Businesses naturally progress through different stages as they grow and mature. So do non-profit organizations. Their boards of directors need to change along with them, otherwise there’ll be a serious mismatch between what an organization needs from its board, and what the board can actually deliver.
As a board moves through these stages over time, it requires a changing set of attributes and competencies from its members. As a director, you’ll be more engaged and more satisfied, and you’ll add more value, if there’s a good fit between what you bring to the table and the life cycle stage of your board.
Let’s explore the topic of the board’s life cycle. And, to help you determine your best fit, we’ll have some questions for you to consider.
The term business life cycle refers to the progression of a business in phases over time. The life cycle is often divided into four (sometimes five) stages: start-up, growth, maturity, and decline. It’s usually depicted as an inverted “U” on a graph, where the horizontal axis is time and the vertical axis is a financial metric such as revenue or profits.
Start-Up: At start-up, a company launches a new product or service and begins operations. This is a risky period. The business model is unproven and success is far from certain. Revenue is low, start-up costs are high, and cash flow is often negative. Initially, it’s difficult, if not impossible, for the company to obtain finances from traditional sources, leaving the company dependent on the founder, family, and friends for seed capital. Many a start-up doesn’t make it any further. But if it does, and the product or service begins to prove its viability, venture capital might become available.
Growth: The growth stage is one of rapid increase in sales. Cash flow becomes positive, and the businesses starts to see profits. Business risk decreases, and it becomes easier for the company to raise money through venture capital, private equity, or debt. This in turn allows the company to expand its market reach or maybe diversify the business.
This kind of success invites competition, and soon the market is saturated. Over time, growth slows down. Eventually sales peak and profits start to decrease. Even so, at the point of peak sales, companies are viewed as successful and have relatively easy access to both equity and debt.
Maturity: Mature businesses are dependable and consistent. Their operations are smooth, revenue is steady, and business risk is low. A company in this stage generally has a strong cash position and good brand recognition. It enjoys easy access to capital, so it can grow through acquisition, defend its market position, or expand into new markets.
Decline: The slide from comfortable maturity to the decline stage isn’t always apparent right away. Initially, sales start to slowly decrease and profit margins get thinner, but cash flow remains steady. As this stage progresses, sales, profits, and cash flow all start to decline at a faster and faster rate.
At this point, the company can follow one of two paths. It might experience a rebirth by reinventing itself, investing in new technology, or entering new markets. If it can’t, or won’t, adapt to the changing environment, it will likely end up exiting the market or winding down altogether.
As a company moves through the business life cycle, its leadership needs change drastically, and so do its governance requirements. A mismatch between the board’s governance approach and the life cycle phase can slow down progress or prevent it all together. On the other hand, a good match can help the organization scale up and grow to the next stage of its development.
Whatever stage the business is in, the right board of directors can be a huge asset.
An entrepreneur, company founder, or new business may see no good reason to have a board at all. They might view it as a necessary evil that will have to be faced in the future, but can be ignored for now. Yet a board can provide access to valuable guidance, wisdom, skills, and contacts. Establishing one can be a smart move even for a small company.
In the startup stage, a board has three main roles to play: advising the CEO/founder, bringing critical skills to the table, and providing access to its network. A board that decides, controls, and directs isn’t needed and might even have a negative impact on the organization. Instead, the founder needs support and guidance. That makes an advisory board a good match for this stage of the business life cycle.
An advisory board is a small, relatively informal group, usually around three to five people such as other founders, business mentors, and expert advisors. This kind of board doesn’t have the authority to make or enforce decisions. Instead, it provides strategic guidance, acts as a sounding board, and introduces company leaders to valuable contacts.
The world of start-ups is unpredictable, so members of an advisory board need to be comfortable dealing with uncertainty. They might be called on to be hands on at times, helping the young company develop a clear purpose to guide its future direction. They might even be expected to support the business financially.
As a company begins to scale up and grow, it becomes time to consider a corporate board with formal duties and oversight. The existing advisory board can help set the stage for this move to a fiduciary board. Some advisory board members might make the transition to the more formal board, but others might not be a good fit and they will have to move on.
At this point, the size of the board usually increases by adding independent directors with specific skill sets and industry knowledge. These new directors often bring a touch of risk aversion to the board to balance out the earlier risk-takers.
To cope with the expanded workload, the board might establish committees, usually starting with an audit committee. The organization might start compensating directors, often with equity instead of paying director fees.
In this phase, the board shifts its focus to oversight issues like controls, compliance, and risk management. Its time horizon becomes longer as it considers sustainable value creation, not just short-term growth.
By the time a company reaches the maturity stage, it usually needs a formal fiduciary board to serve the owners, shareholders, or members, act as steward of the company’s assets, and ensure the company is well-managed and financially sound.
In this stage, the board’s structure is clear, roles and responsibilities are well-documented, and control practices are effective. Board members are mostly business and professional people who know the market, the economy, and the technology. They are well compensated, usually with directors’ fees.
A mature company can become somewhat risk-averse, so having creative thinkers, innovators, and change agents on the board can bring vitality to an organization that might otherwise be complacent.
As a company begins to decline, stringent control practices must be in place to protect the rights of all parties. Once a company starts to exhibit financial difficulties, it’s time to make sure the board includes professionals with the expertise to try to save it from further deterioration and preserve value for the sake of owners, debtors, and vendors.
But if the company decides to pursue rebirth through new markets, new products, or new technology, its board has to focus on change as well as control – not an easy task. A good way of doing this is to establish an advisory committee that fulfills a similar role as an advisory board does for a start-up - it guides the company in its pursuit of changes to the business model that can help it survive.
So far, our exploration of life cycle stages has used the language of business – words like sales. profits, and venture capital.
But non-profits experience a very similar life cycle. Organizations such as BoardSource and Nonprofit Quarterly provide valuable information about how non-profit boards progress through various life cycle stages. BoardSource calls the stages organizing/founding boards, governing boards, and institutional boards.
An organizing/founding board is small in size and homogeneous in composition. Board members are passionate about the cause and willing to do even mundane tasks to get the organization up and running. As the organization grows, board members are asked to do more and more, to the point where they can’t keep up and some of the founding board members leave. As new board members are recruited to replace them, the board starts to transition to a governing board.
A governing board gradually assumes responsibility for the well-being and longevity of the organization, making plans, approving policies, and overseeing finances. Over time, it becomes larger and more diverse, and it develops a different, more balanced, relationship with management and staff. As the board focuses on its own effectiveness, there’s a gradual transition to the next stage, an institutional board.
An institutional board tends to be large and prestigious as it oversees an organization with a sophisticated staff and a prominent public profile. It establishes a formal committee structure to help with financial oversight, governance, and policy planning. Its major responsibilities include budget approval, audit, strategic planning, program evaluation, and the CEO/board relationship.
When you think about the life cycle of a board of directors, it naturally gives rise to wondering, ‘Where do you, as a savvy director, belong?’ If you’ve been asking yourself this question, a good dose of self-awareness is helpful.
Here are a few useful questions to ask yourself to help pinpoint your best fit:
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help directors prepare for their board role.
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