Old men in three piece suits. Oak panelled walls. Cigar smoke. That's what many people picture the moment they hear "board of directors."
We'll cover what a board is, what it does, and how it's chosen. Then we'll look at which businesses are legally required to have a board, and which ones can elect one by choice. Finally, we'll explain how you can set up a qualified board of directors, and chair board meetings of your own.
A board of directors is a group of professionals who are elected to represent the shareholders of a company. The shareholders are people who have money invested in a company. That could be because they purchased stock, invested venture capital, or founded the company on their own dime.
Typically, the board is chosen by the people who first incorporate the business—usually the founders. Later on, those members are either re-elected or replaced, once shareholders hold a vote.
Non-profit companies have boards of directors as well. In their case, since there are no shareholders, the board members select new members themselves.
The board's job is corporate governance. That means they establish policies for how the company is run; set broad, long-term goals; make sure the company has enough money to keep operating; and choose who to hire for executive management positions. They also decide how stock options and dividends are issued.
Board members may or may not be compensated for their time and effort.
Some types of business are required by law to elect a board of directors. Others can make the choice for themselves.
Every C corporation or S corporation is legally required to elect a board of directors.
If you run an LLC, or partnership, you don't have to elect a board of directors—but you may choose to do so. Later in this article, we cover the pros and cons.
The typical board ranges in size from three to 31 members. Some business analysts claim the best number is seven. But there's no magic number.
There are two different types of people on the board—inside and outside directors. Then, there are specific positions those members fill.
An inside director already plays a role in the operation of the company before joining the board. Usually, this means they're an executive, major shareholder, or another stakeholder whose decisions make an impact—like a union rep. An inside director should have the best interests of major shareholders, officers (CEO, COO, etc.) and employees in mind. They aren't typically paid for serving on the board.
An outside director isn't involved in the day-to-day workings of the company. Their duty is to bring an external, neutral eye to board and company disputes, and help settle them. People filling this role may be venture capital investors, or experts in the company's industry. They're often compensated for serving on the board.
Remember the oak-panelled room and the guys smoking cigars? The boards of directors for most businesses don't look like that. If you're unsure whether your business needs one, consider a few example boards of directors:
You don't need to be Global Megacorp Inc. to have a board of investors. That being said, take into account the pros and cons before you form one.
You aren't a business tycoon. Your company is small—maybe it doesn't even issue shares. So why should you care about having a board of directors?
You can draw on a deeper well of expertise
Brian Hamilton, a seasoned entrepreneur, has consulted with hundreds of companies of every size. He says,
Entrepreneurs, founders and CEOs have common characteristics, one of which is that they are, on average, very strong-willed individuals"¦. They struggle with the process of obtaining (and then integrating) advice from outside sources.
If your business has traditionally been a one-person show, with you as the star, bringing on a board can be a good way to make sure more opinions are taken into account.
Even if you're an expert in your industry, hearing new perspectives—and talking through differences of opinion—can help you break out of traditional patterns and make new strides.
You'll put official processes in place
Once you've got a board of directors, you're more or less forced to formalize some aspects of business planning. These may be tasks you've always done on the fly—but, once the board is handling them, they get the treatment they deserve.
Examples of these processes include:
You may especially benefit from a board of directors if"¦.
Having a board of directors means adding another layer of organization to your company. You'll need to select initial members, create regulatory guidelines, hold meetings, and keep minutes.
If your business runs lean, you're confident in the leadership, and you don't have shareholders clambering for representation, you may be better off without a board.
You also likely won't benefit from a board if:
Depending on whether you're incorporating your company at the same time, the process for putting in place a board of directors will differ. But generally, you can follow these steps:
Again—this is only necessary if you're incorporating. Corporations are regulated at the state level. So, you file your Articles of Corporation with the Office of Secretary of State in the state where your business operates.
The Articles of Corporation act as your corporate charter. They include the name of your corporation and the names of the people incorporating, its purpose, its status (non or for-profit), the amount and types of stock being issued.
While it varies state by state, typically you must select an initial board of at least three people.
Your board bylaws lay out corporate governance rules—the structure of the board, and the rules it follows.
The bylaws describe:
You can create your own bylaws from scratch, or sign up for an automated online service that will draft bylaws according to your needs.
Once a board is selected during incorporation, it needs to be validated by shareholders. A shareholder meeting is a chance for the shareholders to officially accept the board, or elect new members.
The board of directors contract lays out the duties of the board members, the purpose they serve as members, and what happens if a board member fails in their duties. Every member needs to sign this agreement.
Once the board has been selected and put in place, it's time to go ahead and hold your first board meeting.
Board meetings happen on a regularly recurring basis—as set out in your bylaws—and follow a standard format. It's the Chairperson's duty to plan, call, and preside over a board meeting.
Before the meeting starts, the Chairperson needs to notify the right people in advance. These are usually board members, shareholders, and employees. Precisely who get notified, and how, is outlined in your board's bylaws.
Also, the Chairperson is responsible for drawing up an agenda for each meeting—an outline of what board members will discuss. If the agenda calls for any research to be presented, it's up to the Chairperson to send the results of that research to board members before the meeting starts. Examples include research into new markets, competitors, or products.
It's up to the Secretary of the Board, during the meeting, to take down minutes. These can take the format of a typed document, an audio recording, or a video recording.
At the next meeting, the board votes to approve the minutes. This time between two board meetings doesn't just give the Secretary time to type up the minutes. By approving them as a group, the board is agreeing on one official version of reality—who said what, and what they decided.
Why keep minutes?
Minutes make the board meeting a matter of official record. You can use them to look back and recall decisions the board made. Also, in the case of an IRS audit, you'll need to provide comprehensive minutes for all your board meetings.
What do board minutes look like?
Meeting minutes aren't a verbatim copy of what was said in the meeting. They're an outline that summarizes decisions, debates, and points made. Most importantly, they include the outcome of board votes.
Every copy of board minutes begins with the time and date of the meeting, and the names of everyone present at the meeting, including guests.
With only a few variations, the following series of events needs to take place during every board meeting.
There's one final step the Chairperson can take. They may follow up with the CEO to review anything from the meeting they need to discuss before the secretary writes up the minutes.
A board of directors is an important decision-making body, not a recreational softball team—you can't just call up a few friends and see if they'd like to join.
When you're picking board members—whether to nominate them, or to appoint them when you incorporate—ask yourself the following.
Do they have conflicts of interest?
If they stand to benefit financially or professionally from any decisions they make on the board, a person's choices could be impacted. Or, for instance, you don't want any board members whose spouse works for a competitor.
What kind of expertise do they offer?
Ideally, each board member will be a specialist in one field relevant to your business. That could mean they're a CTO with decades of software development experience, or an investor who has backed other, successful companies like your own.
Do they have leadership experience?
It's not enough for a board member to know your business well. They need to be familiar with making big decisions. The most experienced employee at your auto body shop may know everything there is to know about cars. But unless they've run their own department—or independent business—before, you probably don't want them on your board.
Are they committed to the business?
Your board members should have a personal stake in the long-term success of your business. No matter how knowledgeable they are, the freelance business consultant you've contracted may not care all that much about whether you succeed or not.
Do they have the time?
If one of your investors already sits on three other boards, and runs her own business, she may not have the time and energy to devote to a role on your own board.
Can they raise money for you?
Many board members have value because they know how to get your business funding. That could be because they've helped bring on hundreds of millions in Silicon Valley venture capital for other companies, or because they're on a water polo team with the captains of industry in your town. Either way, if you're planning on taking on new investors, they're the person you want on your board.
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