BUILDING A SOLID BOARD of directors that is dedicated to serving your company’s best interests greatly enhances your chances for success.Attracting a board in the wake of Enron, Worldcom, Qwest and other corporate scandals may be more challenging than ever.
To structure a board and attract productive board members, follow these practical tips:
Assessing needs. Carefully contemplate the expertise that will be required. Consider the issues and goals faced by your company. For example, if you are struggling with finances, seek a member with strong financial skills. However, don’t fill your entire board with financiers — diversification is key.
Seek a variety of individuals who augment the skills and experiences of your management team. Avoid filling the board with individuals who have no identifiable expertise to contribute; are relatives, friends or close colleagues; or whose main contribution is that they have invested in the business.
Most companies are likely to need expertise in operations, administration, finance and sales. Even though you plan for management to have all of these skills, consider having these skill sets represented on your board to better augment and communicate with the management team. Consider less obvious needs — maybe you need someone who has successfully been involved in complex distribution relationships.
Identifying candidates. A general rule is not to offer board seats to professionals and others with whom you already have a strong relationship. Your accountants, attorneys, family, and friends should be willing and able to participate and contribute without an active vote on the board.
Don’t be afraid to pursue candidates who seem beyond your circle or a bit out of reach. Use your networking skills and business contacts to help create an initial contact. Successful businesspeople in the local community are often willing to help others advance their entrepreneurial dreams. Even if they don’t have the time to commit personally, they are likely to know others who might.
Attracting board members. Before you approach potential board members, consider the type of commitment you anticipate. How often will you meet and what are your other expectations? Be prepared to answer the difficult questions about your business, the challenges you face, and the risks involved.
If liability concerns arise, there are ways to alleviate them. If your business is later stage with quantifiable risks, consider obtaining director and officer liability insurance. This may be too costly and a premature move for many early stage companies where risks are truly nominal and cash is king.
Consider developing a board of advisers. The commitment to such a board is likely to be viewed as less significant both in terms of regular activity and duration. One of the benefits of a board of advisers is that it can have the same positive impact of a board of directors but, because management isn’t legally obligated to follow the direction of its board of advisers, there isn’t any real exposure for those who act in this capacity. In addition, you may be able to use your board of advisers as a “courtship” prior to formal board of director status once both parties are comfortable.
Retaining board members. Once you have established your board, two questions arise: how do I retain these people as board members? and how do I prevent these individuals from becoming “deadwood directors”?
Companies use many approaches to compensate their boards, ranging from meals at meetings to actual cash compensation and the granting of equity or options. Part of how to compensate your board, if at all, will be dependent on several factors. What can the company afford? Is the board member also an investor in the company? If yes, that individual should already have some incentive to contribute value.
The more you expect for a time commitment, the more you may need to offer as an incentive for the person to stay involved in the company. As a general rule, if the board members are also part of management, they should not receive any additional compensation. Only outside directors (nonemployee directors) should expect some compensation for their efforts.
Board size and composition. When determining the composition of your board, start by thinking what your board needs to accomplish. Optimal composition may vary according to the position in your businesses life cycle, its mission, and its fundraising necessities.
One of the few axioms in picking the size of the board is to choose an odd number of persons. Boards tend to act unanimously. However, when disagreement does exist it’s better to have resolution than stalemate.
Select a board size that is nimble enough to get through an agenda, where the conversation can flow, and where voices can be heard. In a company positioned for rapid growth, be careful about having a board that is too large to move at the speed you will need. The best boards we work with are typically not larger than seven members, and there are many boards composed of three or five members that are exceptionally effective.
Having two engaged board members with relevant experience is better than having seven who don’t contribute. Be conscious of the size and stage of your company. A high-profile board member with relevant skills who has spent the last two decades at a large successful company may not understand why a start-up doesn’t have the level of formality or the structure they’re used to.
Developing an effective board is much more art than science. If there were truly only one way to do it, all boards would look and feel the same. Think about your business – evaluate its strengths and weaknesses, your personality, your expectations, and its stage of progress.
And most importantly, once you have your board, use it. Listen, communicate and encourage dialogue. Many boards suffer because the “Minnesota nice” approach inhibits individuals from saying what they really believe or questioning things they don’t understand. Welcome input and don’t be defensive.
[contact] Daniel Tenenbaum is chair and Les Korsh a member of the entrepreneurial services practice group at the law firm Gray Plant Mooty in Minneapolis, where they advise entrepreneurs in all stages of business: Tenenbaum at 612.343.2978; dan.tenenbaum@gpmlaw.com; Korsh at 612.343.2887; les.korsh@gpmlaw.com; www.gpmlaw.com
