“Thinking About Creating a Board For Your Business” is Part 1 of a series of 3.
Considerations for having a ‘Board’ of any type
Whether your company is a start-up or a more established business, building or leading a privately held enterprise can be very lonely at the top. In order to thrive in today’s increasingly competitive and global marketplace, private companies need to secure advice from a wide variety of expertise to help guide them and to facilitate growth. An advisory board or a board of directors allows you to access a group people who are dedicated and on-hand to provide quality expertise, guidance, and bring different perspectives to bear on decision-making, which strengthens an organization’s chances of survival and success.
Determining whether your company should have a board is often a very difficult process for most entrepreneurs. If you are planning to do an IPO, your company will be required by law to have a board of directors. If you are planning for your company to remain private, you have the flexibility to choose between an advisory board and a board of directors. As a first step, it’s important to have a high-level overview of the key differences:
|Advisory Board||Board of Directors|
|No fiduciary duties or any other duties to the corporation. An advisory board is a consulting body that provides non-binding advice and guidance. It cannot enforce any policies or recommendations that they make, and the corporation can heed or disregard the advisory board’s suggestions at its own discretion.||Have fiduciary and other duties to act in the best interest of the company and shareholders whilst providing oversight of the organization and its management.|
|Because advisory board members are not bound by fiduciary duty, they are not under any obligation to disclose conflicts of interest.||Board members have a duty to disclose conflicts of interest.|
|Can be constructed to provide focused input on very specific business issues. Do not have the power to veto, instruct executives, direct the organization, and are not responsible for hiring, replacing, and monitoring the CEO’s performance. You will not have to cede authority or control.||Ultimate supervisory responsibility for all the affairs of the business. The CEO reports to the board of directors; the board is responsible for hiring and replacing the CEO, and monitoring the CEO’s performance. You will need to cede authority and control.|
|Have no legislated liabilities, no statutory authority, under which to hold the advisory board liable. However, there is also nothing to prevent a regulator or any plaintiff from naming the advisory board in a suit. Whether a plaintiff would be successful in holding an advisory board member liable remains to be seen. For Limited liability companies, there are distinctions that should be delved into and understood.||Have legislated liabilities such as unpaid wages and taxes, environmental damage etc. Have fiduciary, and other duties that may lead to civil or regulatory liability. You will need directors and officers (D&O) insurance policy.|
|An advisory board provides a safe haven in which the CEO or delegate can express partially defined views or ideas in order to solicit feedback. Comfort, trust and respect are the guiding principles that make this relationship work.||A CEO must go to the board with a well defined, well thought out plan that considers all aspects of the business, and all of the risks. The board is not a safe haven in which to test ideas.|
|For an advisory board, typically the ideal size is 3 to 4 members, but it can be larger depending on the size and complexity of the business.||For a traditional board, the ideal size is six to ten board members, depending on the size and complexity of the business.|
|Far less time consuming. Typically meets 2 to 4 times a year. Meetings are much shorter, as the range of issues being dealt with are much narrower.||Time consuming. Typically meet 8 to 12 times a year, with additional committee meetings. The range of issues being discussed are broad, and includes all aspects of the enterprise.|
|Less expensive to form, and while its members need to be carefully selected; it can be done fairly quickly.||Considerably more expensive to form, manage and maintain, and the development of an effective board is a significant commitment.|
|Advisory board members receive lower compensation for attending meetings, and are reimbursed for travel expenses. In some cases, advisory members forgo their fees in exchange for a small equity stake in the company.||Depending on the size of the company, board members can be paid a retainer, or they can be paid to attend meetings, in both cases members are reimbursed for travel expenses.|
The second step, and one of the most important; is to determine why you believe your business needs a board, and which type of board is right for your business. You will need to engage in a rigorous process with your shareholders to do a deep dive and examine the underlying rationale for wanting to create a board, and to understand the many key elements involved in nurturing and maintaining each type of board. Some key areas to examine in order to get you started are:
- Current ownership structure and challenges;
- Current family dynamics and challenges;
- Do you wish to preserve the family legacy and vision;
- Are there future generations to consider;
- Financial stability – How the business is funded, will the company need funding in the future, are the owners willing to invest, or will it need external funding;
- What stage the business is in now – Are you looking to maintain the business, grow the business, or, are you considering selling it to monetize the business;
- Identify the company’s challenges, and its aspirations, and take stock of where the company is today;
- Detail precisely how you believe a board can help your business;
- Detail precisely what you hope to achieve by having a board; and,
- Determine the degree of authority and control you’re willing to cede.
Lansdowne Board Intelligence
This is not a guide to set up a board. Rather, it is meant to be a helpful overview for business owners who are considering whether or not they should have a board for the first time. Business owners are advised to retain experts to guide them when setting up a board.