Putting together a board of directors can be an intimidating task, but one that could potentially add long-term value and strength to your company.
A strategically assembled, independent board of directors contributes many important functions of a business, including industry expertise, strategic management and the vital process of succession planning.
If your business is structured as a corporation or S corp, you are required to name a board of directors that meets at least once annually, according to the Small Business Administration. If you receive venture capital funding, you will also need to form a board on which your investors will sit.
Typically, the board will include a president,treasurer and secretary. A written record of items discussed and action taken must be maintained.
Specifically, a board of directors can provide assistance in the following areas:
Selection of a Successor – A company founder may be unwilling or unable to properly evaluate the capabilities of family members. Personal biases and past experiences may cloud judgment. An independent board can provide an unbiased evaluation of the abilities of family members who would potentially assume the responsibilities of management. More importantly, an independent board has the authority and responsibility to warn the founder if the successor isn’t capable.
Communication – Independent boards can act as buffers to facilitate communication between family members. Board meetings can provide a forum for family members to openly discuss problems that may be festering, which could lead to the downfall of the company. A board is legally and morally responsible to the stockholders, as well as the communities where they reside and the people they serve.
Resources – A well-selected board is a valuable resource of contacts, experience and expertise. A company may not have the financial resources to hire personnel with expertise in all necessary fields. Board members can provide valuable professional and financial contacts, network connections and links to potential markets.
Strategic Planning and Decision Making – An independent board can act as an impartial sounding board to help evaluate the decisions of family members. If family members have disagreements about business decisions, the board can act as an arbitrator.
Crisis Management – A board can provide security in the event of the unexpected loss of the founder. The board can provide interim decision making and authority until the new successor is in place.
Considerations when forming a board of directors
Size – The size, nature and complexity of the business often influences the size of the board. Boards with fewer than five members are generally ineffective, while those with more than 10 members often find it difficult to reach a consensus. Five to seven members is the optimum size.
Mix of Board Members – A board containing only shareholders, family members, longtime friends or company employees will often lack objectivity and credibility. Such a board may not feel empowered to challenge the decisions of management when necessary. To be effective, a significant portion of the board should be independent members with diverse talents, experiences and backgrounds. Consideration should be given to those with expertise in technology, marketing, finance or human resources. Choose members who will complement each other’s strengths and skills, be impartial and have the fortitude to challenge ideas.
Frequency of Meetings – Meetings are held periodically, depending on the needs of the company and the issues facing management. For most companies, quarterly board meetings are adequate and may be supplemented by special strategic planning meetings as required.
Compensation – Compensation will vary widely depending on the size and profitability of the company. Compensation must be meaningful to attract quality candidates. One method is to pay a retainer fee and an attendance fee. Combined retainer and attendance fees often start at several thousand dollars annually and increase in conjunction with company size.