Small Business: Governance journeys - Simon Arcus, Institute of Directors

Simon Arcus, CEO and manager of the Institute of Directors.

This week, Small Business editor Caitlyn Sykes talks to business owners about their firms' governance structures.

Simon Arcus is the CEO and manager of the Institute of Directors (IoD).

What proportion of our smaller businesses have governance structures in place, and how do we compare on this internationally?

The answer is the proportion is low in New Zealand. But I think we also need to think about governance in new ways. People need to think about what structures work for a business in each particular stage in the growth cycle, whether that's a mentor, or an advisory board, or a formalised board structure.

What typically prompts a small business owner to start thinking about bringing on an independent director?

It's often when a business has got to a certain point in its growth and there's huge potential to take it to the next step. Often it's when a business owner thinks 'I've got the business to this stage, now I need a new perspective and to be challenged about where I can take it in the next 10 years'.

Is that an ideal time to bring on an independent director or ideally would that happen earlier?

My view is you utilise different advisors at different stages. Right at the beginning you're looking at that business mentor market and a lot of people offer that service for free. Then you may get to a point when you know you need to make changes but you want to retain control of the business, so you may get an advisory board. Then the next stage — a full board — is when you know you want to take your business to the world and build it into something really big. At that point maybe you're getting ready to float, or you may be wanting capital or you may be wanting your strategy examined very closely by an outsider.

How do small business owners typically find someone for these governance roles?

I talk about finding someone who will rattle the cage. Too often people go down the wrong avenues, turning to someone who is already very embedded or attached to their business like their lawyer or accountant. But I think people need to look more widely, because you want an independent director who will come in with fresh eyes and make you sit up and think.

The IoD can help people find an independent director and there are other groups out there that have similar offerings. And it doesn't have to be expensive; there are different ways that businesses can approach this. One example is offering an equity interest to someone who you think is really going to make the business hum. Another way might be undertaking a short-term contract with an independent director. I'm really encouraged by the enormous number of experienced directors who are prepared to invest their time in new or fast-growing businesses.

Given there are a number of experienced people out there, how do you find the right fit for your business?

I definitely recommend an interview process and the IoD offers a set of interview questions that are free to members and we have a First Boards resource on our website for SMEs. It's a slightly different process to taking on an employee because this person is a peer who you're also going to have pretty robust debates with. I think one of the key things you're looking for from any director is a passion for what you're doing. That doesn't mean they can't see ways to do things better or differently, but you know they're going to connect with your vision and they'll care about the business going forwards.

Once you have someone on board, how do you get the most out of the relationship?

Taking on governance requires a cultural change in the organisation, and you need to be open enough to embrace that new person and their views. I'd also make sure there's a formal agreement of expectations in place with the independent director. You don't have to draw up a huge contract, but you do need to have the ground rules well established for the relationship to grow — things like the number of hours they expect to put in, the number of meetings they'll have and a good induction.