With the issue of board governance still on the minds of many shareholders and government agencies, the CIBC Presents Entrepreneurship 101 lecture on boards of directors and advisory boards was a real treat.
Moderator Ron Close assembled a panel including Bill Wignall, Kerri Golden and myself. As we were introduced to the panel we could only be impressed with the diverse level of board experience our group had from not-for-profits to TSX-listed to early stage start-ups. We had the expertise to cover the topic from all angles and help to shore up the foundation.
First on the agenda was to explain the difference between a board of directors and an advisory board. In simplistic terms, the board of directors is elected by the shareholders to enhance management’s decision making capability. Under Canadian law, the board is there to serve in the “best interests of the corporation” which is to say that they must consider the interests of a broad group of stakeholders. These stakeholders include the shareholders, the bond holders, employees, customers, regulators and non-government organizations (NGOs) to name a few. The advisory board, on the other hand, is assembled by management to help with specific functional gaps in the leadership or stewardship of the organization. An advisory board may include individuals with specific business development, customer relations, product Development, fund raising and/or human resource skills that are not adequately represented by the existing leadership.
Advisory boards are usually the first structure that management needs to pay some attention to as they move from a product development to a customer-centric organization. Leadership teams need to identify which skills they currently have and which will be critical to their next stage of evolution. By identifying the gap, a picture of a diverse advisory board will start to come into focus. Perhaps your team could benefit from having a product development specialist or individual with significant European contacts or even an indirect channel expert. Regardless of the complexion of the group, best practices suggest that a simple board charter be written that will clearly articulate your expectations including a time allocation for each individual on the advisory board. Many companies use this charter as a way of securing commitment and a performance expectation in exchange for some level of compensation which may include, meeting fees, options and cash. Board members like the “give for the get” documentation to help them determine their level of interest and commitment.
Unlike an advisory board, the board of directors has a fiduciary responsibility to act in the best interests of the corporation. Failing to act in this manner can result in joint and several liabilities. Directors have a number of tools at their disposal to protect themselves. First of all, the board will ask that Director and Officer (D&O) insurance be put in place before they will agree to serve. Next, directors will ask that certain policies and procedures to be established to ensure that the appropriate checks and balances are in place to monitor the financial and other risks associated with the corporation. Professional directors will also ask for meeting process and that board materials be distributed in advance of any meeting. Finally, directors will come to board meetings fully briefed on the materials and ask lots of questions. In this manner, directors significantly decrease their risk of sitting on a board – they will be able to prove that they have studied the issues from multiple angles and made the best quality decision that any prudent person would make with similar facts.
As a company evolves in its business development cycle and starts to takes on funding from external sources there are several evolutionary and revolutionary changes that will need to be put into place to solidify your house. A solid foundation will include boards of both types.
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