Southern Ag Management offers services in developing Governance structures for larger scale farm businesses.
The Governance structures that are implemented are often in the form of an advisory board (as opposed to a formal board of Directors). This structure gives owners a greater level of accountability within their business, and the ability to continuously re-evaluate the business strategy and direction.
The aims of an advisory board include:
· Determining the strategic objectives, financial targets and capital expenditure
· Assessing and monitoring the performance of the business
· The structuring of activity, objectives and operating plans
· Evaluating internal audit functions
· Internal/external risk assessments
Level of Accountability
By inviting independent (non-executive) people to be involved in the governance of your business, it is important firstly to define the level of accountability and responsibility these individuals have for decision and advice within the business – in essence whether these people are advisers to your business and will they be legally accountable for decisions and/or overall business performance.
Within a company Board of Directors, directors’ actions are governed by the Companies Act, with legal duties and responsibilities defined by statutes and case law. This form of governance is more common where shareholders are not closely related to the management of the company (public companies). In the case of a small family business, being a family business where shareholders and other stakeholders are closely involved, the value of promoting this level of accountability is not as significant.
In this context, an Advisory Board, where non-executive people will act as advisers to management of the company would be most beneficial. In this information package, people on the advisory board will be referred to as directors.
Role of Advisory Board
The board’s role is to govern the company, rather than manage it. It is the role of senior management to manage the company, taking into account the advice and direction of the board.
It is recognised that given the small nature of this farming company and the close relationship between management and performance, that management issues may well be broached at board level. However, in this situation, it should still be recognised that successful implementation of management strategies and ultimate accountability must be the responsibility of management.
The role of a board can be encompassed in two main areas:
Ensuring compliance (through monitoring of the company and promoting accountability at both board and management level);
Improving the performance of the company through strategy formulation and policy making.
Specific tasks that the advisory board can provide to the business include:
- Assist in setting the goals of your business including short-term, medium term and long term objectives;
- Input into the overall strategic direction of your business;
- Ensuring policies for the farming operation achieve business objectives and are in keeping with overall strategic direction;
- Reviewing the performance of the CEO or general manager, and possibly other family members at management level;
- Approving and monitoring budgets;
- Reviewing and approving capital expenditure (possibly beyond a certain level) which relates essentially to the utilisation of cash surpluses;
- Reviewing progress towards business goals and promoting accountability within the management structure.
The advisory board should consist of non-executive along with existing family members (being executive members). The make-up of the board should have a blend of expertise in accounting, finance, business management and industry exposure.
Where specific expertise is required (e.g. legal) specific people may be asked to attend board meetings.
For individual board members to perform roles effectively several requirements need to be met which include:
- Access to appropriate, timely and accurate information;
- Sufficient time to enable directors to carry out specific duties;
- A willingness to ask questions that go to the fundamental core of an issue, and may at times pursue independent lines of enquiry with other team members.
As this is an advisory board, family members (shareholders) will have sole discretion over board membership, term and specific roles.
Expectations of directors in the board process include (but are not limited to):
- Acting in a business-like manner with integrity and in the best interests of the company as a whole;
- Using judgement, common sense and tact when discussing issues;
- Being sensitive to interpreting any request or indication from the chairperson that aims to ensure the orderly and good-spirited conduct of the meeting;
- Fully support board decisions, particularly with discussions involving business partners, suppliers, customers, staff and other stakeholders;
- Keeping confidential all board discussions and deliberations;
- Disclosing to the board actual or potential conflicts of interest which may exist or might reasonably be thought to exist between the interests of the director and the company.
Role of Chairperson
The Chairperson’s role within an advisory board is critical to the success of this process. This person is considered the lead director and effectively facilitates the governance process.
The chairperson will normally be a non-executive director with experience in this role. Suggested that the chairperson is elected by yourselves prior to the first meeting, or indeed elected at the first meeting.
Specific roles of the chairperson include:
- Chair board meetings;
- Establish the agenda for board meetings in consultation with CEO / General Manager;
- Regularly review with the CEO / General Manager progress on important initiatives and significant issues facing the company;
- Provide a mentoring role for the CEO / General Manager.
A company secretary is nominated with the primary responsibility of:
- Coordination of board papers and agenda and forwarding these to directors at least five working days before meetings,
- Recording and distributing the minutes of board meetings.
*This role may not be appointed officially and may be conducted internally as required.
The meeting agenda is a key element in the planning process for all board meetings with the intent of enabling an efficient flow of information which results in effective decisions. A typical board agenda may look something like this:
- Date, time and venue;
- Approval of minutes of the previous meeting;
- Matters arising from the previous meeting;
- Formal approval of matters requiring discussion;
- Specific reports that may be required by directors;
- CEO’s report;
- Finance report (if not included with CEO’s report);
- Operational policy issues (may be supported by discussion papers);
- Strategic issues;
- Contributions from outside specialists if scheduled;
- Other business;
- Date, time and venue of next meeting;
- It may be useful at various points to review the meeting progress and evaluate.
Key Board Functions
The above sections describe a typical board process, with the following section looking at more specific issues relating to board functions and activities:
It will be important to document the company strategy. Once a strategic plan has been developed this will need review on an annual basis and be approved prior to the financial year beginning. In most cases, we would begin the planning and budgeting process in January / February before the financial year begins (for a June balance date). This enables directors to identify issues and risks associated with current strategy and revise accordingly.
More often than not, strategy will become a continual discussion as opportunities and new information becomes available to directors.
Service / Contacts / Advice
One of the most important roles of an advisory board is providing a sounding board for management to challenge ideas. To this end, it is important that directors provide frank and honest advice (and have the ability to provide such advice) in a constructive and positive manner.
Within your selected non-executive directors there will be a significant range of specialists within contact networks which should be available if specific needs arise. There is also a national flavour amongst people involved which should lead to exposure to other successful large scale agribusinesses.
It is an essential role of any board is to provide mentoring functions to CEO / management through monitoring performance and compliance of the company. To this end, it is important the board monitors both financial and non-financial key performance indicators. These indicators should be developed during the board’s initiation meetings, however there are some obvious KPIs that all businesses need to adhere to, e.g. sound financial position, liquidity ratios, level of debt servicing, productivity etc.
There is a greater requirement for businesses to meet legal and ethical responsibilities, particularly in areas such as employment, occupational health and safety, environment, etc. A role of any board is to ensure these standards are being maintained and processes implemented to minimise the risk of non-compliance.
Risk management is one of the most important areas of input from a board. This is particularly the case in a farming business, where many of the variables are beyond the direct control of management. General areas of risk and associated potential hazards may include:
- Business risk
- Asset management and resource planning;
- Change in organisational / technical / political aspects;
- Foreign exchange;
- Animal health, weed and pest;
- Interest rates;
- Market prices.
- Legislative risk
- Employment procedures, training, discrimination etc;
- Environmental issues;
- Fraud prevention / detection management;
- Occupational health and safety;
- Public risk and general liability.
- People risk
- Work ethic;
- Human, animal and plant health;
- Professional advice;
- Reputation and image;
- Disaster risk
- Contingency, disaster and emergency planning.
CEO/General Manager Evaluation
An important function of the overall accountability of management is through the performance of the company CEO / General Manager. Particularly in family owned businesses the level of accountability is generally low and as a result business performance is often compromised. The CEO is ultimately the most critical person within the business as implementation of strategies and policies will dictate success. This process should not be seen as threatening but simply part of personal development.
Suggest this may happen on a six monthly basis. The chairman will often provide a CEO evaluation and report back to the board.
The above processes and functions of the proposed advisory board as previously discussed should be seen as an initial discussion document. I would be interested in your thoughts on the points raised as there may be issues you feel will not add value to the governance of your business or there may be other issues that I have not addressed.