How Your First Board of Directors Shapes Your Company
Entrepreneur's New Year’s Guide
Congratulations! You've grown your business, and your company has expanded. It's time to assemble a board of directors (BOD) to help protect, govern and manage all you've built.
The good news: You're successful enough to need a BOD.
The bad news: You'll never again be completely your own boss. Choosing the people who will serve on your BOD is critical -- especially if you don't want them to fire you.
Why create a BOD?
BODs exist to represent the interest of all shareholders. If you maintain 51 percent of your company’s equity, then the board actually answers to you. If you took venture capital, diluted shares or even went public, then odds are you report to the BOD. The shareholder always is the boss. The BOD serves as the shareholders' representative and has authority to execute their will, which could include replacing you.
Related: A Startup Founder's Biggest Blunder?
The BOD oversees company operations. The entity works as a team of typically of five or more people who possess knowledge about your industry, markets and competition. BODs often are divided into several subgroups, or committees, each with a focus on a key aspect of your business:
- Audit Committee: A minimum of two members qualified to read and interpret financial statements
- Corporate Governance Committee: Ensures the company is following all government regulations and corporate laws (and if you are public, listing regulations)
- Nominating Committee: Identifies candidates to fill BOD and senior-management roles
Your full BOD will meet quarterly, though team members can meet as needed. When the full board gathers, its primary job is to communicate. Members will receive a financial-status update, hear reports on legal or regulatory issues and learn about progress from each committee.
These basic reporting activities keep the board informed so members can confer with top management about the company's condition and outlook. Because legal matters might revolve around these discussions, full and complete records must be captured and preserved. It's essential for your general or outside counsel to attend and provide contextual understanding for any legal issues that arise.
The CEO’s dilemma.
Your BOD members should know your industry, and there are times they'll second-guess the strategic decisions that you and your executive team make. The short-term desires of shareholders can be in direct opposition to the long-term vision of the CEO, especially a founding CEO. When the two interests diverge too greatly, conflicts arise between BOD and CEO. Generally, CEOs who push too far or too fast lose ground and often are replaced.
This is the CEO’s dilemma when selecting board members. Stacking the board with idolizing sycophants reduces the perspective the BOD can offer the CEO. Leaders benefit when many eyes watch from the top. But a BOD easily swayed by the fickle nature of investors and their desire for short-term profit can dismiss truly visionary CEOs and crush world-changing missions.
The goal, then, is to appoint individuals who understand and share the CEO's vision but otherwise perform the due diligence of impartial board members. The two extremes should not be in conflict. If conflict arises, one of three shortcomings typically is to blame: The leader’s vision is wrong, the board members are poor fits or the shareholders don't have the right investment horizon for your company.
Related: 10 Qualities of Authentic People
Structuring the board.
When you select your first BOD, set rules so members can serve your company well while still respecting your vision as its founder. Consider these important factors.
Term of Service: Board membership should be a maximum of one year, with the option to re-elect each member. And, like congressional representatives, board members should not serve forever.
Limited External Participation: BOD members often serve on the boards of several corporations. There's a limit to every human’s attention span, so choose and keep members who will sit on no more than one other board.
Industry Experience: At least three of your board members should have senior management experience in your industry. Outside eyes and new perspectives are great (Lou Gerstner went from running Nabisco to running IBM -- from cookies to computers -- and saved the computing giant), but deep knowledge of your markets is an essential component.
Leadership: Regardless of specific industry experience, BOD members should have proven leadership track records. They are part of your company’s leadership team and must be able to see and advance big-picture issues.
Vetting: Because this is your first BOD, your entire senior management team should interview each candidate. As you continue to grow, the entire board should interview new candidates. This helps establish continuity of purpose and maintain institutional knowledge.
During my tenure as the founding CEO of Micrel, I had five different boards. Each made a difference in how my company thrived and how we kept our shareholders happy.Your BOD is like a highly trained watchdog. It exists to keep the company safe, but it can turn on you if you are incorrectly perceived as a threat. Multiply your leadership and select BOD members who know your industry and champion your long-term vision for the business. By keeping their eyes wide open, they can help you make that vision a reality and achieve more than you've already accomplished.