As an attorney who counsels companies ranging in size from a one-person start-up to public companies and everything in between, I often get asked, “Does my company need a Board of Directors? And, if so, what should it do?”
Yes, you need a Board of Directors – even if it just one person (although we usually recommend having a functioning Board with more than one person). The duty of a Board of Directors is to manage the business and affairs of the corporation. In a smaller, privately held company, this may mean that the Board takes an active role in the corporation’s day-to-day operations. In larger companies, including public companies, the Board typically establishes the corporation’s strategic direction and business plan and is responsible for hiring and evaluating the CEO and overseeing financial performance, but otherwise relies on management to run the company. Even if your company is a LLC, you should have a board of managers or similar type of governing body to oversee the business and affairs of the company.
So, you may ask, how can I have a functioning Board?
- Select Board members that have some knowledge in your industry, or at least experience with start-ups, and can add value to your company in the form of experience, expertise, introductions and ideas.
- Choose Board members who are willing to invest time in your company – by reviewing Board materials, attending Board meetings, responding to your calls and emails and making introductions on your behalf.
- Pick Board members who are willing to say “no” to you – don’t just pick friends who will rubberstamp all of your requests – however, make sure that these Board members will also be willing to brainstorm with you and find a way to get to “yes.”
- If possible, have an odd number of Board members. Deadlock at the Board level can paralyze a company.
- Be wary of Board members who are aggressive about receiving some form of compensation (cash or equity) in return for their board service. It signals that they are interested mostly in money or upside and less in contributing to the overall success of your business.
- Hold Board meetings on a consistent basis – even if by conference call. We recommend at least 2-4 meetings a year (and preferably more frequently) to review company performance, discuss new initiatives and help ensure accountability for the company’s management team. If you’ve just brought on a new group of Board members (for example, following a financing round), we recommend holding a few Board meetings on a monthly basis to give time for the new directors to establish a rapport with the rest of the Board.
- Make sure that the Board approves all significant corporate acts, including the issuance of equity (e.g., stock and/or stock options), the incurrence of debt (including bank loans and bridge notes), the entry into any material agreement (such as lease agreements, significant customer or vendor agreements, credit facilities, etc.), the hiring of executive officers and other key employees, the adoption of equity plans, and the amendment of charter documents.
- If it is impractical to hold a meeting to approve a significant corporate event, then work with your attorney to circulate an appropriate “Board consent” – this process enables Board members to approve actions with their signatures rather than requiring a formal meeting. Note that actions by written consent must be unanimous (i.e. the written consent must be signed by all directors), so if you have or expect to have any dissenting directors, you must hold a properly noticed Board meeting in accordance with the company’s Bylaws and hold a vote at that meeting to approve a controversial action item.
- Keep Board minutes! It is important to not only keep minutes of the key decisions made during a Board meeting, but to also get these minutes approved at the next Board meeting and filed in a minute book.
- A corollary to this last item – make sure to attach all exhibits referenced in Board minutes (or Board consents) and keep complete copies in the minute book. If your company has any plans to raise money from angels or VCs or to be acquired, you should expect that the attorneys for the investor or buyer will ask to review your minute book with complete minutes for regular Board meetings and/or written consents in lieu of meetings along with all referenced attachments and exhibits. Without a comprehensive set of corporate records, you will spend a lot of time and money doing “corporate clean-up” when you would rather spend time on building your business and increasing shareholder value. If you keep good records as you go, it makes the financing and acquisition process go much more smoothly and quickly, which saves you lots of money and headaches.
- Keep your Board informed. This means sending out a Board agenda and the related materials well in advance of Board meetings (including financial reports for any regular Board meetings). At each regular Board meeting, the Board should receive reports on the overall financial and operating performance of the company as a whole. In addition, management is encouraged to provide the Board with other presentations on important aspects of the business and business/regulatory environment, including presentations from divisional executives.
An important aspect of any successful corporation is the strength of its Board of Directors. We encourage entrepreneurs to view their Board as a resource rather than a hindrance. If operating effectively, not only should the members of a Board of Directors serve as representatives of the shareholders to oversee the corporation’s business and affairs, but should also provide management with advice, wisdom, introductions and ideas and serve as a sounding board (pun intended).
- Why You’re Not Getting the Most Out of Your Board (inc.com)
- What are the fundamental principles of corporate governance? (newstatesman.com)