Corporate governance : Unlocking potential growth – Are boards underutilised in growth strategies?

Privately owned medium-sized companies are valuable contributors to the New Zealand economy with an estimated 3500 of them contributing an estimated $110 billion year in revenues.
But could they be contributing more?
The ANZ Bank’s Privately Owned Business Barometer identifies barriers to growth and suggests that the underutilisation of boards may be preventing some of these companies from acheiving their maximum growth potential.
Given their importance to the national economy, this not only frustrates the owners’ individual aspirations, it has negative economic implications for the whole country.
ANZ managing director of institutional, corporate and commercial banking Nigel Williams says there is lot of talk about the need for New Zealanders to be world champions not only in the sporting and cultural arenas, but in business too.
“We look enviously at Finland where former gumboot manufacturer became world leader in mobile telephony; to Europe for its reputation in haute couture and to Japan for world leaders in the design and manufacture of household electronic products and motor cars,” he says.
The stories of most of these firms are very similar: they started small and grew to become world leaders.
“In their home markets Nokia, Versace, Sony and Toyota have even greater significance than abroad. As icons they create national pride and confidence; as economic powerhouses they create enormous wealth for their employees, suppliers, shareholders and the economy,” says Williams.
In order for the same to happen here, some significant issues currently confronting the privately owned medium-sized business sector must be addressed. The Barometer identifies these.
1) The role of boards. Do the ones in place really cut the mustard and do business owners really understand the role boards can play beyond governance?
2) Barriers to growth. Is complacency stifling business growth or is lack of knowledge (about how to grow or how to fund growth) factor? Could greater access to advice and expertise help?
3) Growth by acquisition. Is lack of capital constraint to growth and why aren’t more companies growing via acquisition?
4) Motivators for change. What are the real motivators for change and do owners want more options? Forget succession – if anything, it’s staggered exits that many owners are really after.
5) Is value being destroyed? Are majority shareholders holding onto the reins too tightly and for too long?
6) The role of management’s family. Why is management seemingly being ignored and is handing down to family becoming an increasingly unrealistic goal?
Williams says an increased and wider use of boards would address some of these issues and expresses concern that the survey found 31 percent of companies surveyed had no boards at all, of those with boards, only 57 percent met regularly (monthly or bimonthly), and 48 percent had no independent directors.
He believes the sector is ‘holding back’, not achieving maximum potential which, given its role as as the economy’s engine, is of concern at national level – and that lack of boards and advisors is key issue.
Also causing concern are findings that the sector has looming succession issues, that there was reluctance to take on risk to achieve maximum potential and that glass ceilings in New Zealand businesses meant untapped growth potential.
While there are many reasons for this (skill shortages or access to capital for starters), Williams says it is clear that directors and boards are underutilised and their increased involvement could help address the current problems.
“Boards can offer more than just governance, yet one third of these companies have no boards at all, only half of boards which are in place meet regularly and only half have independent directors,” he says.
“The managers and owners of privately owned medium-sized businesses are often looking either to reduce the amount of time or money they have involved. One of the issues we looked at is the risks to growth if people do that in the absence of board. If you are looking to perhaps retire in three years then, without board, would you actually end up taking riskier option than you might otherwise?”
Williams says the value board (and advisors) can bring is significant and can be cost-effective way for business owners to tap into complementary experience and skills.
“Growth [for these businesses] will often occur in new markets or through acquisitions where the experience of independent directors can reduce risk,” he says.
According to the ANZ Barometer, just under half of the respondents plan to retire in the next five years. Historically, owners’ options around retirement have been limited – with outright exit being the only real option.
“This survey reinforces our view that many owners want more – most want to release time and capital – perhaps as first step towards an eventual change in ownership,” Williams says.
When it comes to succession, the key is to raise awareness among business owners of the many different options they have beyond outright exit, he says.
“The role of boards and advisors cannot be over-emphasised in adding value to this process. Good quality advice, from boards and external advisors is critical to helping owners realise their maximum potential.”
The survey findings also raise questions about whether the growth aspirations of privately owned businesses match their potential opportunities – and the barriers standing in their way – including lack of directors.
“Business owners are reinvesting profits in their businesses, but we suspect that the next round of growth through acquisitions or in new markets will require clear strategies,” Williams says, adding that independent directors with relevant growth experience will be able to help these owners who are often constrained by lack of time, resources and experience in new markets.
(He notes that the survey findings confirm that access to capital is not the only constraint to growth.)
Conscious of the fact that privately owned businesses may be wary of bringing in outsiders, Williams says this reluctance is not helped by the difficulties there are in researching and accessing potential candidates.
But he believes it is worth the effort as he firmly maintains that having small but effective board is cost-effective way of tapping into external expertise which can reduce the risk of any growth strategy the company is considering.
“When you actually start discussing strategy at board level then having people who have experience about strategy means there is some overlap in terms of that role which can be helpful,” Williams says, when asked whether boards run the risk of straying into operational roles in medium-sized companies.
Addressing the issue of finding the required directors, Williams believes there are plenty of interested candidates, saying that medium-sized company will, by definition, have different issues than large corporate and this will present different challenges for directors to keep them engaged.
“A large organisation with 1000 employees versus high growth business with 30 – the strategy and options will be quite different and I think there are lot of directors who already have experience but who will be quite challenged by that difference,” he says.
“A small diverse board can reduce the risk of acquisitions, it can reduce the risk of expansion, particularly international expansion, so it’s quite cost-effective way of creating some continuity and having discussion around strategy,” Williams says.
That discussion may be challenging to the owners, bringing in an outside view, but this should mean any decisions made are more robust, he says.
“And at the end of the day they still own the business so if they don’t like the challenge then they have the ability to do something about it.”
As final reinforcement, Williams points to the proof of directors being demonstrated by the fact that there is often continuity of independ