The importance of a good board of directors for SMEs

FOR many non-listed small and medium enterprises (SMEs) in Singapore, putting in place a board of directors is often seen as a statutory requirement. Most SMEs do not separate the board from owner-management, especially those that are majority-owned by their founders who operate and manage the business.

Given that there is no separation between the owner and management in these SMEs, and the fact that many employ their own family members, some argue there is no need for such firms to have independent or non-executive directors (NEDs) on their boards. Further, these SMEs are not accountable to the public, so the separation of roles between the owner-manager and the board is viewed as unimportant.

Understanding the board's role

While these views are valid, they also stem from a lack of understanding of the role of the board in a company. More often than not, local SMEs see the board as a regulatory conformance and overlook the fact that the board should play a key role in the firms' performance.

To understand the value that a board member brings to an SME, we need to understand that a board is appointed by shareholders to act on their behalf in the affairs of the company, to manage the corporate sustainability of the business and to ensure good returns to shareholders. This is why the board, operating under good governance, is responsible for the success of the business.

A firm's success should not just lie on the founder or the CEO alone. With the lack of resources being a common issue for SMEs, SMEs are usually heavily dependent on the vision, capabilities and network of their founders. This dependence, if not managed properly, can potentially limit the growth of a company. At the same time, if the company wants to expand its business outside of Singapore, it will have to manage a whole new set of challenges that it may not be equipped to handle. In my opinion, it is at this stage of growth where SMEs can benefit from having a strong board. As the business grows, an owner-manager needs to be aware of the immense benefits that an NED can bring to the company and consider bringing one or more NEDs on board to take the business forward.

Value of a good board of directors

How can a good board of directors, with the right NEDs, contribute to the growth and sustainability of a company?

First, a board of directors with diverse and independent members tends to be more objective and less emotionally attached to the business than the founders. Founders often find it difficult to give up control and decision making. They also tend to be less willing to replace existing staff for better-skilled hires, or may hang on too long to a declining business for sentimental reasons.

Without renewal of talent, some companies may inevitably be slower in adapting to changing industry trends, investing in new technology or adopting new business models. In this respect, a good NED can play a critical role in objectively evaluating the company's business and giving advice to ensure its long-term sustainability. Sometimes this means making tough decisions such as giving up the business or setting it up for acquisition.

Secondly, SMEs are usually family-run businesses. With generational changes, some businesses suffer as a result of conflicts or poor decisions which turn the companies into a "milk cow" to feed the family members. In these circumstances, the NEDs have the challenge of mediating between the family shareholders. The founders or owner-managers will also need the right mindset to heed to the advice of an objective board and act in the best interest of the business, and not just for the family members.

That said, it is not uncommon for SME boards to be influenced by the founder and/or majority shareholder. Once, I was on the board of a SME evaluating a major acquisition. Even though the deal was not beneficial to the company in most aspects, it went ahead with the acquisition because the founder was convinced to go ahead with the deal.

In another incident, although the board had unanimously agreed to raise capital for the firm's survival, its members had differing views on how it should be done. One member agreed to put in money, understandably at a low valuation as the firm was in bad shape, but the executive directors who were concerned about their employees, customers and suppliers, wanted the investors to continue funding the business without diluting the existing shareholders. In the end, the negotiations came to a standstill and the firm went bust. How could such an important decision end up in a disaster? I believe this and many other conflicting decisions cause boards a lot of untold hardship. Thirdly, a good board should include NEDs who are experienced in managing and growing businesses, and typically possess at least one area of professional expertise, such as in accountancy, human resource, and marketing. They should have deep experience in their respective fields, so that they can guide the SMEs in overcoming challenges and driving growth. The NEDs also need to understand the company's business model and industry well enough to contribute effectively.

On the SME boards which I sit on, the board members are able to advise on areas including legal, corporate finance and banking - expertise which the management teams do not have. We have also been able to help our SMEs recruit good financial controllers, supported by a proper audit committee that is chaired by a qualified chartered accountant. Firms with reputable and professional board members are seen to be more credible, better governed and have higher growth potential. Through the NEDs' own networks, the companies can also gain access to strong and reliable partners.

Having been a board director since 1998, and serving on the boards of public companies listed on Singapore Exchange, the Hong Kong Stock Exchange (HKSE) and UK AIM, as well as private SMEs and startups, I have seen many successful stories. A case in point is Ajisen China listed on HKSE. Armed with a right mindset, the founder worked closely with the board to chart the growth of her business from a private company with 40 food and beverage outlets to become a public listed company with 700 outlets.

A noble responsibility

Given the authority that board directors have, it is imperative that they have the integrity, sense of righteousness and wisdom to make the right decisions and recommendations, in the best interest of all stakeholders. Besides being humble to learn from others, they must be objective and courageous in making sound assessments, without fear of losing their membership on the board.

There was one occasion when the CEO of a board I was on wanted to issue share options to all key staff and board directors. He suggested an arrangement that would offer him the largest allocation at a strike price that was way below the last traded price, making the options immediately in-the-money. Because the CEO was also the founder, chairman and director of the company, the arrangement was harshly conflicted. As a board member, I raised an objection on the basis that this action would not be in the interest of shareholders but, surprisingly, I had no support from the rest of the board. Disillusioned, I decided to resign after that board meeting.

A good board director, in my view, is one who empathises with the management and yet be bold enough to change course, or even change the captain, if the ship is being steered into the reefs amid shallow waters. Any board would certainly not want the captain to sink with the ship, but want the ship to reach its destination. The job of directors is ultimately to direct the firm, by making the right decision, which may not always appear to be the best one.

I have had the privilege of undergoing directorship training in Singapore and overseas. Through these sessions, it is noteworthy that the SMEs in the United States, UK and Australia place a greater emphasis on recruiting good board members and NEDs. Although Singapore SMEs are beginning to understand the value and importance of a good board to the long-term growth of their businesses, we still have much to learn from others. It is my wish to see more directors undergo training and contribute to the boards of our local SMEs, to help them grow in Singapore and beyond.