My good friend, colleague, and attorney, Anne, had a client who needed to create a Board of Directors for his growing company. Anne and her client understood that most companies realize greater success by creating a Board. However, Anne’s experience in this area was limited. She contacted me for advice. We discussed the importance and advantages of having a Board, and then explored the criteria and selection process of creating one.
Why Have a Board of Directors?
Anne’s client needs a Board with a broad range of experiences and skills. A board’s objective advice can make the difference in a company’s success or failure. Hearing an unbiased perspective from the outside is valuable for publicly traded companies, privately owned businesses and non-profits alike. Most entrepreneurs, however, have been “calling the shots” for a long time, and have a misconception that a Board will cause them to give up some degree of control. Rarely is this the case. For others, they have their eye simply on running the business, and they don’t want to take the time to find, create and train a Board. They are too busy working “in the business” to work “on the business.”
Companies organized as corporations are legally required to have a Board of Directors. Why? The owner and/or management oversee the daily decision making of the company, while the Board guides the overall direction. The requirements of the Board vary by state, but the number of directors on the Board cannot exceed the number of corporate shareholders, and in many states a Board must be comprised of no fewer than three people. In non-profit organizations, the Board of Directors exists to ensure that management stays focused on the charitable mission and manages funds effectively. They are the “watchful eyes” to ensure contributions are being used for the purposes outlined in the charitable mission statement of the organization.
“Insider” Board vs. “Outsider” Board
For Anne’s client, deciding to have a Board of Directors has been a daunting decision. Where to start? First, determine if an “insider” or “outsider” Board would be more effective. An insider Board is made up of friends, family, and contacts you trust. Whereas, an outsider Board is made up of people you recruit based on their skills because you need them to expand your business. While advice from insiders can be valuable, it often reflects a very narrow industry perspective. An outsider Board can broaden the range of experiences and skills and provide more objective advice.
Characteristics of a Good Board
For additional feedback, we contacted Susan Snow, a Principal at OSAS, who has served on many public and private Boards. She offered her opinion of characteristics to consider in a good Board:
- Competency. While this seems obvious, private company Boards tend to allow directors who lack adequate skill sets. For example, everyone should understand how to read and interpret financial statements and related information. Not everyone must be qualified to sit on the Audit Committee, but fundamentals are required by all.
- Education and Training. All directors must keep up-to-date professionally. This means learning from mentors in action during effective meetings. Directors need to stay current with laws and regulations. In the past few years, obligations of members of the Compensation Committees have expanded dramatically. We now must disclose far more information than ever before.
- Accountability and understanding of Board Duties. Sometimes a Board member must speak up and hold the executive management accountable. For example, if the CEO repeatedly projects fantastic growth in the future, but keeps missing his budgets, the Board must hold the executive accountable. In no way do I advocate for cantankerous Board meetings, however a healthy skepticism and give & take make for far more productive relationships between Boards and executives.
- Executive Office. Lastly, directors must respect the role of the CEO. In fact, one of the Board primary duties is to select and retain the absolute best executive to run the company. If there is a problem with the CEO, work with him for course correction, or find the next absolute best executive. Board members should not trip into executive roles unless it is strategically necessary and short-lived.
Effective Board members
Anne’s client had unique expertise requirements because of the company’s development stage and industry challenges. We asked Antonio (Tony) Rodríguez, president and CEO of Ivy Advisory Resources, for his advice on getting started. “You should develop an inventory of required skills vs. existing capabilities to determine prioritized needs for directors. The complexity of the business model or industry will determine how many industry experts you need, but it’s always good to have fresh outside perspectives to challenge conventional thinking. Every Board has distinct dynamics for how it approaches the oversight role. In cases of private companies, operating performance will trump oversight for the Board, but the Board functions as a group to achieve this objective and new members need to understand how that works to be an effective part of the team.”
Finally, with so much at stake for Anne’s client, I gave her my “Top 6” tips for selecting Board members:
- Board size should be an uneven number with 5-7 for smaller entities and 9-11 or more with more complex Boards and sub-committees. Attendance will vary and you do need enough present to make decisions. If you are looking for more control, consider a 7 person Board with 3 permanent board positions for family and key employees and 4 rotating positions.
- Determine expertise in a specific area which can help your business grow. Often Boards include an attorney, financial advisor, risk manager, banker or CPA on the Board.
- Look for leadership skills and management experience, especially in related industries and businesses.’
- Only appoint Board members who are committed and clearly interested in the business and its continued well-being. They should not be serving just for the money or for personal interests.
- Select Board members that are willing to commit to coming prepared, having read material sent in advance, and are willing to attend a pre-determined percentage of meetings.
- Choose Board members with demonstrated integrity, and without a potential conflict of interest. Best practices recommend Board members sign a “conflict of interest statement”, which states that the interest of the business or organization are to be put before the Board member’s own individual or business interests.
For Anne’s client a high functioning Board of Directors would definitely provide a value to the business far in excess of the cost to implement. The client must remember that a “perfect” Board does not exist. There will be frustrations and setback. Yet the rewards will far outweigh the pain, and at some point he will look back and wonder why he didn’t do this sooner.
Written by R. J. Kelly – June 2011