The view from above

Entrepreneurial ventures that grow at breakneck speed can often stall due to lack of governance, but appointing an independent board can help turn the business around. Tony Featherstone reports.

An entrepreneurial venture delivers hyper-growth within a few years of launch. Annual turnover jumps 30 to 40 per cent, large clients are won, and staff are hired at breakneck speed. The founder races to ensure the venture can keep up with growth.

Everything looks great on paper: there is multi-million-dollar revenue, an established client base and a charismatic, successful founder. But rapid sales growth does not translate into profitable growth, clients are agitating, and internal systems and structures are poor.

Even worse, the founder runs the venture like a private enterprise, despite it having external shareholders after several capital raisings. They do not realise that an entrepreneur is sometimes the worst person to run a business that requires greater governance.

Anne Harbers MAICD, experienced a broadly similar scenario in April 2012 after becoming CEO of Petrofin International, a leading provider of speciality ingredients to the fuels and lubricants industry. Harbers, a part-owner since 2001, joined to get Petrofin back on track.

Founded in 1978, the Sydney-based company has 40 staff, annual turnover above $80 million, and some of the world’s largest energy companies as clients. It started a new business, RejuvaCare International, in 2006 to service the personal care, functional foods and health and wellbeing industries, and it continues to attract more Asia-based companies. It has also expanded into speciality ingredients in water treatment, oil fields, and agriculture.

“Petrofin had a classic entrepreneurial management style,” says Harbers. “The business model was based on high turnover on low profit margins, and it led to excessive, unsustainable growth, with not enough systems supporting the business. After working with lawyers and forensic accountants, and engaging a consultant chief financial officer (CFO), Stephen Avery MAICD, we realised the business lacked corporate structure and financial-reporting depth, and needed better governance.”

Forming a board was a critical part of Petrofin’s turnaround strategy. Harbers believes it has created a more transparent culture across the business, provided insightful external advice, and an independent assessment of the business and Harbers’ performance.

Although they sound good in theory, governance systems can be hard to implement in small and medium-size (SME) enterprises. Too many policies and procedures can bog down the business in reporting and compliance, and crush its entrepreneurial spirit. 

The founder resists the push for more structure because they are used to a nimble environment that provides maximum operational freedom, helps them control information and sustain a secretive culture, and boosts their powers over other stakeholders.

In truth, some entrepreneurs do not have the management skills to sustain a larger business. Their dynamism and sales skills help get the venture off the ground, but detail and process are not strengths. And they struggle with honest, constructive comments from other shareholders.

Cost can be another issue. The lean SME does not want to pay an auditor to review the accounts, or non-executive director fees if a board is formed. Paying an independent chair $5,000 each time he or she attends a board meeting is too much money out of the founder’s pocket.

The result can be an insular culture that does not recognise the benefits of high-quality, independent advice and having somebody challenge strategy and performance. Rather than seeing the board as an investment in growth, the founder sees it only as a cost and a handbrake.

Harbers has seen this “closed-shop” culture in too many private companies. “I’m always surprised at functions when other SME owners ask why Petrofin formed a board. They don’t understand why you would ever let someone else see what you are doing. The best private companies recognise the benefits of a strong advisory board. They invite external, independent scrutiny because they know it leads to a better business in the long run.”

Solid foundations

Harbers’ background in family companies and multinational corporations provides unusual perspective. She spent 25 years in biotechnology and technical sales, most recently as a business unit manager at GE Healthcare until 2010. Six years at GE, one of the toughest, best-regarded managerial training grounds, reinforced the benefits of transparency, structure and reporting.

“I was exceptionally fortunate to have had the personal and skill development from running a multi-million-dollar GE business unit. I saw the benefits of organisations that have very open cultures, a strong focus on performance management and measurement, and no surprises. I wanted that type of thinking to drive Petrofin’s turnaround strategy.”

Harbers formed a three-member board for Petrofin. Martin Green, a corporate turnaround specialist, joined as non-executive chairman in 2013. Chief operating officer Stephen Avery, previously the acting CFO, and Harbers are executive directors.

"The board was a fantastic opportunity to bring external advice into Petrofin, and help create more structure around our budgeting and reporting processes, and a greater focus on sustainable profit growth rather than only turnover.

The general managers of our business units now present to the board each quarter and visibility across the business has improved greatly.”

Harbers said it was important to pay market fees for an independent, experienced chairman. “If you are serious about forming a board, you need to make a real commitment and investment, and look to attract somebody who understands governance and can offer a different perspective. All too often, SMEs ask somebody they know to chair the organisation. The board ends up telling the founder what he or she wants to hear and the business stagnates.”

Harbers says Petrofin’s board could expand in coming years. “As the organisation grows, it might need different skills on the board and additional knowledge from independent directors. The great thing about a board is it forces you to take a step back and think about where the business is heading, and not just about the day-to-day. You are being challenged to think about where the business might be in three, five or 10 years.”

Monitoring CEO performance is another benefit of boards, says Harbers. “It’s very important for a CEO to put themselves in front of the chairman and have their performance appraised. It’s too easy for CEOs of a private company to work for years without any thought to their own performance, development or succession planning. The danger is they start to kid themselves with their story and believe there is no room for personal development.”

Harbers says the Australian Institute of Company Directors’ (AICD’s) Company Directors Course and AICD networking events have been invaluable. “I would strongly recommend other SME owners to do the various courses AICD offers and use them as an opportunity to step back and think about their business. Learning about governance and boards forces you to think more strategically.”