After a lot of hard work and effort, you’re finally ready to take your company to the next stage by creating a board of directors. Maybe your fundraising and board seats are a crucial piece of leverage, or maybe you’re just ready to incorporate on your own. At any rate, there are a lot of considerations to properly assembling your board of directors.
Read on to get a full view of the role of a board of directors, their responsibilities, and how to best work with your own board.
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What is a board of directors and what does it do?
If your business is a corporation, state law requires that you have a board of directors. Board members are appointed by the shareholders, and their chief responsibility is to keep the company profitable. As part of this responsibility, boards create and oversee a company’s high-level strategy, including hiring and firing upper management.
Board members also:
- Create and uphold the corporate bylaws (the company’s operating rules)
- Develop and modify the company mission statement
- Provide oversight of corporate officers
- Approve financial statements
- Make announcements at the annual shareholders’ meeting
- Act as mentors to the CEO and possibly to other corporate officers
Positions and roles of the board of directors
The board of directors includes the following positions:
- Chairperson/President: This member is responsible for running board meetings, representing the board and the company at events, and generally keeping the board functioning.
- Vice Chairperson/Vice President: This member assists the president and will take over as chair if the existing chair leaves. Not all boards appoint a vice president. Particularly small companies may not need a direct line of succession for board leadership.
- Secretary: This member takes the board meeting minutes and is also responsible for general record-keeping. Most states require corporations to keep such records, so the secretary position is vital to keeping your business in compliance with state law.
- Treasurer: This member manages and reports on the company’s finances. Many small corporations combine the secretary and treasurer roles into one.
- Board Member: Any member of the board of directors who doesn’t fill one of the above roles is simply referred to as a board member. Members attend meetings, contribute to decisions, and vote. Most states require that the majority of board members attend and vote at meetings, so every member has a crucial role to play in keeping the company running.
Boards often create committees to manage certain tasks. For example, many boards create an executive compensation committee to set compensation and bonuses for corporate officers. Microsoft’s board of directors layout is an excellent example of setting up committees and assigning members. Each of their committees has its own chairperson and three members, providing enough manpower to handle each set of duties. This allows them to spread important tasks out across the entire board.
Board member responsibilities
Board members are obligated to act in the company’s best interests at all times—they are considered fiduciaries for the companies they serve. This means that they are legally required to put the company’s needs ahead of their own interests.
Each state has its own Business Corporation Act (BCA) with slightly different rules and standards for boards. But all BCAs stress the same two duties as being most crucial for board members:
Duty of care
Board members must make decisions based on what’s best for the company—or at least what they reasonably think is best. It’s OK for board members to make decisions that turn out to be mistakes, as long as they make reasonable efforts.
As part of the duty of care, board members are expected to attend meetings, pay attention to reports that corporate officers and committees present, and actively participate in decisions. A board member who doesn’t meet these minimum standards could be in violation of his or her fiduciary duty. In a worst-case scenario, this could have legal consequences.
Because most states require a certain percentage of members to be present in order to hold a vote, failing to attend meetings could cause real problems for the board. If frequent absences bring the board’s activities to a halt, that would certainly violate the member’s duty of care.
Duty of loyalty
Board members will frequently encounter opportunities that they could use for personal profit or advancement. The duty of loyalty says that members need to give the company a first shot at those opportunities. Only if the company declines to follow up can an individual member then pursue it for themselves.
For example, if a board member discovers an opportunity that would be perfect for their own business while doing work for the board, they are required to first alert the other board members to the opportunity. If the board decides not to take advantage, the member can then take action for their own company instead.
The duties of care and loyalty have the highest priority, but they’re not the only board member duties. Members are expected to uphold the duty of confidentiality, duty of good faith (which requires board members to obey state and federal laws), duty of disclosure (primarily to the stockholders), and duty of prudence as well.
How to choose directors for your board
Shareholders have the ultimate responsibility for appointing directors, but founders are usually the ones who get to search for, select, interview, and nominate candidates for the shareholders to consider. That gives founders a huge opportunity to select potential board members who can do the best possible job of overseeing the company.
Outside vs. inside members
Most boards of directors include both members who are employees of the company, such as the CEO, and members who are not involved in day-to-day operations. The latter are called independent or outside members, and they can be a crucial resource for founders. Outside members are frequently high-level executives of other corporations, sometimes very large ones. Such members typically join the boards of small, promising companies, to both act as mentors and to foster potentially useful connections with such companies.
Publicly-traded companies are required to have a certain percentage of outside members, but private companies have a lot more latitude. But even a small, private company would be wise to appoint one or more outside directors. Outsiders can provide a fresh viewpoint and knowledge and experience that your team may not have. Plus, outside board members can use their business networks and other external resources to help complete important tasks, such as sourcing new corporate officers.
Choosing outside members
Start by putting together a profile of what you’re looking for in a board member. All board members should have certain characteristics: Integrity, relevant experience, time and willingness to meet responsibilities, and the ability to work both independently and as part of a team. Other important board member qualities include:
- Experience as a CEO. Board members who have already successfully run a company have useful skills and experience to lend yours.
- Industry experience. A member who has worked in your company’s industry will already be familiar with your customers, best practices, and means of doing business. However, make sure there’s no conflict of interest (i.e., a relationship with a competitor).
- Specialized knowledge. Aim for a group with deep experience in different fields. For example, you’d want a treasurer with a strong financial background, at least one or two members with a technical background that matches your product or service, and a sales and marketing expert. The more diversity you have, the better.
- Broad knowledge. In addition to that specialized knowledge, look for members who each have backgrounds in other areas this will make it easier for members to see eye-to-eye. For example, if your finance wizard also has some marketing experience, they’ll be able to frame their financial advice in terms that your sales and marketing expert will understand and appreciate.
Finally, while the appropriate number of board members will depend on your company’s size and complexity, it’s best to choose an odd number of members to avoid ties when voting.
Board meeting basics
Board meetings typically happen every four to six weeks. During the first board meeting, your board of directors will elect officers and authorize them to do various things (i.e., authorize the treasurer to open bank accounts for the business), formally adopt the company’s bylaws, appoint duties, and schedule future meetings and activities.
In future meetings, board members will usually open the meeting by listening to the minutes of the previous meeting. Then, individual members will present reports on what they’ve discovered and accomplished since the last meeting. The board will discuss these reports and vote on decisions based on this new information.
Meetings usually conclude with general discussion, and individual members may raise new concerns to be investigated and then discussed at the next meeting. These are generally referred to as “new business” in the agenda. Any agenda items that the board doesn’t discuss or resolve during the meeting will be moved to the next meeting’s agenda as old business.
DocSend board management software can make it much easier for your board members to uphold their duty of confidentiality by allowing you to share confidential materials like financials and board packets easily and securely. That way, your board can worry less about managing documents and focus tightly on making your company a lasting success.