Neal Jenson: Best Available Free Software for Your Business
Forming a Board of Directors: 5 Things You Need to Know
A board of directors can be a valuable resource. How to determine if your company really needs one.
Posted 3/ 3 11 at 11:00 PM | 5 Things You Need to Know, Management, Leadership, Legal Issues
Text Size:
A A A
Thinking about forming a board of directors for your business? First, you should probably figure out if you really need one. While a formal board of directors can be beneficial, and even essential, if you plan to go public in the near future, an advisory board of peers, friends, business associates and others in your network could provide much of the advice you need -- without any of the interfering, equity and the like. "An advisory board provides advice on important issues, but all decisions remain with management," says Beverly Behan, founder of Board Advisor, based in New York.All that said, more than a few entrepreneurs aspire to build the next Apple or Nike, so if you do intend on going public, forming a board of directors now will give you the opportunity to experience working with such a group before your IPO and the legal requirements that state every public corporation must have one. It will also help you earn the respect of potential investors.
Another reason to form a board? Your business could have significant investors who "want their interests represented in the governance of the company, even though they are not involved in company management," Behan says.
So how do you form an ideal board of directors for your company? Here are five things you need to know.
1
Firsthand experience is key.
Never participated on a board before? Now is as good a time as any to gain that valuable experience. Think of it as real-world training that will benefit your professional development, especially if you plan on forming your own board of directors someday. And in addition to leadership experience, you'll gain valuable exposure to governance issues and raise your profile in the community. Sitting on the board of a nonprofit organization is a good place to start. BoardSource, a 501(c)(3) dedicated to nonprofit governance, offers essential tips and information for anyone thinking about forming or serving on a nonprofit board. For instance, the website lists in detail the typical responsibilities expected of individual board members and the particular skill sets and characteristics you'll need in order to be a successful board member. For suggestions on how to secure a board seat, check out the National Association of Corporate Directors.
2
Take time to find the right candidates.
When you're ready to form your board, it's vital that you choose individuals who will offer real value and contribute to your success. Corporations often spend up to $100,000 hiring a professional search firm to do this for them, but this option is understandably too expensive for smaller companies. When forming a board on your own, start by considering the experience, skills, and capabilities most valuable to you, Behan says. Don't just look to your friends or immediate network -- widen your search to find skilled, reputable candidates who understand your business and industry. Also, don't recruit replicas of yourself. Instead, seek out candidates who offer specific knowledge or experience that you currently lack. "Prioritize which [factors] are the most important before you begin to extend invitations to people to serve on your board," adds Behan, who is also author of the forthcoming Great Companies Deserve Great Boards: A CEO's Guide to the Boardroom.
3
Communicate your expectations.
The next step is meeting with the interested candidates who best fit your goals so you can evaluate their potential. Behan recommends entrepreneurs ask the following questions regarding potential board members: "What kind of time commitment should they be willing to make? What compensation will they receive for serving on your board? Where do you most want them to add value for you and your company?" Make sure the members you select are willing to dedicate the time and expertise required. The last thing you want is to get stuck with a board member who offers little value to your growing company.
4
Progress takes time.
Where are you going and how are you going to get there? Your board members are there to help you succeed and push your company beyond what you hope to achieve, so use them. Lay out the goals, issues and challenges you need to tackle, and strategize solutions. Determine a schedule. Will you meet monthly or quarterly? Think big picture and listen to feedback -- which is not always easy: Since your board members will ideally come from diverse backgrounds, you just might hear assessments or criticisms that hadn't occurred to you before. Be open.
5
Boards aren't perfect.
Some entrepreneurs don't have the time or patience to deal with a board of directors, so they put the process off as long as possible. Also, moving forward means understanding you're giving up the control you once had -- a situation all too familiar to Behan. "Many entrepreneurs dislike sharing power and authority with a board -- particularly one with decision-making powers," she says. "This factor, and the somewhat related expense and effort involved in regulatory compliance for public companies, has caused at least three CEOs I have worked with to forego the option of taking their companies public."
Getty Images
- 'Marriage Penalty' Could Make Costly Return - CNNMoney
- Oil Rises on Optimism for Cliff Deal - FOXBusiness
- Dow 2012: The Studs and Duds - InvestorPlace
- Turning the Corner: Why 2012 Wasn't as Bad as You Think - The Motley Fool
- World’s Longest High-Speed Rail Line Unveiled In China - IBTimes
- FORGET THE DEFICIT: Here's The Real Reason Liberals Want To Hike Taxes On The Rich - Business Insider
- CEOs to Fire in 2013 - 24/7 Wall St.
- DailyFinance Market Minute - DailyFinance
Comments (Page 1 of 1)
An alternative to a Board of Directors is a Board of Advisors. A board of advisors holds many advantages over a traditional board of directors. A board of advisors is:
Easy to Create and Expand
A board of directors has legally defined responsibilities and is usually elected by the shareholders and governed by the corporation’s bylaws. Therefore, the management team’s ability to create and expand its board of directors is restricted by law and corporate policy. Moreover, directors are elected for established terms and may be difficult to remove.
An advisory board, on the other hand, is informal group of experts and advisors hand-picked by the CEO and management team. It is relatively easy to create, expand or decrease the size of an advisory board in order to meet the needs of the organization. Moreover, members of a board of advisors can be recruited to serve only as long as they are needed and can be easily replaced.
Less Costly
Since a board of directors has a fiduciary duty to the company and can be held personally liable for mistakes, board members often receive generous compensation. Therefore, securing or expanding a board of directors can be expensive, especially for smaller companies with limited means.
On the other hand, a board of advisors cannot be held liable for mistakes made in connection with their duties and, therefore, less compensation is required to retain an advisor. Members of an advisory board are usually compensated through an equity interest in the company or through a small yearly stipend.
Beholden to the Management Team
The fiduciary duty of a board of directors requires it to place the needs of the organization and its shareholders before the needs of its employees. Conversely, a board of advisors has no such duty to the company; directing, mentoring and advising the CEO and management team are the advisory board’s foremost priority.
Not Liable To the Company and Shareholders
Companies frequently obtain Directors & Officers Liability (D&O) Insurance to indemnify directors against claims from shareholders, employees and clients. Sarbanes-Oxley and other recent legislation have raised the accountability of corporate directors, increasing the risk that they will be found liable for acts performed connection with their duties. As a result, the cost of D&O insurance has become prohibitively expensive for small companies. Employing a board of advisors instead of a board of directors eliminates the need for costly D&O insurance.