What a Board of Directors Does
Even with great executives, a great product, and a great team, the success of a new startup can be determined by its Board of Directors. Choosing a Board of Directors is a critical process. The Board of Directors for your venture are the strategic advisors or final votes in major decisions and changes. With the right Board in place, a company can accelerate and take the right strategic steps to a favorable exit or IPO.
Building a Board of Directors is a crucial process and one that should be done deliberately and strategically. Decisions about the type of board your company needs, the types of board members and how they will strategically work together, and planning ahead for potential board obstacles and stumbling points are all aspects to consider when building a Board of Directors that will actually help your company grow.
What a Board of Directors Does
At the highest level, a Board of Directors provides some type of strategic advisory and decision making for a company. In some cases, and for some types of boards, this decision-making could be fiscal and provide the board members the electoral power to make changes above the company’s executives. In other cases, it can be purely strategic, with no formal and final power but rather to serve as a collective of experience and guidance as the company grows and evolves over time. In general, a Board of Directors serves as a voting or advisory body of appointed or elected leaders that help make decisions for a company. There are nuances and three primary types of Boards of Directors.
The Different Types of Boards
Board of Directors
A Board of Directors is made up of appointed members typically representing from inside the company and outside the company. Board of Director members are experts in their field, fields relating to company leadership or aligned strategically with what a company does or what industry they serve. A Board of Directors may serve in an advisory role or a fiduciary role or both. These two types of boards are most common. Inside company representation may include leaders of the executive board and even the CEO of the company. Outside appointees vary depending on the type of Board of Directors. The type of board of directors can also influence how a specific board meeting is run. Check out our guide on How to Run a Board Meeting to learn more about the various meeting flows.
The main differentiator of an advisory board is that its decisions are non-binding and more informal in nature. Just as the name suggests, Advisory Boards are composed of appointed experts that provide advice and help a company with forward-thinking decisions such as custom acquisition, go-to-market strategy, category tactics, pricing, or even acquisition decisions. Advisory Board cannot force a CEO or executive team to take any action. They are also not appointed to represent any specific interests, rather composed of folks that are experts in their field or have strong track records of scaling great businesses. Sometimes, in exchange for an Advisory Board seat and contributing their time and help to a company, the stock is given as part of the “payment” for serving in an Advisory Board role. This also ties the advisory board member to the company’s long-term success. In general, Advisory Boards do not assume any liability or responsibility legally from company decisions and outcomes.
First and foremost, Fiduciary Boards are made up of an equal representation of all the shareholders, not just majority owners. Public companies are required to have Fiduciary Boards but Private companies are not. Fiduciary Boards are tasked with ensuring that the company is making decisions that are fiscally beneficial to its shareholders. Because of this heavy responsibility and oversight, Fiduciary Boards are given the voting rights to overrule the CEO’s decisions. Members of a Fiduciary Board are appointed by each party they represent. Often, when a big funding round takes place, the leading investor of that round will appoint a partner to sit on the Board of Directors at the company – earning a board seat as part of their investment to represent their fiduciary interests. Inside the company members are present as well including the CEO and possibly another C-level executive.
The Different Types of Board Members
Not only are there different kinds of Boards of Directors, there are also a variety of different types of board members that make up said boards.
Management Board Members
Internal representatives on a Board of Directors from the company are referred to as management board members. Management board members are direct representatives from the day-to-day of the company, often the CEO, COO or another executive leader. They provide the frontline perspective into the discussions and decision-making for the board and are often responsible for running the agenda and managing the flow of information out to the rest of the board members.
Investor Board Members
Often, when a VC firm or PE firm makes an investment into a company’s funding round, they are granted representation with a board seat. Investors that join your board at different stages of a company’s growth may have different perspectives or rationale around upholding specific decisions or fiduciary responsibility. It’s critical that you spend the time onboarding not only the board seat holder, but your broader team of new investors after every round.
Knowing that management members and investor members both have direct ties to the success of the company and are personally tied financially to the outcomes decided on by a board, independent directors provide an air of checks and balances to the table. Independent directors are qualified individuals that have no affiliation or tie to the company. They may be business leaders or industry experts and are there as a 3rd party, non-bias advisors to the business.
How To Build a Strong Board of Directors
Now knowing that there are various types of a Board of Directors and various members that make up those ranks, the decision-making process begins to form the perfect board for your company’s needs and future.
Choosing a Board Type
First and foremost, if your company is public, a fiduciary board is required. However, if your company is private, you have the option to build a board with just advisory duties or to grant them fiduciary power as well. It’s important to consider why each function exists. Choosing an advisory board is smart for any founder to make sure their company building does not exist in an echo chamber, and insight and advice is considered early and often as the company scales. The more external funding you take and the more shareholders are present, fiduciary responsibility may make the most sense to protect the overall interests of the company and spread out the risk and legal responsibility amongst shareholders, not just on the executive leadership at the company.
Deciding on a Board Size
There is no mandatory set number of Board Members, and most range from 3 to 31 employees. Typically a board is always composed of an odd number to prevent tied votes. Analysts suggest that the ideal Board of Directors size is 7 members. Deciding on your Board size is up to you as a founder. Perhaps a smaller board is good to start with expansions being made as more investors come to the table, earning more seats, or as new problems or growth opportunities arise at the company that requires new expertise to be brought in.
Establishing a Board Structure
In addition to Board of Directors Size and Type, the structure of the board is critical to the success of the board. Having a clear, and defined structure that is agreed upon by members as they join ensures that board meetings are run smoothly and the purpose and goals of the board are clearly achieved. Structural elements of a board to consider include setting clear bylaws that outline member responsibilities and expectations, defined roles, and duties such as who will take minutes, who will report out, and who will run the meeting flow at each board meeting. Term limits are also something to consider, especially for a fiduciary board, to keep decision-making ethical and tied to the best interests of the shareholders. Additionally, check if your specific industry or board type has any industry or corporate governance rules that are needed to be abided by.
Fill Knowledge and Skills Gaps
When appointing new board members, or even just as you appoint the first few board members, consider what skills they bring to the table and how they can best aid your company’s success. If there are gaps that the current management team or founders of the company have, a board of directors can help fill knowledge and skills gaps. For example, if the founders of a company are technical, they may want to build an advisory board of directors with go-to-market experts, revenue leaders, and financial advisors to ensure that the business decisions are made in conjunction with the great product evolution or development taking place. On the flip side, if a company is expanding into a new industry or adding a product line, an expert in that product field or industry may be a crucial knowledge gap to fill with a board seat.
Prioritize Diverse Perspectives
The best way to make sure your business actually grows from implementing a board and making forward-thinking decisions as a board is to avoid an echo chamber. An echo chamber refers to the same ideas or thoughts being “Echoed” back many times over. Often, it’s easy to be drawn to like-minded leaders or partners you’ve worked within the past when selecting board members. However, think more about the qualities and traits and perspectives the management members or already selected members bring to the table. Then try and find a completely opposite perspective or experience (that still helps your business). Avoiding an echo chamber will ensure all perspectives and sides of an idea are considered when making a decision and avoid obvious mistakes that might be made if everyone can only see one direction clearly.
Onboard Your Directors
Plain and simple, onboard your Board of Directors. Just as you would likely build out a comprehensive onboarding plan for your new employees so they have everything they need to do their job, the Board of Directors are no different. Provide a detailed, comprehensive, and repeatable path for onboarding for your Directors. This will ensure everyone is on the same page and has a clear understanding of the “why” that brings them to the table for your company each and every day.
Regularly Evaluate Your Board
If the board type and structure is set, all your Directors are onboarded, and you have your Board up and running, don’t stop thinking about what your Board’s ideal state looks like. Make quarterly and annual evaluations a habit with your Board to ensure that all members are continuously able (and willing) to serve in their Board role at full capacity. This ensures that your Board remains a valuable part of your business’s strategy and success.
Potential Obstacles to Your Board’s Success (and Solutions)
Despite taking all the steps to build a strong Board of Directors, be aware of potential obstacles to your board’s success.
Too many like-Minded Members
When building your board, especially early on, the board may be small. Between management members and investor or industry expert appointees, you always run the risk of having too many like minded members on the board, preventing any real change or growth to be done. The best solution to avoiding this potential obstacles is to be really intentional when building your board to diversity the perspectives represented and to set clear term limits for your board. That way, even if after working to select members with diverse perspectives, there is a second safety net in place to ensure that after a set number of time, board members will be interchanged to bring in even more perspectives and prevent a like-minded board from forming.
Conflicts of Interest
Another common obstacle many Boards of Directors face is a conflict of interest among board members. This could be due to too much management representation on the board or possibly too many friends and family represented on the board as shareholders. A solution on the management side is to ensure there is a cap on how many management members are represented at any one time on the board. This limit will prevent the management perspective from taking over. Similarly, term limits, or voting rules around stakeholder involvement can help ensure that decisions are made fairly and not just in the interest of the individual board member.
Let Visible Help
A Board of Directors can be game-changing for your business and completely shape the strategic direction to take a company public or through other favorable business outcomes. Once your Board is up and running, it’s important to ensure communications to the Board are seamless and clear. Learn more about keeping your investors updated with Visible here.