New Zealanders are justifiably proud of their No. 8 wire mentality – their uncanny ability to come up with solutions from whatever lies at hand. The associated characteristic, however, of Kiwis believing “I can do it all myself” does not always bode well for their business undertakings. Too many family companies and SMEs flounder and ultimately fail in this country because the owner-managers do not get outside help or advice.
 

Their adaptability, ingenuity and passion and their strong relationships with employees, suppliers and customers can give smaller companies the winning edge over larger competitors. But that edge is easily lost. Inward-looking leadership and failure to plan for the future often prevent SMEs and family companies from lasting the distance.
 

There are no firm figures for the number of companies in New Zealand that have a formal board. A sample extracted from the Companies Register indicates that of a total 29,562 companies operating between January and July last year, more than 90% had two or fewer directors, suggesting they did not have a formal structure. This means fewer than 10% of New Zealand companies are likely to have a board. Evidently, the benefits that boards offer businesses are not well recognised in the New Zealand business scene.
 

Norman Geary

So why a board?
A former chief executive of Air New Zealand and director of a large number of listed and unlisted companies in New Zealand over the past 25 years, Norman Geary has also served on the boards of many smaller and family companies. He says any company that is small with uncomplicated operations and a modest capitalisation has no need of a board because the owners can probably manage and run it themselves. But when a business builds up a reasonable turnover and staff and is expanding, it needs the right sort of input to help it. He says even when their turnover is less than $5 million, enlightened and openminded business owners may invite an outsider whom they regard as intelligent and having particular expertise to form a board. Norman is convinced that having a board with one or more independent directors is the cheapest form of consultancy advice available to a business. And, he says, a director’s commitment to a company is inevitably greater than that of a consultant.
 

Plenty of SMEs don’t know they need the help of a board, he says, until they’re prompted by their bank, accountant or a business mentor. The advice might also come from trustees of a family company, or a co-owner who is not involved in the day-today operations of the company. But a company that belatedly decides to form a board to help fight its way out of trouble may find prospective directors are put off when they carry out due diligence on the company. Norman says owners of smallish businesses know a great deal about their own company, but a company dominated by one person will get a viewpoint that has never been challenged. Providing a different perspective on the management’s existing knowledge or attitudes – what he describes as ‘challenging sacred cows’ – can produce fruitful outcomes.

 

A board also provides a sounding board for the chief executive, who may otherwise have no avenue to canvass ideas, and it helps lift a company’s standards and skills. It will insist the company has the correct management processes, and help the chief executive and management team achieve them. At the same time, Norman says it’s important that a company is not over-governed, to a point where it can’t get on with the job.
 

He says a newly formed board should not be too big at the outset, and even a large company should not have more than six members, with the chief executive the only executive director. He regards the ideal person to join a board as the existing, or a former chief executive, a savvy chief financial officer or someone with a real passion for, and experience in, that company or industry. Someone who is a good generalist but has no understanding of the company needs to quickly get up to speed with its ‘quirks’, and can’t be as immediately useful in providing strategic and commercial judgment. On the other hand, Norman says there is always a good case for appointing a commercial lawyer or proven financial officer because business processes are fundamentally similar, making good governance transferable.
 

Michael Morris

Many people in business recognise that the discipline of governance is good for a business and a natural progression, but Michael Morris suspects some company owners, rather than dismissing the idea, simply haven’t given it any thought. A former partner and chairman of KPMG, Michael has chaired a number of national organisations, but also has extensive experience with private companies. He is currently a director of an HR consultancy employing about 80 people in Auckland and Wellington, and of the Hawke’s Bay winery Te Mata Estate.
 

Michael says there are different triggers for a company to establish a board, but the firm has to be of a size that justifies it. Rapid expansion and the need for finance, or the desire to set up in a new location or offshore, often precipitate a move directly from an owner/manager-run company to having a formal board, rather than a gradual transition involving advisory boards.
 

He says sometimes dominant individuals who own their own businesses don’t want interference in what they regard as their own domain, “but the smarter, progressive ones recognise what directors and a board will bring”. And overcoming concerns about having external involvement in the workings of a company “comes down to selecting people they are comfortable with”. Michael says it’s important for banks and investors to know that formal reporting and business planning are happening within a company and a board provides this assurance. Although it’s rare for a company to have board members forced on them, he says a bank might recommend an independent director if it thinks the company is heading the wrong way, rather than appointing a receiver or administrator. “There’s probably a lot of that happening in the current economic climate,” he says.
 

A particular gain from having independent directors on a board is a higher profile and greater credibility for the company.
 

Michael says it can be very helpful to have directors meet major clients. And, he says, “it’s a strength for senior staff to know there’s a restraining hand provided by a company with a governance structure that involves independent directors. They are more prepared to speak their mind.”
 

Brian Corban

Succession planning
Having a board is also instrumental in succession planning. For family companies in particular, setting up a board can offer a chance for the older generation to step back while the younger generation steps up. Professional company director Brian Corban says a long-established company having an emotional investment in what it does – as is the case for many rural businesses – can be a powerful effect for both good and ill. “The ‘heritage’ aspect may mean the family is too closely involved to be able to deal with issues on a fully business-like basis,” he says.
 

 Part of his motivation in chairing a number of proprietary companies over the past 20 years has been to introduce governance disciplines to some of the country’s small companies and to help them to grow, because “too many New Zealand companies become extinct when the proprietor grows old”. Unlike in Europe – where companies may remain in family ownership for hundreds of years with family members expecting and accepting that they will join the business – not many family companies in New Zealand survive beyond one or two generations.
 

Brian sees a business’s progression as “grow, corporatise and professionalise the management – for example by the husband-and-wife founders of the business remaining on the board, but not running it”. He often has the role of helping businesses identify the need for and then makethis kind of transition. When a business is expanding or diversifying, the need for a board becomes critical, he says: “Without professional expertise, a company can get into serious trouble once it has moved beyond ‘seeing-eye control’ to having to interpret performance through the figures and formal reporting.” A board also provides for long-term planning, “above and beyond the day-to-day chatting
that has the effect of mixing management up with governance and muddling the issues”. Brian believes monthly board meetings are vital in helping maintain a helicopter view of the business, offering a chance to climb above the detail and look at bigger issues.
 

Wayne Norrie

Joint ventures and takeovers too
Wayne Norrie, director and co-founder of the IT solutions company Revera, is a more recent convert to the world of the boardroom. Yet he is adamant that a wellperforming board is the best – and cheapest – asset a business can have. At the time of their management buyout of Hitachi Data Systems, Revera’s two co-owners recognised they would need a board to ensure strong governance in their joint venture with the multinational. And when they later set out to buy Hitachi’s remaining stake, Wayne says having a highly experienced independent director and chairman who had been through the process before, helped smooth the way. They subsequently brought a third independent member on board to assist with matters like capitalisation and exit strategies.
 

Wayne says “As a capital intensive business it is imperative that we have strong advice with regards to future capital planning. In this aspect alone our board has proved invaluable in giving that advice especially in these economic times. The board has been a big part of our success – it has significantly assisted the company once or twice and certainly, in a number of situations, it has been quite active and beneficial. At others, it has been watching from the sidelines.”
 

He says there can be a perception by businesses that “a board just creates another front in which to do battle. Already businesses are battling with customers, suppliers, staff – they don’t want another one. Rather that the board is there to help fight the existing battles.” And Wayne says excuses that boards are too costly and time-consuming arise from boards being seen in the wrong context. “If you view a board as the auditors, then you haven’t got time for it.  If you think about it as a very sensible sounding board, to talk about the big picture, the future, and how to gazump the opposition, you’ve got all the time in the world – because that’s all you do outside of work.”
 
He says boards very quickly become self-funding. “The average remuneration for a director of an SME is $20,000 to $40,000. I’m in the IT sector. That’s about half the cost of one of our lowest paid employees. If you get it right, the benefit you get is around ten times that of your highest-paid employee.”


(Source: IoD Boardroom Magazine)