At last week’s Entrepreneurship 101 lecture, Advisor David Pasieka talked about how boards of directors and advisory boards will affect your start-up. We learned what business governance is and what entrepreneurs need to know.

Many recent failures of corporate giants – Enron, Nortel, Hollinger – can be traced to dysfunctional governance (see this Wall Street Follies diagram for an example) and from the ashes of such meltdowns entrepreneurs can learn crucial lessons.

David talked about the common problems that lead to governance failure:

  • Lack of management communication to board and “management spin”
  • A part-time board when full-time is needed
  • Overly forceful CEOs
  • Board inexperience
  • Default trust in management when criticism is needed
  • Unwillingness to “rock the boat”

A board of directors is a legal structure whose members have specific duties and obligations:

  • To look out for the best interests of your enterprise’s stakeholders
  • Track the performance of management (they can fire you as CEO)
  • Approve your strategic plan and track how objectives are being met
  • They may even be legally and financially on the hook for businesses that go bankrupt or are sued (be sure to look into “director’s insurance” for your board members)

Establishing a board is a mandatory for an incorporated business: all corporations have at least one director. Before incorporation, advisory boards may play the larger role. Advisory boards are less formalized (although many large companies still rely on them) and might simply be made up of family members, friends, colleagues, expert you know, or any stakeholder with a keen interest in the success of your business.

But as your business grows, and especially if it goes public, a board of directors typically gains influence.

As such, Pasieka says that getting the “board chemistry”, is crucial. It’s important that directors know exactly what their job entails.

  • Inform directors well in advance of your plans and activities – make sure they have prep time and all necessary materials before meetings. Express-courier documents to board members’ homes if you have to.
  • Have directors sign a charter that lay out the duties for their role.
  • Offer the chance for regular feedback from board members. Maybe distribute a survey directly following a meeting. Ask what worked and what didn’t. Ask whom they felt contributed and who didn’t.
  • Evaluation of directors themselves will help identify members who aren’t pulling their weight. It will also give the board chair (technically in charge of the board, but who ought to be an ally of the CEO) an opportunity to address dysfunction and even usher unproductive members off the board.

The best boards are able to act in a happy space between a “rubber stamp” – a board that has ill-prepared directors, infrequent meetings and an all-powerful CEO – and a “micro-manager”– a board with an overly demanding schedule that tends to strong-arm the CEO and overflows with distracting committees.

Downloads and resources:

Entrepreneurship 101 2010/11 – Week 10 – Governance with David Pasieka from MaRS Discovery District on Vimeo.

Pat Tanzola

Pat Tanzola is a writer and serial social entrepreneur enrolled in ENT 101. He is a founder of PunGents.com, the Giro T.O. bike ride and the Toronto Neighbourhood Brunch Club. He worked on digital media at The Walrus and currently at the University of Toronto. He also writes for The Mark and his personal blog. See more…