Governance and startups: the unique skills required for directorship

Being a director of a small to medium enterprise (SME) is both a science and an art. While it requires the same fundamental skills as those required for corporate environments, the unique nature of the SME environment requires additional skills and abilities.

As with corporate governance in larger organisations, foundational knowledge of governance principles, King III and the fiduciary duties of directors is essential. This includes both an academic understanding and a practical knowledge of how to translate governance principles into SME-specific board actions that drive real results.

Coupled with this is the need for a holistic perspective and broad-based business experience. In corporate environments, a larger board, board advisors, and specialist committees, create greater space for specialist skills as a director. SME directors need to have a practical understanding of all aspects of business as opposed to depth in just one area.

SME directors need to be all-rounders who appreciate just how quickly change can be implemented. The ability to seize opportunities while being mindful of risk is a delicate balancing act.

Executive SME directors, who are often the business owners, tend to struggle to manage the distinction between shareholder, director and manager. Independent SME directors must be able to clearly discern the differences and ensure that the right discussions happen at the right time with the right perspective.

Directors also need to ensure that management and board issues are kept separate. SME executive directors are so closely involved in the day-to-day running of the business that they easily succumb to an operational mindset at the board room table. Independent directors are required to be vigilant that the dialogue remains at a board level and that there is a clear distinction between board and management actions.

In a corporate environment many of the business structures required have already been developed. In an SME many of these structures just simply do not yet exist. A director therefore needs to be able to support putting these structures in place at a board level and should be flexible to work around areas where those structures are not yet in place. These include marketing plans, a sales team, a business plan or even a documented business model.

Perhaps the greatest skill needed by independent SME directors is being able to maintain that fine balance between mentoring executive SME directors while holding them to account. Working with governance in an SME creates rapid change in how business owners conduct their business. In the initial stages, mentoring and coaching is required to support this very real transition in thinking and doing. Yet too close a mentoring relationship undermines an independent director’s real responsibility of ensuring that governance principles are implemented effectively. It takes a well developed communication ability to walk the fine line between the two.

If you have not yet had the experience of working as an independent director at an SME level, I highly recommend that you find a way to do so. Not only will you deepen your governance skills, you will also support this critical sector of our economy through good business practices.