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How Board of Directors Shapes Your Company

Last updated: November 30, 2016

If you are here, reading this article then are two scenarios at hand:

  • You are an aspiring entrepreneur and want to know about the internal workings of a corporate body.

You are at the right place! 

  • You are an entrepreneur who has already scaled up his business to a point where a Board of Directors (BOD) cannot be avoided.

Well, congratulations! You have grown your business, and your company is now in an excellent position. Let’s see how a BOD can help or not help your cause.

As businesses scale up, creating a board of directors is important to maintain smooth company operations and help protect, govern and manage the mini-empire that you have built. However, creating a BOD effectively also mean that you will never again be your own boss.

Steve Jobs was fired from Apple. We all know that. What many don’t know, is that it was his BOD that was stacked against him! 

Therefore, choose them members that will serve on your Board of Directors carefully

But why essentially is a BOD created?

Any company board only exists to represent the interest of all shareholders. Suppose you own 51% of your company’s equity. This will imply that the Board will answer to you.

However, companies with venture capital or IPOs and other cases where funding equity is diluted under the majority, risks are greater as you are no longer the master. Now, you report to the BOD.

In a nutshell, the stakeholder is always the boss.

The BOD serves as the shareholders’ representative and has authority to execute their will, which could include replacing you.

Let us look into the functioning of the Board of Directors

The primary purpose of any BOD is to oversee company operations and make sure the interests of the shareholders are protected at all times.

It is a team of 5 or more people who are experts in the industry with loads of experience and knowledge about markets and competition.

The Board (a common lingo for the BOD), is often classified into subgroups or committees, each with their specific roles that include:

  • Auditing Committee: Members are qualified and in charge of reading and interpreting financial statements.
  • Corporate Governance Committee: This subgroup makes sure that the company follows all government regulations, and it maintains strict adherence to all corporate laws.
  • Nominating Committee: This subgroup identifies candidates that are suitable to take senior management and BOD roles when the time is right. 

In general, the BOD meets quarterly and communicates about company operations. However, they can meet at any time and as when needed. Members receive updates on the financial status of the company, listen to reports regarding any legal or regulatory issues and track the progress of each committee.

This reporting mechanism helps in keeping the board informed and allows members to delegate ideas and suggestions to top management regarding the future course of action.

All discussions of the Board are considered highly significant and are completely recorded and preserved.

This kind of due diligence is also maintained as many legal and financial matters are always discussed. It’s essential for your general or outside counsel to attend and provide contextual understanding for any legal issues that arise.

Challenges and Scope of the CEO-BOD Relationship

It is inadvertently clear that each board member must know the industry your company operates in.

There are times when the BOD doesn’t agree with the strategic decisions of the executive team. The variables they take into consideration are often based solely on shareholder interests and ignore long-term implications for short-term gains and security.

When the interests of the BOD and CEO collide, the results are often not so great. Remember Rahul Yadav from housing.com?

CEOs often push harder to achieve their agenda. This makes them lose ground, and they are often replaced are moved out of the equation.

Therefore, a very cautious and balanced approach is essential when selecting your board members

Having idolizing, inferior and flattering candidates for the Board is also not cool as they will never have an expert’s perspective to guide you with.

Having unbiased board members with experience and expertise can turn into the biggest boon for your company as you will consistently gain from these watchful eyes at the top.

But often, short-term interests of the investors that even end up destroying visionary CEOs and game-changing ideas easily persuade the BOD.

The ultimate aim is to appoint people that understand and share the vision of the CEO but are impartial when it comes to due diligence and company compliances.

The two extremes should not be in conflict.

In the case of a conflict, there can only be three reasons. Take note:

  • Your vision might be misguided
  • The board members don’t have the necessary skills/vision
  • Shareholders don’t align with long-term vision and are actually in it only for profit

Always remember these essentials when you begin structuring the Board

Before the BOD is created, you are the decision maker. So take steps so as to the long-term vision that you have for your enterprise is always protected and your mission as its founder is always respected.

Here are some factors to consider:

#1. Terms of Service

The best practice is to limit membership to one year with an option to get re-elected. And in no case should any board member serve forever!

#2. Limited External Participation

Board members have experienced individuals and often serve on multiple Boards. Therefore, choose those people who are not associated with many boards.

Their attention spans will be long enough to give you the importance that your company needs.

#3. Industry Experience

Make sure that some members of your Board have senior management experience in your industry. An outsider’s perspective is often game changing, but in-depth knowledge of your markets is a primary part of the package.

#4. Leadership

Don’t choose people just because they won’t turn against you. A proven leadership track record ensures that they see the big picture and welcome a long-term vision.

#5. Vetting

The entire senior management should interview each BOD candidate when setting it up. As you expand further, the existing board should interview the new candidates.

Through this, a sense of continuity, transparency, and credibility is inspired, and institutional knowledge is maintained.

To conclude, The Board of Directors exists to keep the company safe. However, as CEO you should always make sure through communication that you are not perceived as a threat. Multiply your leadership and select BOD members who know your industry and champion your long-term vision for the business.

When chosen right, their experience, knowledge and mentoring can help you turn stellar visions into reality and go even further ahead on the path of success!

How Board of Directors Shapes Your Company
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