Eight common mistakes on AE board of directors and six ways to fix them
There are eight common mistakes firms make when they create their board of directors. Six tips on fixing these common issues are highlighted.
No doubt, some boards of directors in this industry get the job done. The right people tackle the right issues at the right time. But based on experience, these boards are the exception, not the rule. Why is that? Why aren’t they consistently productive and impactful? After all, the people who serve on them are smart, well-intended folks. They are experienced, skilled, and dedicated. So, what gives?
These eight issues stand out:
1. Directors don’t know what a board is really supposed to do. It sounds obvious, but if board members don’t know the role of a board, they’re going to flounder. The purpose of a board is to provide governance, maintain strategic oversight, and ensure a firm’s long-term success. Below is a list of some of the more prominent board responsibilities:
Strategic planning: The board plays a pivotal role in setting a firm’s strategic direction, including framing its mission, vision, and long-term goals. The board also reviews and approves strategic initiatives and business plans.
Leadership succession: The board is typically involved in selecting and evaluating the CEO or managing partner of the firm as well as other officers, such as the treasurer and secretary, and ensures there is a succession plan in place for leadership positions.
Financial oversight: The board oversees the financial health of the firm, including budget approvals, financial statements, and major financial transactions. The board also decides what percentage of profits will be used for bonus and ownership pools and what percentage will be retained for reinvestment into the firm.
Corporate governance: The board is responsible for maintaining sound corporate governance practices, such as establishing and enforcing ethical guidelines and ensuring that the firm complies with all relevant laws and regulations.
Audit and compliance: The board establishes and oversees an internal audit function to ensure compliance with internal policies and external regulations. The board may also hire external auditors to review the firm’s financial practices.
M&A and strategic partnerships: The board evaluates and approves acquisitions, strategic partnerships, divestitures, and external transitions—and it ensures that any and all align with the firm’s strategic goals.
Crisis management: In times of crisis or significant challenges, the board provides guidance and support to the firm’s leadership and helps make critical decisions.
Shareholder communication: The board is responsible for communicating with shareholders and ensuring that they have the information they require to make grounded assessments and informed decisions.
2. Boards are too big. I’ve seen boards that include every shareholder in the firm, and the ranks swell annually as new shareholders are added. I’ve never seen an efficient and effective 20-person board and likely never will—but they’re out there, sinking deeper and deeper into the tar pits of their own making.
3. Miscast directors. Boards fail when tenure alone is valued more highly than contributions. This results in a board composed of directors who have a limited perspective of how other firms do things and how things work outside of the AE industry.
4. “I’ve got mine” mentality. I often see boards filled with directors who are there to represent their office, service, or business line—but that’s not the job. Directors are there to watch the back of the shareholders and to look out for the best interests of the firm. If the board members aren’t watching out for the golden goose, they can’t expect it from anyone else in the firm.
5. Not enough diversity. I don’t need to describe the demographics of most boards in our industry—I trust you get the picture. Suffice it to say that decision-making improves and creative thinking increases as more perspectives are brought to the table.
6. Too many meetings. There’s no need for a board to meet monthly (or even more frequently than that). If your board is meeting that often, you’re not talking about board-level issues.
7. Meetings are too long. I’ve seen AE firms hold two-day board meetings at remote locations. Like having too many meetings, if you are in a board meeting that lasts that long, you’re not talking about board-level issues. When you factor in that most boards are too big in the first place, the cost is significant and the value produced is questionable at best.
8. Operational topics. Last but certainly not least, AE boards are famous for descending into day-to-day management issues, such as who’s going to run what department, who gets what bonus, and whether to have a holiday party this year. Before you know it, the agenda, if there was one, is blown. There are a lot of heated debates and passionate pleas, but an hour after the session, each director is hard-pressed to remember anything of substance that came out of the meeting. No notes were taken anyway, so nothing ends up being communicated, and the shareholders piece together their own narratives of what transpired.
Six tips to reversing board problems
In addition to reversing the problems listed above, here are a half-dozen measures you can take that will help create a high-performance board for your firm:
1. Have an odd number of directors. Having an odd number of directors on a firm’s board is often considered good practice. When there is an odd number of directors, it is less likely to encounter tie votes or deadlocks during board decision-making. Decision-making speeds up, which is particularly important in time-sensitive situations or when the board needs to respond quickly to emerging opportunities or challenges.
2. Stagger the terms. Staggered terms ensure that not all board members are up for re-election or replacement at the same time. This provides continuity of leadership, as a portion of experienced directors remains on the board even as new members are introduced. This continuity can help the board maintain institutional knowledge and historical perspective.
3. One director, one vote. While shareholders vote their shares to elect board members, directors should not be voting their shares on board decisions. Allotting each director one vote helps prevent the concentration of power in the hands of a few individuals or a single director. This distribution of voting rights ensures that important decisions are made collectively and in the best interests of the organization as a whole.
4. Add outside board members. Outside board members offer an objective perspective that can be crucial in decision-making. They can provide fresh insights, challenge conventional thinking, and offer unbiased assessments of the firm’s strategies and operations. They can also bring expertise and experiences from other industries that often proves valuable in addressing complex challenges.
5. Prepare for each board meeting. Distribute the agenda to each board member in advance of the meeting so directors can provide input and ideas. Also, distribute financials in advance. That will eliminate time-sucking performance reviews at the beginning of the meeting.
6. Look ahead. Dedicate part of the board agenda to peering into the future. Explore changes and disruptions looming on the horizon (e.g., advances in technology, regulatory changes, shifts in client needs) and the implications they may have on your firm. Considering the future will help your board anticipate and adapt to these changes, ensuring your firm remains competitive and relevant.