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6 Ways Outside Directors Benefit Business Growth

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6 Ways Outside Directors Benefit Business Growth

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An outside director is a member of the board of directors or advisors who is not part of the executive management team. These professionals are sometimes referred to as independent or non-executive directors. They are not employees of the company and are differentiated from inside directors, who do serve as executive managers and/or corporate officers.

Outside directors are advantageous because they rarely have conflict of interest and they often see the big picture differently than insiders. While corporate governance standards of public companies require a certain number or percentage of outside directors because they are more likely to provide unbiased opinions, private companies are normally left alone — but, I highly recommend that unbiased advice.

In today’s business environment, smart organizations frequently seek outside expertise. Traditionally, companies invited advisors to join their board of directors. There is now, however, more risk to these directors based upon recent legislation (Sarbanes-Oxley). While there is formality (shareholder reporting, responsibility, risk), liability, and more expense (D&O insurance, etc.) to a board of directors, there is a budget friendly alternative in the form of a ‘board of advisors’ who is beholden to management. The main difference is in where the fiduciary duty lies: to the shareholders or to management.  Regardless of which vehicle you use, there is great value to be obtained by hiring an outside director.

Why add outsiders to your board of directors or advisors?

1) Outside directors can be a low-risk, low-cost, but valuable resource. They bring a new set of skills that will produce benefit for your company.

2) Outside directors are on your side. Unlike other outsiders to whom even a private company must answer, like banks and insurance companies, the IRS, OSHA, EPA, etc., these advisors answer to you.

3) Outside directors add credibility. When it comes time for a liquidity seeking event, like new financing, selling the company, or IPO, outside directors send the message that you are a professional serious organization with guidance.

With a board of directors, your company immediately gains legitimacy, and a panel with expertise that you probably don’t have “in house.” Selecting board members from the business community can also bring greater awareness of your company.

Benefits of Outside Directors

Action/Skill

Benefit

Independent Perspective

Challenge Management,
Sounding Board

Strategic Thinking & Planning

New Directions, Transitions,
Incentive-Based Compensation

Experience & Objectivity

Been There, Done That,
Oversee Performance & Risk

Contacts

Partners, Customers, Suppliers, Personnel, Lenders, Investors

Capital Infusion

Raise Money, Restructure,
Create Offering Package

Transactions

Prepare Company For Sale,
Negotiate The Deal

 

Create a culture and structure that will withstand third party accountability. Start thinking as a serious growing company and prepare for a potential future life as a public company.

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