There is a vast difference between an SME and a large company in terms of necessary resource structure and the skills of an external director need to match the needs of the company.
An SME has a shallow management structure, normally involving family members and particularly founders or their subsequent generations, without an external director (whether executive or non-executive). The operation of the company is based on collegiate behaviour, on teambuilding, on respect for the inventiveness and commitment of the founders.
What happens when such a company seeks funding from the public and becomes part of the regulatory ‘chasm’ of public companies and stock exchanges?
One of the changes is inevitably the introduction of external directors. These people are normally professional directors with little experience of SME culture and often no understanding of the products or markets that have been created and served by the business. In most situations, the SME culture soon drowns and culture changes as the external directors exert influence (on behalf of independent shareholders).
In too many examples, the founders are ’disrobed’ and professional managers and accountants become the leaders of the business. In this situation, the value of the technical leadership is decimated as the role of the technological team changes from leadership to subservience. (This last point is not limited to SMEs as many great technology companies have been destroyed by lack of technological and marketing leadership)
How has this been allowed to occur? The rules of stock exchanges contribute to this problem, particularly in stock markets where companies of all sizes are listed on the one board. The basic cost of a public listed company excluding operations is at least €400.000 per annum. This comprises costs of the board, external auditors, legal and corporate advisors, additional accounting resources, capital market promotion, and corporate travel.
A key role of the board is to maximise profits of the company for the benefit of shareholders. Yet the first activity of becoming a public listed vehicle has been to add costs. Subsequently, pressure is increased on the original management to reduce costs and bring new products to market earlier than credible. In the eyes of many external directors, the core staff are no longer the key resource for growth but an avoidable cost. Conflict soon arises between the board and management, and experience and expertise of the founders is lost as the board exercises one of its other rights – to hire and fire the CEO.
Why is this destruction necessary? It is not, but it occurs more often than not, and the stock markets of the world arelittered with thousands of bankruptcies of previously profitable technology based businesses and those bringing revolutionary technological products to the markets. Often the destruction is due to ignorance on each side of the equation. Other times it is a power play, often by ‘frustrated professionals’ whose training does not provide a good basis for business leadership.
But, let us look on the other side of the coin and address the experienced director who has joined the board with all goodwill and a desire to contribute.
The major factor to be remembered by this external director is that the founder is unable most often, or at best unlikely, to change. This is not necessarily bad, as the success of the venture to date has been the result of the ‘manic’ drive of the founder(s). So, improving the performance of the company can only occur if the external director(s) can ‘join’ with the management and technical teams, show respect for the contributions of the team, learn the business, and consequently develop the trust of the core staff. Issues such as succession training and new executive appointments need to beaddressed carefully to prevent fear of loss among the founder(s), who are also likely to be substantial shareholders and therefore a potentially disruptive force in the investment marketplace. This is a medium term challenge.
Another important service of an experienced external director is to provide advice on likely costs and challenges in bringing a novel product to market, and why to avoid diversification when cash flow has not been secured. Additionally, the sage head can advise whether and when debt finance is appropriate for growth.
Yet, overall, the external director must not attempt to inject big business culture into a technical stock. That is a certain method for business failure. Of course, many a glib entrepreneurial director has raised the value of a high tech stock, by regular market promotion followed by capital injections, to a level where the business model cannot deliver the promised returns.
Their solutions are either to inject other products to attempt to plug the dyke or to modify the business model for lower valuation. Eventually the board suffers the indignity of the share value disappearing when the ‘boat comes in’. Meanwhile these entrepreneurial directors with their resumes of market successes move on to their next venture. For not many do the ‘sins’ of their past appear in their CV’s for the future, these are selectively forgotten.
Surely a key role of the institutes of company directors could be to grade directors as to performance and suitability for different categories of business, taking particular note of their successes and failures. Maybe we need a ‘tripadvisor’ model.