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.

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Board games: A board of directors can be a valuable resource for fast-growing companies.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."

Tags: 5 Things You Need to Know, advisory board, Beverly Behan, board, board of advisers, corporate governance, management

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