External members on boards of directors increase innovation and spur growth.
Every firm has different priorities during their organizational evolution. At times the need may be to maintain size or even to scale back while making a shift in markets or clientele. Maintaining your growth on pace with inflation and concentrating on optimizing operations to maximize profit can also be an intelligent strategic decision. At other times, you may realize you have all your ducks in a row, are making great profits, but just aren’t growing, and need some new blood or new perspective. According to Zweig Group’s 2021 Principals, Partners & Owners Survey Report, the median length of time principals have been in their current firm is 20 years. That’s a long time to be with a company, and it’s a long time for a group of people to work together. It’s no surprise then that, over time, firms can encounter points of stagnation in growth and/or innovation.
At Zweig Group, our experience has been that external members on boards of directors increase innovation and spur growth. We analyzed the 2021 Principals, Partners & Owners Survey Report, taking a deeper dive to examine the relationship between BOD member composition, specifically the presence of external board members, and firm growth and profitability. Not all firms have a BOD, but the group of firms in our dataset with a BOD was representative of our population of data in terms of geography, size, and type of firm. Of this group, 73 percent had a BOD composed entirely of members employed by the firm. The other 27 percent of firms had a BOD that had at least one external member. The average number of external BOD members was 2.5.
Next, we looked at the growth rates and profitability of these firms. Average annual growth rates are defined as “fast” (20 percent or more), “slow” (1 percent to 19 percent), “stable” (unchanged for three years), and “declining” (average annual decline). Profitability is defined as annual net pre-tax, pre-bonus profit on net service revenue, and categorized as “very high” (greater than 15 percent), “high” (10 percent to 14.9 percent), “average” (5 percent to 9.9 percent), and “low/loss” (4 percent or less).
Instinctually, it would make sense to assume that firms that incorporate external members in their boards would tend to be more diverse in thought, and that diversity brings new ideas and spurs growth. The data clearly carried that hypothesis, and a summary is shown in the table below. The presence of external BOD members has a stronger correlation with growth than with profit. Approximately 72 percent of firms without external BOD members have slow or fast growth, versus 92 percent of firms with external BOD members.
Approximately 64 percent of firms without external BOD members have high or very high profits, compared with approximately 66 percent of firms with external BOD members. Profit isn’t necessarily determined as a result of the actual opportunities that diversity of thought and new ideas that an external member might bring, so there’s a lack of significant difference in profit between firms with external BOD members versus firms without. Rather, profit is determined more by operational and organizational factors, conditions, or enablers, including the strategies you have in place for organizational structure, policies, contract, and project management.
This presents a defensible case for two main actionable items:
- Carefully and strategically assessing your organizational and operational conditions in advance of planning a period of increased growth. At a bare minimum, growth and tightening up any operational shortfalls need to happen concurrent with board changes to safeguard the long-term health and increased value of your firm.
- External BOD members can bring more diversity of thought leading to growth. In the 2021 Principals, Partners & Owners Survey Report, 62 percent of principals also think there is a diversity issue in the industry – an increase from 59 percent in 2020. A focus on diversity, equity, and inclusion is good for culture and for business, is the right thing to do, and starts at the top and has a waterfall effect throughout your firm and the industry.
Data in this article was from Zweig Group’s recently released 2021 Principals, Partners & Owners Survey Report. Meet with peers to discuss this and other important industry issues at the 2021 In-Person ElevateAEC Conference & Awards Gala, which includes the iconic black-tie awards gala celebrating the 2021 winners of the Hot Firm list, Best Firms To Work For, Marketing Excellence, Rising Stars, Top New Ventures, and the Jerry Allen Courage In Leadership awards. The limited-attendance CEO Roundtable Retreat is also a unique opportunity for AEC firm leaders to engage and interact with industry peers to discuss current issues facing firms today, explore industry trends and next practices, and confront the biggest challenges they face leading their firms.
Stephanie Warino is a licensed environmental professional and a strategic planning advisor with Zweig Group. Contact her at firstname.lastname@example.org.Click here for this week's issue of The Zweig Letter!