Insights for a new SME establishing a Board of Directors

Are you an SME considering good governance? The starting point is to set up a Board of Directors, regardless of your size.

Research by top experts and thought leaders at Harvard and other leading universities say that companies that are well-governed consistently outperform those that are not. One of the qualities of effective governance is having in place a board of directors that provides the roles of oversight and going concerned over the business.

As an SME intending to set up the board of directors for the first time, where and how do you start? Below are some questions to provide pointers of where to start.

How many board members to start with? What is the optimal number of board members?

In Uganda, the Companies Act 2012 provides for the board of directors. The act is silent on the minimum number of directors. However, public entities and parastatals formed by an act of parliament contain provisions for the board of directors and their composition. In other jurisdictions, company law provides for a minimum number of three board members and no maximum number.

Best practice recommend a minimum of three members and a maximum of seven, however, this also depends on the size of the company and the sophistication of business. You want board members who bring some value to the table. For some companies operating in highly regulated sectors like financial institutions, the respective acts (Financial Institutions Act, laws of Uganda), provide the board composition and the vetting of the board members. And today, a board member is not allowed to serve on more than two bank boards in Uganda for obvious reasons.

Experienced board members and business leaders suggest that a board composition of five or seven members is optimal, you need to examine your unique organization challenges and opportunities. Your board composition should be influenced by:

  1. Type of business – what is your business model? Who is your competition? Are you local, regional or international? The bigger your market outlook, the more likely you need wide board representation. If your biggest market is in China, you may need a person who lives in China on your board regardless of your company headquarters.
  2. How many committees do you need? Committees of the board are informed by the type of technical issues that must be discussed? If you are an SME involved in custom apps development for different companies, you may need a cybersecurity committee, business development, branding and innovations, finance and strategy, risk management, among others. You need more board members to serve on these committees. Otherwise, the board must prepare itself to handle lots of business at every meeting which could lead to dysfunctions and deciding on issues they lack technical expertise.
  3. The mix of skills and gender sensitivity – which kind of skills do you need – legal, strategy, finance, and IT security? There more the skills mix, the more board members you may consider
  4. And above all, the degree of interaction and debate required. The more the board members, the limited airtime for each member’s contribution. We can see this with our parliament. With more than 450 members, there is no enough airtime for each MP to deliberate on issues. A member can fail to get an opportunity to say something. If you need deep engagements and interactions, have fewer board members.
  5. Cost of board meetings. Remember, board members need facilitation to be effective in terms of transport and sitting allowance. You are hosting top experts in their field, you need to consider paying them. Today, board members ask for a retainer, especially for profit-making companies. You must consider your budget and how much you have set aside for board issues. If you want to keep quality members, compensate them well. There is no free lunch nowadays and don’t expect a successful executive to provide you with free insights! It is just not sustainable. Better pay a few people better, than having a big board with poorly renumerated members.

What I have learned

When you are doing the right thing, you can start anywhere at any time. Start by appointing members to your board. You can start with three members – two executive and one non-executive who could also double as board chair.

To be continued…

Copyright Mustapha B Mugisa, 2020. All rights reserved.

To know more about corporate governance, buy my book, 7tools of an effective board member.

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