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Picking your first Board of Directors

Picking your first Board of Directors
In Entrepreneurs, Management

Congratulations! You have grown your business to the point that you need a board of directors (BOD). The good news is that you have been successful enough to need a BOD. The bad news is that you need a BOD and will never again be completely your own boss.

Picking your board 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 really answers to you. If you took venture capital, diluted shares or even went public, then odds are you report to the BOD. This is because the shareholder is always the boss, and the BOD exists to be their representatives and to execute their will, which could include replacing you.

The BOD oversees company operations.  They work as a team, composed typically of five or more people who know something about your industry, markets and competition. Often the BOD is divided into several teams that focus on key aspects of your business, such as:

  • 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: Finds new board and senior management candidates

Your full BOD will meet quarterly, though team members can meet as needed. When the full board gathers, their primary job is to communicate. This includes a general financial status update, reports on legal and regulatory issues, and reports by all the committees. These basic reporting activities are the baseline, keeping the board fully informed as they will be conferring with top management about the condition and outlook of the company. Since legal matters may revolve around these discussions, full and complete records must be captured and preserved, and the attendance of your general or outside counsel is essential in understanding any legal issues that may arise.

The CEO’s dilemma

Because your BOD should know your industry, they will second guess you and your executive team’s strategic business decisions. Often the short-term desires of shareholders conflicts with the long-term vision of the CEO, especially founding CEOs. When the two diverge too much, a conflict between the BOD and the CEO arises. If pushed too far, the CEO often loses and is replaced.

This is the CEO’s dilemma when selecting board members. Stacking the board with idolizing sycophants reduces the perspective of the CEO. A leader benefits from having many eyes watching 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 board members who understand and agree with the CEOs vision, but otherwise perform the due diligence of impartial board members. The two extremes should not be in conflict, and if the conflict arises, then either the leader’s vision is wrong, the board members are poor fits, or the shareholders have the wrong investment horizon for your company.

Picking a good board

When you select your first BOD, set the rules so that your vision is respected and your company is well serviced.

Term of Service: Board membership should be a maximum of one year, with the option to re-elect each member. And, like congressmen, they should not serve forever.

Limited External Participation: BOD members often serve on the boards of several corporations. There is 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 he saved IBM) but deep knowledge of your markets is essential for your BOD.

Leadership: BOD members, regardless of their industry experience, should have a proven leadership track record. They are part of your company’s leadership team, and thus must be able to lead.

Vetting: Because this is your first BOD, each candidate should be interviewed by your entire senior management team. As you continue to grow, the entire board should interview new candidates. This helps perpetuate continuity.

During my tenure as the founding CEO of Micrel, I had five different boards. They make a difference in how your company thrives and how shareholders are made happy.

Your BOD is like a highly trained watchdog. It exists to keep the company safe, but can turn on you if you are incorrectly perceived as a threat. By picking BOD members who know and champion your long-term vision, who know your industry and can help achieve that vision, and who otherwise keep their eyes wide open, you can multiply your leadership and achieve even more than you have already.

Originally published at Entrepreneur.com

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