Kate Costello

One of the most common pieces of advice given to fast-growing SMEs is to put a board in place to help steer the company. But how do you do it? And what potential problems can arise?

Kate Costello of Governance Matters has been advising boards for 25 years. Today she shares her thoughts on the potential conflicts between management and the board, how to handle dud directors and why entrepreneurs should join someone else’s board.

One of the big issues of this year has been whether Australia should move towards quotas for female directors. You deal with a lot of boards that are different shapes and sizes, what is your take on that?

Australia hasn’t moved in the way other countries have to recognise the skills that a lot of fantastic women have, so the effort that’s occurring now with the Institute of Company Directors, with the mentoring program, with the ASX requiring listed companies to actually talk about their policy on women at senior management level and at board level, I think is a good thing. If this doesn’t work, I actually think they’ll have to legislate or regulate.

Are we at the point though where we have waited long enough? It’s been an issue for decades really.

It has been. You often hear groups of men talking about the fact that it’s the best person for the job, and then moving on to say there aren’t women who are experienced. Frankly that’s actually rubbish. There are, it’s just that what you have to do is think a little more outside the square and outside what might be a traditional board’s comfort zone to look for the women.

While many companies now have committees looking for new directors, it doesn’t really matter that those structures are in place because basically it’s still a networking thing. It really is. I mean there’s this semblance that we’ll go through a process of appointing search people and blah, blah, blah, but the reality is they actually ask the board if they have any names to put into the hat and you often end up with someone the directors themselves have nominated.

I might sound as though I’m tough, but in fact I can tell a story against myself on this issue. Given the nature of the work I do, I’m sometimes asked by companies to help them or asked if I’ve got any suggestions on anyone that might make a good director. This is a shocking thing to tell you, but historically I’ve found myself only recommending men and then one morning I was thinking what the hell am I doing? And the only excuse I had was that at that point in time, really I had only ever served on boards as a sole female. So actually, what I was used to seeing around the board table were men. So now I try very hard – and you don’t actually have to try that hard – to recommend women who are very experienced and fabulous for these positions.

For as long as we’ve been talking about the female directors issue, business advisors and experts have been pushing for SMEs to adopt some sort of board structure, whether it be advisory or more formal? Is that message getting through?

In terms of governance and boards and structures, I’m absolutely not a purist so what works for a particular company at a particular stage in its development, may not work for another one. So there’re examples as you would know of SMEs that have experienced colossal growth and they’ve done that with really a sole director, one individual still owning 100% of the shares and never really appointing anyone to a board except themselves.

Equally you can find companies where a sole individual, a sole director, has appreciated that they might not have certain skills required to take the company through a good growth phase. What I found is that individuals who are prepared to really acknowledge where their skill gaps lie and fill those skill gaps by finding absolutely tremendous people, whether they act in an advisory capacity or appointed to a more formal board structure I don’t think matters that’s much. It’s whether the individual’s prepared to listen and learn.

A sense that we’ve gotten is that faster-growing companies are appointing boards much earlier than they did in the past.

You are absolutely right, and I can think right back I remember speaking to Janine Allis who started Boost Juice and she did just that. She recognised very early that given she did not own too much of the market there would be copycats creating juice bars, so she knew the only way she would succeed would be to get big quickly with lots of stores. So she realised she was going to have to partly franchise and so she looked around and thought, who’s good at that? So she bought in one of the guys from Flight Centre, and an accountant from Sydney who specialised in franchising and she did that very, very early to great advantage.

And you know I find the people who are most successful, I find them interesting, because when you go to talk to them, they actually don’t want to talk about themselves too much. They want to fire questions at you and learn about what you know that they may not know. And I think people who have that tendency are smart enough to recognise that they don’t have all the skills and they surround themselves with really good people, sometimes in an advisory board, sometimes in a more formal board.

What are the sort of skills you would try to get on an SME board?

Whenever people look to appoint people to an advisory board or a board, the first things they think of are financial and legal and they often don’t think further than that. And they should.

So what they need to do really is to sit down and say, given that where we are strategically positioned at the moment and given what’s happening with our industry and given where we want to take the company over the next five years to six years, what would be the perfect skill set if we were starting with a blank sheet of paper?

Sometimes it won’t be as simple as saying an accountant, it will be quite specific. It might be someone who has finance qualifications who’s maybe been an insolvency practitioner, because they’ve learnt to resurrect companies as well as bury them and that’s required them to be across a whole lot of issues from human resources issues to IT issues.

And then it might be that the particular company wants to begin to spread geographically, maybe offshore, so it will be someone who’s also got international experience. So I think what you need to do is be highly specific about where your skill gaps are and those skills gaps should align with the strategic direction of the company into the foreseeable future. And then you look for individuals that fill those gaps for you. I think it’s too narrow to say an accountant, a lawyer, you can be much smarter than that I think.

In very small companies, where it really is only one or two shareholders calling the shots, does a board provide that much value?

You know, even where the directors were the owners working in the business I have seen some of them do incredible things. In one instance the three blokes that ran this company, they put a bit of butchers paper up in the staff room and put a line across the middle. They put at the top board issues and then operational issues under the line. Then when one of them thought of something that needed to be discussed with the others, they would say is this more of a board issue, more strategic, or is this more of an operational issue? They would handle the operational issues in staff meetings once a fortnight, but about once a month or so they would tear the paper in half and take the bit with the board issues and they’d go to a coffee shop and switch their mobiles off, and wouldn’t leave until they’d resolved those issues. Now that was fantastic governance for a company of that size. Really fabulous.