Wow! What a great way to kick off the 2019 IBASA & EPI Webinar Series.
I am sure that if you are a business adviser dealing with owner-managers, you would know how difficult it is for entrepreneurs to not only distinguish between the three roles of a shareholder, director and manager but also how to practically live them out. 78% of the webinar attendees indicated that more than 75% of their clients fit this profile.
But this webinar offered more.
Tim Holmes from Sirdar Group shared his considerable expertise, not only on training advisers how to become effective independent directors, but also how to support shareholder-manager entrepreneurs to set up proper structures within which to play these roles to the benefit of their businesses.
Wendy Simelane from Eqstra Fleet Management brought her experience on how to successfully develop and position yourself as an independent director, a career 78% of attendees indicated as a high possibility.
Tim started us off by sharing why they are so serious about trying to grow good directors, stating that “if you start at the board, you can change not only the people in the organization’s lives, but you can change the country and then ultimately, the continent”.
Like any good coach, he shared useful sports analogies, illustrating the parallel between the types of sport you can play, individual sport (like golf or badminton) or team sports (like rugby), and a business concept of craft versus an enterprise. Tim sees craft very much like games of golf, it’s all about the individual, whereas an enterprise is very much about the team.
He challenged the business advisors, as business people themselves, to really make sure they understand what type of game they are playing and what game their clients are playing. Most businesses start as a craft. The business is about the knowledge and expertise of the individual, with the entrepreneur becoming a master craftsman sharing her or his knowledge with a team of apprentices. Once you take the founder out of it, you don’t own a particular asset that you can sell. A craft business needs to operate according to specific game rules which are, earn as much as you can, save and invest so that when you retire, you can use that as an income stream.
An enterprise is very different. Tim believes that we wrongly state that we own a business because the enterprise is registered as a juristic person and cannot be “enslaved”. This kind of framing also causes entrepreneurs to drive the wrong outcomes and thinking of it as: “My business, I do what I want to… I have authority. I have control.”
He stresses that a true business is about a team. So, you can’t own a business, just like you can’t own human beings.
To be considered an enterprise, Tim says, requires two principles. First, an enterprise must be able to operate without the immediate involvement of the founder on a day-to-day business. Secondly, an enterprise must have its own significant value (and potential) and can continue to grow and develop that value despite the non-involvement, death or retirement of the founder.
This is a fundamental difference. An enterprise has nothing to do with you. It’s all about the team. An individual can be replaced, and the business will continue. It’s about building a system. The game rules are clearly different.
Tim emphasised that if you truly want to set up an enterprise, you need to clearly understand the different roles of a shareholder, director and manager. While they are different, all are needed in an enterprise. Because most businesses start as a craft, it is often very difficult for entrepreneurs to evolve into the roles and requirements of a growing enterprise, and then struggle to sell the business when they want to retire.
He uses the Company Diagram to explain the three heads in the enterprise.
- Shareholders have a vote, and with possibly a different number of shares each, their votes may have different powers.
- Directors are a team. You need more than one for the board to run effectively, but it’s a team of equals, with one vote each.
- Management is a hierarchy. You have a leader at the top and the rest of the team are spread out below.
There is clearly a very hard line between a shareholder and the directors.
As a shareholder, you have very specific rights, like a return on and growth of your investment and the power to nominate, appoint or remove directors. However, you cannot get involved in the strategy, you cannot get involved in meddling with the operations.
The line between directors and management is much more porous because you’ve got information flow going backwards and forwards on a daily, weekly, monthly basis. Whereas you are submitting a report to shareholders to demonstrate how you are delivering on their requirements on their shareholders’ statement of intent shared once or twice a year.
It clearly cannot work effectively if you have multiple MDS and multiple CEOs. Pick one, otherwise, the board doesn’t have the ability to hold an individual accountable for the operations of the business.
Tim stresses that all three of those parties are related to the company, but their relationships are very different.
The relationship between the company and the shareholder is entirely selfish. They put money into the company, but he says it’s typically a once-off or it’s something that’s not doesn’t happen frequently and ideally shouldn’t happen frequently. You need to fund the money for the next period, and that’s it. You expect a return. It’s a selfish return
Being on a board is completely different. You are completely unselfish. You are giving to the company and even though you (selfishly) expect a return, it’s a return in terms of a fixed directors fee which may even be zero. The return is potentially minimal, but you’re giving unselfishly in the best interests of that company. Everything you do is in the best interest of the company, not yourself.
The complication. When you get down to the management level is that you have both. You have a self-less relationship and you have a selfish relationship because you have a contract. You are holding a role in organisation, you have a contract to deliver that role. Depending on what the role is, you may have to work overtime, you must work weekends, you may have to go and put an extra effort.
If you’re wearing all three of those hats, it’s really difficult to manage those three different types of relationships.
Tim says the best way to break it up is to bring in independent directors at board level. The conversation always falls to the lowest common denominator. So, if everybody in the boardroom is a manager, the conversation ends up being almost entirely operational.
If all are shareholders and there is an argument, the conversation rises to the high level of commonality, your shareholders’ equity. The majority shareholder therefore argues, what I say, go. As soon as you bring independence into the board meeting, you maintain that conversation at a director level. It’s much easier to stop the conversation rising to a shareholder issue or dropping to an operational conversation. As an independent director, and particularly as an independent Chairman, I have no other reason for being there than being the director.
Tim highlighted that there are different types of directors. So be aware that there is a distinct difference between executive, non-executive and most importantly between independent and non-exec.
He advises that the board have a chairman that’s independent and non-executive, and at least one more independent director. Most of the directors should be non-executive. A Board of five should typically have two executives, the MD and FD, and three non-executives of whom the majority (two) are independent.
Tim defines a high-performance director as “one who is obsessed with creating meaningful economic impact through their role on the board and the role their company plays in the economy. Furthermore, such a director is not afraid to have tough conversations as well as do the mundane aspects that together enable board success.”
A high-performance board is “one that, through its rhythm and decision-making, holds the company accountable to a performance standard higher than it has ever had before, resulting in increased value and improved return for shareholders and other stakeholders on a sustainable basis”. That’s why it is imperative that a managing director is a single person that the board can hold accountable.
Responding to a question, Tim provided some practical perspective on the challenge where someone is starting to build a successful business, so they believe they need to be in control for the business to succeed. They often have a personality that is fundamental to that business, so the conversation is about this is my business. Their entire being is related to the success of that business. Their success in life is directly linked to success in their business.
Tim says that typically a change in thinking is mostly caused by an external change or personal shock, like falling ill and being challenged on business continuity if they can’t continue. Sometimes their value system and priorities change because they become first-time parents and they want to spend more time with the family. Something is needed that triggers a change in their ego.
The solution is offering them a choice. If you want to run a craft. This is what it needs to look like. If the question is “where I can just be a shareholder or I can focus on sales or research and development. I don’t want to run the business anymore” the choice is to set it up an enterprise.
He stresses that after the choice, the question becomes how do you upscale yourself, how do you make sure you’re leveraging your time and contribution effectively.
Wendy worked smart. When she started getting into boards as an executive for large corporates, she volunteered to serve on non-profit organisation boards. She believes that in smaller organisations you really get to understand the roles and challenges, as well as the importance of being an independent director.
She also highlights the importance to separate being a business advisor from being an independent director. It is critical to know and learn the differences in the roles to circumvent possible conflict of interest.
Wendy believes remembering the core mission of an independent director can help.
First, make sure that you challenge your conscience in the development of your strategy. She calls this the North Star. No matter what happens, you want that one single picture enabling decision making in good and bad times.
Next is to ensure management is aligned to the North Star. This requires you to understand the business, you must make it your business to know.
She says that it’s not all about a fancy title, “you’re an independent director”. You need to have a good understanding of what happened, so you can influence the growth and the strategy. As an independent director, you are the custodian of the gravity of governance. For this, it is critical that you demonstrate that you are judging the business within good faith and with a purpose. Your responsibility also goes beyond making the company successful. There is also the legal liability. As an individual, you need to know the fiduciary duties, especially when anything bad happens. Wendy believes the government governance issues currently playing out in our country is because of the failure of, or lack of, independent directors.
According to her people often make the mistake to chase directorship as an opportunity to make extra money, thinking that you can just sit in a corner, they serve you a nice lunch and you just listen and nod, and never need to contribute. That she says is a big no-no. You need to understand that even if you’re not saying anything and something goes wrong, the liability is still in force.
Independent directors are not in that board to be a friend or to form some sort of coalition with some board members you know. You are there to act in good faith and make sure that the business strategy is being carried out.
Your responsibility is to challenge the status quo. Don’t get tired of asking why. It is the way that most problems are solved. This way you assist the entrepreneur to see their business differently. You provide an extra pair of eyes that is not emotionally invested like a shareholder or even an executive director.
Wendy’s practical experience supported the need to understand what is happening on a macro level, but also in the industry to be able to contribute in terms of guiding on a micro level.
She says a big challenge is to assist a founder to realise it is time for them to step away and allow a board to take the businesses to the next level. Conversations in terms of not wanting to let go what I had or did for many years, need to factor in that you’ve got blind spots that an independent director could come in and support you in highlighting and moving the business to the next level.
It is important however for an independent director, as well the board, to work within the structures. She stresses that the appointment of the CEO is the responsibility of the board and not the shareholders. It is therefore imperative to have a conversation with the shareholders, clarifying they cannot be you and you, not them. Each one needs to make sure that the roles and responsibilities are clarified and very well respected.
Wendy also says that in most cases you will find the executive directors, the CEO and CFO, speak the same language and will agree on the same things because of their internal knowledge. Your responsibility remains to scrutinise their ideas by challenging them to contemplate different scenarios and explore alternative solutions. You bring value through an external perspective, and by asking questions improves corporate governance, compliance and risks. For that, you need to know the rules and regulations.
She closes with if, as a business advisor, you’re wondering how to get involved in becoming an independent director, start by volunteering at NPOs and NGOs, smaller organisations that would appreciate your services. Before you do that, however, she stresses the importance of having the right knowledge and the right training on how to be a director, understanding the roles and responsibilities.
The IBASA MD, Andre du Preez summed up being an independent director nicely. If you mess it up, there are legal issues. If you really want to be a good director, be safe, be knowledgeable, act in good faith, and maintain your ethics.
- To view a recording of this webinar, << CLICK HERE >>.
- The next IBASA & EPI Webinar will cover the important subject: “Improving the Quality of Business Advisory Services: What Business Advisors Should Note About the National Discussion Paper”.