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HOW TO CHOOSE PROFESSIONAL ADVISERS FOR A NEW VENTURE Part 5: Board of Directors

image of selected board of directors.
image of selected board of directors. Photo Credit: Pixabay.com

The decision to have a board of directors is influenced by the legal form of a business venture. If the new venture is a corporation, a board of directors is required and is elected by the shareholders. If the business needs venture capital, a board will be necessary, and the venture capitalist will probably demand a seat on it.

Boards of directors serve a valuable purpose; if chosen correctly, they provide expertise that will benefit the new venture.  In that capacity, they act as advisers. They also assist in establishing corporate strategy and philosophy. They do not have the capacity to sing contracts or commit the corporation legally. Instead, they elect the officers of the corporation, who are responsible for the day-to-day operations.

It is important to distinguish when boards of privately owned corporations and those of publicly owned corporations. In a privately owned corporation, the entrepreneurial team owns all or the majority of the stock, so directors serve at the pleasure of the entrepreneur, who has effective control of the company.

On the other hand, directors of publicly traded companies have legitimate power to control the activities of the company and the liability for what they do or fail to do. They are elected by the shareholders and represent the shareholders’ interests in the company.

Boards can comprise of inside or outside members or a combination of the two. An insider board member is one who is a founder, employee, family member, or retired manager of the firm, whereas an outside board member is someone with no direct connection to the business. Which type of board member is better is a matter of opinion and circumstance; research has not provided any clear results on the issue.

In general, however, outside board members are beneficial for succession planning and for raising capital. They can often bring a fresh point of view to the strategic planning process, along with the expertise that the founders may not possess.

 

Insiders have the advantage of complete knowledge about the business; they are generally more available and have demonstrated their effectiveness in the particular positions they occupy in the business.  Often the company Chief Executive Officer (CEO), Chief Financial Officer (CFO), and in-house Attorney sit on the board. But there are political ramifications when the board members report to the CEO; insiders may not always be objective and independent. They may not have the broad expertise from outside the company that is necessary to guide the growth of the business effectively.

 

When choosing people to serve on the board of directors, entrepreneurs should consider those who have:

  • The necessary technical skill related to the business
  •  Significant, successful experience in the industry
  • Experience running a company at that level the entrepreneur wants the company wants to grow to next.
  • Important contacts in the industry.
  • Expertise in finance, capital acquisition, and possibly IPOs.
  • A personality compatible with the rest of the board.
  • Good problem-solving skills.
  • Honesty and integrity, to engender a sense of mutual trust.

If the entrepreneurial team is not careful, it may learn too late that a director it has appointed to the board considers the position an appointment for life, much like being appointed to the Supreme Court. To prevent such a misunderstanding, and to bring a fresh point of view to the board, directors should be asked to serve on a rotation basis for s specified period of time.

 

The board is headed by the chairperson, who, in a new, private venture, is typically the lead entrepreneur. The entrepreneur is also likely to be the president and CEO. The current trend is for the CEO and perhaps the Chief Operating Officer (COO) to be the only inside members of the board.

Depending on the type of business, boards normally meet face-to-face an average of five times a year and through teleconferences as necessary. How often the board meets will be largely a function of how active it is at a given time.  Directors typically spend about nine to ten days a year on duties related to the business and are usually paid a retainer plus per-meeting fee. Their expenses are also reimbursed. The compensation can take the form of cash, stock, or other perquisites.

 

Today, it is more difficult to get people to serve as directors because in some cases they can be held personally liable for the actions of the firm, and the frequency with which boards are being sued is increasing. For this reason, potential directors often require that the business carry directors’ and officers’ (D&O) liability insurance to indemnify them.

 

The expense of this insurance is often prohibitive for a growing company, but it is essential in getting good people to serve, Additional expenses related to the development of a board of directors include meeting rooms, travel, and food. Because e of the expense  of maintaining a formal board of directors, many entrepreneurs with new ventures maintain a small insider board of directors and rely heavily on their informal advisory board for a more objective perspective.

The decision to have a board of directors is influenced by the legal form of a business venture. If the new venture is a corporation, a board of directors is required and is elected by the shareholders. If the business needs venture capital, a board will be necessary, and the venture capitalist will probably demand a seat on it.

Boards of directors serve a valuable purpose; if chosen correctly, they provide expertise that will benefit the new venture.  In that capacity, they act as advisers. They also assist in establishing corporate strategy and philosophy. They do not have the capacity to sing contracts or commit the corporation legally. Instead, they elect the officers of the corporation, who are responsible for the day-to-day operations.

It is important to distinguish when boards of privately owned corporations and those of publicly owned corporations. In a privately owned corporation, the entrepreneurial team owns all or the majority of the stock, so directors serve at the pleasure of the entrepreneur, who has effective control of the company.

On the other hand, directors of publicly traded companies have legitimate power to control the activities of the company and the liability for what they do or fail to do. They are elected by the shareholders and represent the shareholders’ interests in the company.

Boards can comprise of inside or outside members or a combination of the two. An insider board member is one who is a founder, employee, family member, or retired manager of the firm, whereas an outside board member is someone with no direct connection to the business. Which type of board member is better is a matter of opinion and circumstance; research has not provided any clear results on the issue.

In general, however, outside board members are beneficial for succession planning and for raising capital. They can often bring a fresh point of view to the strategic planning process, along with the expertise that the founders may not possess.

Insiders have the advantage of complete knowledge about the business; they are generally more available and have demonstrated their effectiveness in the particular positions they occupy in the business.  Often the company Chief Executive Officer (CEO), Chief Financial Officer (CFO), and in-house Attorney sit on the board. But there are political ramifications when the board members report to the CEO; insiders may not always be objective and independent. They may not have the broad expertise from outside the company that is necessary to guide the growth of the business effectively.

When choosing people to serve on the board of directors, entrepreneurs should consider those who have:

  • The necessary technical skill related to the business
  •  Significant, successful experience in the industry
  • Experience running a company at that level the entrepreneur wants the company wants to grow to next.
  • Important contacts in the industry.
  • Expertise in finance, capital acquisition, and possibly IPOs.
  • A personality compatible with the rest of the board.
  • Good problem-solving skills.
  • Honesty and integrity, to engender a sense of mutual trust.

If the entrepreneurial team is not careful, it may learn too late that a director it has appointed to the board considers the position an appointment for life, much like being appointed to the Supreme Court. To prevent such a misunderstanding, and to bring a fresh point of view to the board, directors should be asked to serve on a rotation basis for s specified period of time.

The board is headed by the chairperson, who, in a new, private venture, is typically the lead entrepreneur. The entrepreneur is also likely to be the president and CEO. The current trend is for the CEO and perhaps the Chief Operating Officer (COO) to be the only inside members of the board.

Depending on the type of business, boards normally meet face-to-face an average of five times a year and through teleconferences as necessary. How often the board meets will be largely a function of how active it is at a given time.  Directors typically spend about nine to ten days a year on duties related to the business and are usually paid a retainer plus per-meeting fee. Their expenses are also reimbursed. The compensation can take the form of cash, stock, or other perquisites.

Today, it is more difficult to get people to serve as directors because in some cases they can be held personally liable for the actions of the firm, and the frequency with which boards are being sued is increasing. For this reason, potential directors often require that the business carry directors’ and officers’ (D&O) liability insurance to indemnify them.

The expense of this insurance is often prohibitive for a growing company, but it is essential in getting good people to serve, Additional expenses related to the development of a board of directors include meeting rooms, travel, and food. Because e of the expense  of maintaining a formal board of directors, many entrepreneurs with new ventures maintain a small insider board of directors and rely heavily on their informal advisory board for a more objective perspective.

Bernard TaiwoBernard Taiwo
Bernard Taiwo
I am Management strategist, Editor and Publisher.

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