Advise and Consent
Utilizing a Board of Directors/Advisors
Because the construction industry is largely made up of “closely held” companies, it is rare to find a board of directors assisting and advising a construction company. Closely held corporations usually have no objective corporate governance because the shareholders, directors, and officers are the same people. Construction entrepreneurs seldom see the need or benefit of formalizing themselves into a self-governing board. However, as a management tool, the “board of directors” concept has been around a long time and offers huge advantages.
A Brief (But Long) History
The phrase “advise and consent” in the U.S. Constitution is actually borrowed from ancient charter documents that formed various commercial enterprises throughout British history.
Back in 1579, Elizabeth I granted charters to companies managed by boards of governors.
- In 1606, James I granted a charter to two companies to establish trade in North America that would be managed by a 13-member council for “superior managing and direction.”
- The Bank of England’s 1694 charter provided for a board of directors which seems to be the first use of the term, “directors”.
- The Society for Establishing Useful Manufactures founded by Alexander Hamilton in 1791 was under the management of 13 directors elected by the shareholders.
- Hamilton also formed the Bank of the United States with a board of directors elected by the shareholders.
- New York’s 1811 Act, commonly considered to be the first general incorporation statute, provided that “stock companies shall be managed and conducted by elected trustees…”
Advise and Consent
This history documents the method used as far back as the 16th century to govern commercial organizations of diverse corporate constituents across widespread geography. For the most part, it applies to the governance function of directors prompted by 4 sound management principles:
- The need for central management
- The advantages of group decision making
- The representation of corporate constituents
- The prudence of monitoring management
The typical construction entrepreneur of a “closely held” company IS the central management – has little use for group decision making – sees themselves as the primary corporate constituent and is convinced that management would not benefit from monitoring.
Thus, a closely-held construction company board of directors or advisors is a rare commodity indeed. Note that I use “Directors and Advisors” as interchangeable for this discussion. There are some differences and boards of advisors are generally less formal.
Advise and Consent
The board-of-directors model conceived by the ancients was all about consent and control:
Shareholders select directors, who select and supervise senior officers, who, in turn, carry out the board’s will.
The function of a board of directors or advisors may seem inappropriate to contractors, however, I have spent my career making the case for utilizing the “advise” function of a board, particularly in a “closely held” company for numerous reason including the reality that it’s lonely at the top.
The board-of-directors model conceived by me is all advise:
Construction CEOs partner with people they respect outside their company who have business talents and expertise the CEO needs to broaden their thinking, audit their decision making, and assist in recognizing, analyzing, and avoiding risk.
A Brief (But Personal) History
When construction slowed down in my contracting market back in the 70s, I started a business in my basement to complete failed projects for bonding companies. The business grew so fast that I shortly rented offices and within 2 years I purchased and occupied the small office building I was in. Two years after that we expanded into two floors of a larger office building and opened our first reginal office.
I was suddenly way over my head. I knew how to do the work, but I had no idea how to grow a company that fast and that big. I needed marketing, management, logistics, and finance advice. People asked why I didn’t simply consult with senior executives from my company. The reason was I met with them continuously, and we all had similar experiences and backgrounds. I needed outside expertise, a board of advisors/directors to contribute the vast amount of varied business experience that I knew I could never have accumulated in four lifetimes.
I formed a five-member board of advisors including three outsiders, two of which I had not met prior to interviewing them for the board. I selected people I respected and would listen to. One was the president of a nationally known food brand, one the president of a bank, and one the executive vice president of the largest utility company in my state. Three years later we had an office across the nation, were celebrating becoming the largest surety consulting firm in the country, and preparing to go international. By our tenth year in business, we were completing over $1billion of failed construction projects annually.
My Belief
I could manage the construction process but could never have and would never have grown that business to that size without the advice, input, and encouragement of my board of advisors. That’s why I believe that every CEO of any size construction organization should have a board of advisors/directors with a majority of outside members to help guide the success and growth of their company. I didn’t imagine this concept. I lived it.
For more information on developing and utilizing boards of directors, click on this link: https://simplarfoundation.org/?s=board+of+directors
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you, Tom
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Read More: Business of Construction Library and Board of Directors
