Posted by Neha De
June 22, 2020 | 4-minute read (690 words)
Many founders find themselves confused about whether or not to set up a board of directors for their small- or medium-sized businesses. To make things simple, if your business is a corporation — even if it’s a small startup — then you are required by law to have a board of directors. And, depending on your state or your corporate structure, one or two directors may be all that’s legally needed.
On the other hand, having a board is often discretionary if you run a company structured outside of the corporation limits. In this case, you can consider appointing an unofficial advisory board, which can be formalized later. An advisory board, however, may not have the authority to oversee the finances and management of your business. Therefore, you should take a moment to determine whether appointing a board of directors might be the right choice for your company.
Typical Role of the Board of Directors
A board of directors can provide stability in your firm and create an independent level of accountability. The board is required to hold at least one meeting every year, although some company boards meet every month in the initial years, as it sets the pace for running the business smoothly.
While public corporations usually have bylaws that set forth the responsibilities of all board members, private companies should also make sure the roles of their boards are well-defined and well-documented. Here are the typical advantages of having a board of directors:
- If you hope to attract outside capital, or if you are considering selling your business at some point in the future, the board can be crucial in reaching a successful outcome. It can also help your company with corporate governance issues.
- The board usually has the authority to appoint and replace your company's senior management, including the founder/CEO, if necessary
- The board can guide you and protect top management. You get a forum to discuss issues that you cannot talk about with others at the company, such as matters concerning employee performance and so on.
- The board ensures accountability by the top management. It sets goals for them and holds them accountable for meeting those benchmarks.
- The board can take care of strategic planning for your company. It shapes the management of the firm and makes adjustments based on the long-term vision of the company, if needed.
- The board members’ business contacts can help you get customers, leads and suppliers for your business.
- A board can help you with succession planning.
Disadvantages of Having a Board of Directors
Some potential disadvantages of having a board of directors include:
- You will most likely have to relinquish some control over the direction of the company.
- You may have to incur extra expenses in order to set up a formal board of directors. Such perks as salaries and allowances may need to be offered to attract experts to sit on your company's board. And because board members may face personal liability as a result of their work for the company, you may have to buy liability insurance for them.
This begs the question: “What should you pay your board members?”
Directors of a board are usually compensated in a combination of cash and equity, in addition to a retainer, fees for attending meetings and additional retainers for committee chairs and members, reports USA Today.
However, the trick is to decide what is just and adequate compensation. This depends on a number of such factors as the size of your business, your industry, your location and the like. For example, if your business is located in a big city, you can expect to pay more than what you’d have to pay if you were in a small town. And if you are looking for experienced directors such as senior executives in large corporations, you will have to shell out more money than if you appointed those from smaller companies.
With these considerations in mind, determine whether appointing a board of directors might be a good move for your business, and if so, you can begin looking for the right people who would most benefit your company.