How Create a Board of Directors

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Board of directorsThis is always a puzzling question:  Do you need to establish a board for your company? Maybe, says Jayna Cooke, CEO of EVENTup, who is in the process of forming her company´s board.

Does My Company Need a Board?

Startups and well-established companies can both benefit from having a board. But every company does not need one. “Almost every kind of business, regardless of size, can benefit from a board.  There are two types of boards, however,” notes Michael J. Berthelot, managing principal of Corporate Governance Advisors Inc. “Boards of directors are found in companies that have significant third-party investment, such as public companies, very large private companies with a diverse ownership base, private companies with private equity or venture capital investors, and private companies who are preparing to go public.  Boards of directors have the authority (and responsibility) to hire and fire the CEO.  As a result, most small private companies do not use a board of directors.”

There are several factions that may push you to create a board. “The main ones are: a. The company is growing quickly in a new market, and needs strong leadership from people who have experienced rapid growth;  b. The company has over $500K in annual sales; c. The company is planning to build with the intention of exiting via an IPO or acquisition within 5 years of formation;  d. The company has a sole founder, and has raised funding; or e. The company has a founder, or co-founder, who is talented yet relatively inexperienced in the business world,” Cooke says.

Advisory Boards can be particularly helpful to startups or companies in transition. They are a different type of board. “Advisory Boards can be invaluable for smaller companies, even one or two person start-ups.  An advisory board has no legal authority, no legally proscribed fiduciary duties to anyone, and serves only to provide the management team of the business with advice and counsel.  Most small business owners and management teams do not have the broad perspective that an advisory board brings to the team,” explains Berthelot.

So Why a Board?

Boards can help keep a company and its executives in line and on track. “Boards are necessary because they provide a check and balance system for the overall health of a company. If the CEO or other high members are not performing, then the board can advise them but also replace them. Otherwise, if the CEO has failed the company, the company would go under and this gives the opportunity for the company to survive. It provides the biased view to make decisions based on the company’s best interest,” explains Cooke.

A board will help companies keep focused on their goals. “A good board is supposed to provide insight and specialization to the business to help guide decision-making. A good board also makes sure that the executives of the company are looking out for the interests of the shareholders,” adds attorney David Reischer of LegalAdvice .com.

According to Berthelot, a board also always looks out for the best interests of the shareholders.”

How to Pick Board Members

Selecting board members should be given a great deal of thought. “Board members should have some understanding of the basics of the business and the industry as a whole. Board members should not be politically aligned with key executives. In other words, there should not be a conflict of interest between the Board members and the executive team,” suggests Reischer.

Think about the experiences each board member can bring the board. “The most important factor when selecting board members is determining what they can bring to the table. In regards to startup companies, board seats are generally given to members of a VC firm that have invested in the company,” says Cooke. “If the business is not a start-up and is simply looking to form a board or add new board members, resources and experience should be the main driver in selecting a board member. If your company struggles in any area, ask someone who has a vested interest in your company and has the knowledge of how to grow the area in which you struggle.”

Selecting a Chairman Board Director

The Chairman of The Board is the person who will help lead your board of directors. “A director is generally selected based upon 1) their individual skill set and experience taken in the context of the needs of the business; 2) their contribution to diversity of the board, including geographic, demographic, and experiential diversity; 3) meeting critical personal characteristics such as a strong sense of ethics and integrity, a willingness and ability to make the necessary time commitment (the average board takes up 250 hours per year); and their ability to ask difficult questions yet remain collegial and respectful with other board members,” says Berthelot.