In the normal progression of companies, most are started without a board of directors, but at some point the question of whether to have a board comes up. The entrepreneur makes one of three decisions: to continue without a board, to have a board of advisors, or to have a corporate board. Each has its advantages. The board of advisors can advise the owner on issues that he presents without the authority or fiduciary responsibility of a board of directors. However, some situations such as an IPO require a board of directors.
If one decides to have either type of board, the same questions are relevant. How many people? Who should I ask? How should I go about asking someone I select? Should I be Chairman or ask someone else? How should the board be organized? What should the agenda include? How should compensation and liability for board service be handled?
I have found that a board of seven or nine people generally works best. In choosing an odd number, if everyone is in attendance and voting, then there won’t be a tie. Another advantage of a board of seven or nine is that special meetings can be arranged more easily and quickly, meetings are more likely to be face to face, and board members feel more of a sense of responsibility. In my experience larger boards tend to be unwieldy and bureaucratic.
I think the best way to select your board of directors is to start with those one or two people in management you would like to serve on the board. Several skills are desirable to have represented on a company’s board: legal, financial, technical/industry knowledge, sales and marketing, the ability to raise capital, previous board experience and someone who lends stature to the corporate community.
On an overall level you want to choose people who can work well with others in a collaborative problem- solving effort. From my experience I think that it works better to have an outside director as the chairman of the board. Important attributes here are a calm and fair demeanor. He needs to give everyone who wants to speak an opportunity to feel that he is heard but to shut someone down who is giving a monotonous monologue.
Prior to inviting someone to serve on the board, you should arrange a meeting with them to discuss responsibilities and expectations. This also gives you a chance to be sure you think this person is the right selection to make. The best advice here is to follow your gut. Remember that in inviting them to serve on your board you are extending an opportunity to them.
In setting up or restructuring a board, it’s very important to establish staggered terms of service and decide on the mechanics of that board service, such as how many consecutive terms, after what period will the bylaws mandate the director taking a break in service, and whether you will have a mandatory retirement age from the board. I favor initially appointing an audit and a compensation committee and then letting your committee structure grow organically, i.e. based on need. Sometimes committees will need to exist for a limited period.
With either a board of advisors or a board of directors, there are the questions of compensation and liability. Generally, compensation is greater with the board of directors than with the board of advisors, because of the added responsibility and liability. I think that a per-meeting attended stipend is the best compensation formula, although sometimes, particularly with larger companies, there is also an annual retainer. Nevertheless, to get the incentive right, the majority of the compensation should be based on meeting attendance. The amount of compensation is a complex and personal issue depending on the size and profitability of the company, the frequency of board meetings, and expected level of participation between or time in preparation for meetings. It’s important to have adequate liability insurance for your board members so that they are not exposed to claims made by others against the company.