Building a board of directors—and its role in corporate governance
As part of the terms of financing, the term sheet provided an outline of the size and composition of the board post-financing. A corporation requires directors, officers and shareholders to act. The directors comprise the board of directors. For early-stage companies prior to an outside investment, the board will likely have one or more founders of the business. As it grows, and especially once outside investors are involved in the company, the board will add outside directors who have increased influence on how the company is run.
Corporate governance and the role of the board
Corporate governance refers to how a board directs and manages the corporation, taking into account the impact of decisions on employees, customers, suppliers, communities and shareholders.
The board oversees the conduct of the business and supervises management. Corporate statutes allow directors to delegate certain powers to the officers of the corporation such as the CEO or CFO. The board delegates responsibility for the company’s day-to-day affairs to the executives.
The board may also have audit and compensation sub-committees. The members of the committee will be subsets of the Board and report back to the board of directors on specific issues.
What is the appropriate board composition for an early-stage company?
As part of the financing, the major investor will require a board seat, so some choices are already made for you. They may also dictate the choice of certain independent board members. The CEO will also have a board seat. For the other board members, choose board representatives who bring either company building expertise or deep market/sector knowledge to the table.
A typical early-stage board consists of five or seven members. Each seat has a vote. They do not have to represent someone with a controlling interest in the company. An odd number of board seats enables you to avoid deadlocks when voting on various items.
Guy Kawasaki’s The Art of the Start outlines one approach to building a good board for a start-up and describes five profiles of who you need on your board:
- “The Customer” truly understands your customers. He or she does not have to be a customer, but should be familiar with your market and its needs.
- “The Geek” understands your business and the development efforts required to fulfill your task. He or she will ask, “Is your task possible? Is your technology defying the laws of physics?”
- “Dad” or “Mom” is the calming influence on the board. He or she offers experience and maturity, and can help mediate and reach decisions on tough problems.
- “The Hard Ass” calls you out when you might not be completely truthful. He or she pushes for completely legal and ethical practices in all situations.
- “Jerry Maguire” is all about connections. He or she offers a network of industry contacts and a willingness to let you use it to further the company.
Early-stage companies often have monthly board meetings. As the CEO, do not be afraid to lean on your board members. If they have ever been part of an early-stage board, then they understand that you may call them on a regular basis. When you do call to discuss an issue, present a solution and solicit feedback. You are in charge and should show the board that you are the right person for the job.
Kawasaki, G. (2004). The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything. Toronto: Penguin Canada.