A key indicator of a successful cooperation is whether that company has a well-functioning and active board of directors. In this lesson, we are going to talk about ways to compensate your board of directors. First, we'll talk about tangible and intangible means for compensation. Then we'll talk about information that your board may need in order to function properly. Then we'll spend a little time talking about the respective roles of the CEO versus the board of directors and then finally, we'll say a bit about strategic planning. First, in terms of board compensation, if you decide to form a corporation for your business, you should note that a board of directors is legally required. But even if you decide to pursue, for example, a limited liability company an LLC, although a may not be required it's still a good idea to have a board of directors. The compensation for the board is usually not that high. Oftentimes a potential directors are not really attracted to a seat on the board their money. Oftentimes directors are more attracted by intangible things such as the ability to learn and collaborate with others. For example, as an entrepreneur you're going to likely be asked to serve on one or more boards, and it's a great opportunity for you to learn and collaborate with other entrepreneurs and other people in the space that you're dealing in and so that's usually a very attractive measure to get members to join your board. The other is prestige. The idea that you sit on the board of directors for a startup or a non-profit or some other corporation, that prestige is also an attractive measure that you can use to get one members to join. Then finally, personal fulfillment. Oftentimes you have individuals who are in the space that your company is dealing in and they really care. They're very passionate about the cause. They're very passionate about the product or service that you're attempting to bring to the market and they're willing to donate or volunteer their time in service to the board in order to see this product or service brought to fruition, and so this personal fulfillment that comes with that again is another intangible way of compensating a potential board member. But some board members are actually attracted to the monetary compensation that can sometimes come with being on the board. When you're thinking about how do you pay a board member for their service, you want to keep in mind that compensation, this is not their full time job. Oftentimes, a board is really only donating a few hours a year in terms of their service to the board. Compensation should recognize that just the time that a board member is giving to your company outside of their normal day job, but also the amount of effort that's being put in. The amount of money that you decide to pay a board members should reflect that proper balance between time and effort. Oftentimes it's also customary for a corporation to reimburse board members for their expenses in connection with board service. For board members having to make copies for the board or travel to annual meetings for the board. Those types of expenses are oftentimes reimbursed by the corporation. You may also consider just giving a board members honorarium, like a lump-sum flat payment as a recognition for being a member of your board. Then also it's very common for startups to consider giving board members some equity stake in the corporation. This is usually like a low barrier for you to offer board members equity, but it's also a very attractive thing. It forces the board member to have their interests aligned with the corporation's interests. They do well and the company does well. It's a way of actually getting monetary compensation to the board, but also at the same time aligning those interests which can result in a very beneficial and mutually beneficial relationship between the company and the perspective board member. As the CEO or as an officer of the company, your job is to report to the board. The board is responsible for the long-term planning for the cooperation. They're also responsible for oversight of the corporation, and so your job as an officer or the CEO of the company is to make sure the board has the information it needs to make the right decisions for the company. There are certain key pieces of information that almost every board is going to require you to prepare for every board meeting and particularly large meetings like the annual meeting. The first is an agenda. You got to keep in mind that your board members, this is not their full-time job. They oftentimes have other full-time jobs, and this is a second almost volunteer activity for them. You want to make sure that whenever you're dealing with the board, at a board meeting or at an annual meeting, you're making the most efficient use of your board members' time. That's why an agenda is very important. The agenda should spell out very clearly what is to take place at the meeting, what actions you need from the board? What actions had previously been taken by the board at a previous meeting? What reports and data that you have assembled properly for the board? All of that you're going to be spelled out in your agenda. Also, you want to assemble facts and data in an organized fashion. We need binders or folders. The idea there is to ensure that the board has the information they need in an organized way so that you are being very efficient with their time. If there are any key personnel issues, not the day-to-day management of personnel, but key personnel issues. If the CEO has issues on officer needs to be removed from the corporation or there are some leak of trade secrets or any type of major issue dealing with personnel, those issues should be brought to the board's attention. Also, the financial outlook. One of the primary jobs of the board is to review and approve the financial outlook of the company. Several aspects to this, like your budget, your cash flow, what assets are owned by the corporation? Whether it's real property, whether it's intellectual property. All of that type of financial information should be assembled for the board regularly in a fashion where the board can very quickly review and make decisions as to approving board action on financial issues. Then finally, while not necessarily required at every board meeting, but very regularly you should ensure that the board has a very clear understanding of the competitive landscape. Where your cooperation sits in the tech space or the retail space or whatever the space that your business will operate in. You want to ensure that the board understands what competitors are doing in that space and what the risks and threats to your business may be. This is to ensure that the board fully understands the business objectives, the competitive landscape, the market, so they can make informed decisions about where they want to take the company. Now roles and responsibilities of the board. You got to get this right because very frequently you hear the position of chairman and CEO of a certain company. That position essentially means that this individual is both the President of the Board of Directors and the CEO. Meaning, this person is responsible as a board member for the long-term strategic planning for the corporation, and as CEO responsible for the day-to-day management of the company. Two very different roles and a lot of responsibility. I often like to recommend that you separate those two positions into two different people. One person as the chair of the board and a different person as the CEO, so that you keep a very clear line between those very different roles. Now, the responsibilities of the board, in addition to oversight and reviewing and approving the financial outlook of the company and thinking about the long-term planning for the company. The board can also serve as a sounding board for the CEO and the officers of the company. A big job with the board is to monitor the CEO performance. They should always be thinking about succession planning for the CEO. What happens if the CEO retires or there's some bad event that happens to the CEO, the board should constantly be thinking about succession planning for the CEO. One job is also to fill board vacancies. If members roll off the board, how is the board replacing those members. Just another function and responsibility of the board. As we've said before, the long-term strategy for the company, the strategic planning for the company is one of the primary objectives for the board. Let's talk a little bit about strategic planning. During strategic planning for the company, which the board is very much responsible for, the board should ask questions around where's the company now? What have we done well? What haven't we done so well? Why didn't we meet our objectives that we set out for ourselves? What do we need to make sure we meet our objectives in the future? What are our risk in the future? What's our financial outlook? How do we get for where we are today to where we want to be two years from now, five years from now, financially or from a technical standpoint. This feedback loop that the board goes to inform where the company is headed is part of this like long-term planning for the company? This should always be a part of your board's discussions. Also recommend the board engaging in a formal strategic planning every three years. This is a process by which the board sits down and thinks about what has passed in the past two years and where the company wants to be in three years going forth. You can ask questions around, should the company's mission change, do we need personnel changes to achieve our goals? This process of formally going through strategic planning forces the board to adhere to its responsibilities for long-term planning, and then allows the CEO to not only get a window into where the company is headed but also phrase the CEO up to engage in the day-to-day management of the company. To wrap this up, there's various ways to compensate your board members oftentimes because the compensation is not high compensation. You can try board members through intangible, such as the prestige of being on the board or the idea that they are fulfilling a personal passion of theirs. But to the extent you're going to actually pay a board member, there are ways to do it. You can do it through equity in the company or by giving an honorarium or finding a board salary that takes to account the amount of time and effort it takes to be a member of your board. We talked about the roles and responsibilities of the CEO and the board. We did that because tension and bad vibes between the CEO and the board, and the CEO reports to the board that bad tension sometimes can hurt your corporate objectives. It can slow down the progress for your company. It also can lead to bad relationships with the company insiders. Having a clear understanding of the roles between the CEO and the board. CEO, responsible for day-to-day management, board responsible for managing the CEO and controlling the long-term strategy for the company. Having a clear understanding of those roles will best position you to make the best use of your board of directors.
