“What real value can independent board members add to my business?”
This is a question often asked by our clients when we discuss corporate governance. It is a fair question when the owners of a successful family business are contemplating the creation of a fiduciary board of directors – why should they include non-family, non-owning, non-management, members with full voting rights? Of course, the right independent directors bring valuable, relevant business experience to your business. But, it can be argued that consultants and/or advisory board members bring that value without having to give them a vote. In other words, can we get their advice without being bound to use it in our decision-making process?
Good advice is always valuable but independent directors on a board designed to represent the interests of all the owners of a business have been shown to add much more tangible value. A study of 1,300 U.S. firms recently released by the Warwick Business School in England shows that banks loan on more favorable terms to businesses with independent directors on their boards. This study, done over a period of 13 years, shows repeatedly that as the number of independent directors on boards in these companies increased, the terms of their loan agreements with banks improved in the company’s favor.
The issue comes down to this: When there is an effective system of corporate governance in place, indicated by the presence of independent directors, banks have greater confidence in a firm’s internal controls and don’t feel they need to impose as much external control through their loan covenants.
How’s this for real value? A better relationship with your bank can yield a lower cost of capital in your business.