Who should be on my board? What types of actions should they be approving? These are common questions that small businesses ask themselves as they grow.
A board of directors has the ultimate authority to direct the management of the business and affairs of the company. Legally, the board will authorize the issuance of stock, hire (and fire) senior executives, approve compensation arrangements, including the issuance of stock options, and authorize the company to enter into significant agreements.
The board will also be asked to provide advice and approve strategic and operating plans, adopt company budgets and oversee the company’s audit, and financial statement functions. Most importantly though, the board’s most critical function is to help management navigate the myriad of critical business decisions that will determined the ultimate success or failure of the company.
In the initial startup stage, a board of directors might consist solely of one or more founders. However, finding an additional board member with insight and experience that no founder has, but who knows the company’s market or technology particularly well, can be particularly helpful in building the business. In addition, the right director can provide some independent validation that a company’s business has promise.
Once a company raises capital, particularly from venture capital funds, board seats will be negotiated as part of the transaction, with a board of directors typically consisting of a combination of founders, investors, and independent directors.
Directors can provide valuable input and an independent voice during discussions over important business matters. As such, directors who offer complementary strengths and work well together are necessary to a well-functioning board. It is important to have strong board members who are willing to voice their opinions and speak up when they disagree.
Prospective board members should not only be able to show up for meetings, but be able to devote enough time and attention to come well-prepared for each meeting.