, and if they seek out experts (lawyers, accountants, industry experts, coaches, strategists, et cetera) for advice, what additional value is to be gained from adding the rigour of a formal governance framework? Would it not make more sense to limit the (formal) practices of corporate governance to those companies with absentee owners, and to those with aspirational owners who want share the decision-making risk?

Please note that this is not an argument against boards for all smaller businesses. If the entity is a company, a board is required. It is the formal practice of corporate governance that may not be. ​

I recently had the privilege of leading a strategy development session with the owner of a large logistics company. His motivation was straightforward: to establish a functional board to secure some additional expertise and to share the decision-making 'burden'. We had a great time together as we worked through the issues. To see the eyes open and pennies drop as the owner, a couple of his team and two outside advisors began to realise what might be possible with a functional board in place was a delight.

Contrast that experience with another recent discussion. The two owners of a successful and profitable business approached me for some advice after they were told "you need a board" by a consultant (whose business is to set up boards). They could not see the benefit of establishing a formal corporate governance framework given their aspirations. (Their stated intention was to continue to work in the business for the foreseeable future.) After discussion, I suggested they consider the option of surrounding themselves with expert advisors that they call on from time to time instead. ​

So, where does this leave us? We need to get our thinking straight: to understand when a functional board (i.e., one undertaking the practices of corporate governance) is necessary, when one is helpful, and when one is, quite frankly, a burden. Otherwise, we run the very real risk of treating the whole world as it it were a nail on the basis that we have a hammer in our hand. All that will do is squash some very capable owners under a burden of cost and compliance: a burden that they don't really need.