If you have chosen to organize your company as a corporation, you are legally required
to have a board of directors. Whereas your management (i.e. CEO and president)
oversees the daily decision making of your company, your board guides the overall
direction of your company.
The size of the board you must have varies by state, but the number of directors on the
board cannot exceed the number of corporate shareholders, and in many states a
board must be comprised of no fewer than three people. The CEO and president of a
small business report to the board of directors, who can, in some cases, vote them out
of the company or override their decisions. In many cases, however, the president or
CEO owns a bulk of the company's stock, limiting the power of the board to override
their decisions.
Large public companies pay directors for their membership, but small companies are
more likely to provide board members with an interest in the company or just a free
lunch or dinner when the board meets.
When you are creating a board of directors, you must decide on an "inside" or "outside"
board. An inside board is comprised of friends, family, and contacts you trust, and is
what most small business owners form first. An outside board is made up of people you
recruit based on their skills because you need them to expand your business. If your
company is looking for an acquisition, or thinking about an Initial Public Offering (IPO),
you may need talent that you can only get from an outside board of directors.
If your business is not incorporated, you may want to form a board of advisors. An
advisory board is more informal than a board of directors in that it generally does not
have regular meetings, and even in larger companies advisory board members are
often not compensated for their services. An advisory board is also not usually
authorized to oust a CEO and is created primarily to provide business advice to a
company.
Tips on putting together a board of directors:
- Create a board that complements existing management
Look for people who bring new areas of expertise to your company. For example, if you
own a small technology company but don't have any marketing background, search for
board members who can provide the marketing experience you need.
- Chart your management needs
Create a chart to determine the kind of talent needed to move your company ahead.
List the skills your management possesses. You can then make a list of the skills sets
you need to acquire and the people who possess those skills.
- Use a headhunter
Some executive recruitment companies specialize in recruiting directors and
management professionals/executives. For a fee they will locate board of director
candidates for you. If you choose this route, keep in mind that the search firm must
have a good understanding of you, your company, and the talents you seek in order to
be able to recruit effectively for you.
- Use your network of colleagues and friends
A well-rounded board of directors can be formed from your former school mates,
vendors, professional service providers and social acquaintances. Make a list of
candidates from this field and then vigorously scrutinize the list to ensure you are
choosing the right talent for your company, not just people you like.
- Keep board size manageable
The smaller your board, the more efficiently it is likely to operate. Unlike large
companies that recruit high-profile board members to enhance corporate image, the
board of a small company is usually a working board. The exception to this rule is if your
small company is going public and needs a larger board to guide you through the
process.
- Make sure the CEO contacts board prospects
Once you have identified board member prospects, the CEO should call those
individuals. If you are the CEO, you should explain who you are, provide details of the
corporation, how the individual's name came to your attention, and state that you would
like to have an appointment to talk about possible participation on the board.
- Look for people who know how to raise capital
Even if your company does not need to raise capital now, it most likely will at some
stage. Board members who have a strong financial background and knowledge of how
to raise money are always an asset.