Choosing a board of directors is an important step in creating your business structure. Getting advice from experienced, connected business people in your industry and related industries can fast-track your growth. Also, some types of corporations require you to have a board of directors by law. Here’s how to choose a board of directors for your company.
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Responsibilities of a Board of Directors
Before choosing a board of directors, it is important to know what the board’s responsibilities are. While the executive management team like the president, CEO, and CFO are all there to handle the day to day responsibilities, the board often includes outside experts to help with the general and overall direction of the company.
The duties of a board of directors are usually outlined in your company bylaws. They generally consist of the following responsibilities:
- Define a Mission – The board can help define the mission of the new business. Their expertise is vital in refining the main purpose of the company and setting that purpose into a written mission and overall goal.
- Approve CEO and Management – In most cases of an incorporated business, the board has authority to hire and approve the main management, including the CEO, CFO, and other top management.
- Financial Direction – When it comes to finances, the right board can offer sound financial advice for the direction of the new small business.
- Oversight – It is always a good idea to have the board as the “outside eyes” of the company and direct the oversight of strategic plans, ethics, policies, etc.
Difference Between Board of Directors and Board of Advisors
While the terms might sound similar, there is a big difference between choosing a board of directors and a board of advisors.
Directors usually have a fiduciary responsibility to your company. This means that they are ethically responsible for the high level decisions relating to corporate decisions. Directors can vote to decide who will lead the company. They can also be sued if a shareholder deems their actions to be against the best interest of the company.
Board of Directors often receive stock options and cash as compensation. When venture capitalists invest in a company, part of the deal usually includes a board of directors seat so they can oversee how their investment is managed.
It is important that you know how to choose a board of directors for your company because they may have the authority to vote the management team out due to performance or other issues. If you are the CEO, this means your board can kick you out – like Apple’s board fired Steve Jobs in 1985.
Advisors typically do not have fiduciary responsibility. They can provide input, but they do not have voting rights to change senior management, like the CEO or president. Think of a board of advisors as the people who provide mentorship and guidance for your business. You may choose to compensate them with stock options or cash.
Qualities of a Good Board Member
What are the qualities of a good board of directors member? Oftentimes, the board of a small business consists of friends, family, and trusted individuals. When it comes down to it, you want a board that will be willing to put the time and effort into helping your business through both tough and easy times.
Here are qualities to look for when choosing a board of directors:
- Experienced – Your board is there to offer advice and direction. Don’t choose a board member simply because he or she is a friend or family member. Pick one based on experience in analyzing information and making sound decisions.
- Competent – Your board of directors should be competent for the purpose of your business. While it may seem desirable to have a real estate agent on your board, it may not do you any good if you need advice and direction in computer software engineering.
- Enthusiastic – You, of course, want a board full of members who are excited about your business prospects. Be sure your board is enthusiastic about helping your business succeed.
- Honest – A bunch of “yes men” are not helpful in setting up business strategy and direction. Find a board that is ready to be honest with their opinions.
How to Choose a Board of Directors
Unlike your family, you have the opportunity to pick and choose your board members. Do it like you were assembling the “dream team” of the Olympics. Choose wisely.
One important thing you need to decide when choosing your board of directors is whether they will be compensated. Most larger corporations pay their board members generously, plus provide additional compensation for travel, room, and food allowance for meetings. In the case of smaller businesses, compensation may be interest or shares in the company or even just a catered meal during board meetings.
Some other nuggets to keep in mind when choosing a board of directors:
- Keep the board size manageable. Too many voices and opinions could keep your small business from moving forward.
- Find board members who can raise money. If your small business needs financing, a board with contacts and experience with raising money could be a valuable addition.
- Complement existing management. A board of directors that has similar temperaments, risk aversion (or taking), and enthusiasm can create great synergy with existing executive directors.
Have Members Sign a Board of Directors Contract
When you bring on a board of directors, you should have them sign a board of directors contract. This agreement is designed to clarify their responsibilities, compensation and other points.
Download a fill-in-the-blank board of directors contract and many other board of directors agreements to use as starting points for your own (provided by our affiliate partner, US Legal Forms):
Remember, if your small business is incorporated, a board is required by law. Whether you are filling a required board position or looking for additional insight, interview your board members carefully. By knowing how to choose a board of directors for your company, you can create a valuable asset that will help you grow.