The high cost of directors' liability insurance has made it a lot tougher for smaller companies to justify the cost of a board of directors. Put this together with the antipathy many chief executive officers feel toward accountability to outsiders, and you've got a good explanation for the appearance of informal "advisory boards." Think about it: if you can get the advice without the formal obligation to follow it, are there any reasons left to have a full-blown board?
Sandy Brown, president and CEO of Rhode Island Welding Supply Co., thinks there are -- as long as you can get around the problem of insurance, which in Brown's case would have cost about $8,000 a year.
Brown says he wanted a board of experienced businesspeople to help him shift his focus from the day-to-day to broader concerns. After months of looking, he found three people who fit the bill. Not only did they have the experience and expertise he was looking for, they were willing to serve even though the business carries no directors' liability coverage.
Before each quarterly meeting, Brown sends each director an agenda, an update on major developments, and a $250 check. During meetings, Brown expects the directors to challenge him and to point out things he should consider.
But couldn't a bunch of informal advisers do the same thing? Not really, argues Brown. He doubts that the individuals would be as interested or as committed, and he doubts that he himself would be as engaged. "Having a board means I mean business," Brown says.
It also means that he expects his business to endure. If anything ever happened to him, Brown is confident that his directors, with their personal and legal commitments as formal board members, would take charge, and would find a successor to keep the business going.