One of the key indicators of successful cooperation is whether that corporation has a fully functioning and active board of directors. For a corporation like a C corp or an S corporation, a board of directors is legally required. For a company like an LLC, although not legally required, is not a bad idea to have a board of directors to help guide the company through its strategic objectives. In this lesson, we're going to talk about the benefits of having a board of directors. We'll go through some of the process for building a board of directors and talk about some of the responsibilities of the board. Benefits. Board of directors brings experience and an outside perspective to your corporation. Oftentimes, when I'm meeting with startups or entrepreneurs, I learn that their initial board of directors are essentially family and friends. Now, while family or friends may bring emotional support to the business, they may even provide financial support early on for your business venture, it's very hard sometimes for family and friends to serve as a real check on your business idea. That's why it's very good to have outsiders as part of your board of directors, because they bring strategic value and industry expertise and an outside perspective that can challenge some of the assumptions that the business is putting forth. The last thing you want as an entrepreneur who was trying to take your business to the next level, the last thing you want is someone on your board who's essentially rubber stamping every idea and every assertion or statement that the CEO or founders are putting forward. You need that outside perspective. A board of directors also brings additional skills and insight. You may be great at the technology, but you may need someone who's very skilled in marketing or very skilled in finance. Having these additional skills on the board adds great value to the operation of your company. A board collectively is also very effective at long-term planning. One of the challenges for startups and for entrepreneurs is trying to find the right balance between the here-and-now, getting a good product off the ground, and thinking about where you want the business to be three years from now, five years from now, 10 years from now. Board of directors with the collective skills that are represented on the board could actually be very, very valuable in allowing you to think about the here and now, while the board is planning for long-term strategic objectives. The board is also very effective at controlling the organization and working with management to ensure that the corporation is meeting its stated goals. It serves as a check from the CEO so that the CEO has someone or some entity to which he or she is held accountable. Then finally, a board of directors is very important in terms of attracting capital for your cooperation. In terms of the makeup of the board, the skills that are represented there, the personalities that are represented there, even the companies that may be represented there as part of your board of directors play a crucial role in your ability to attract the funding you need to get your cooperation off the ground. Let's talk about building your board. There are several factors that will go through that are relevant to an effective board. The first is the size of the board. This is a hard question. It's more of a art and it is a science, but there's this rule of thumb that you want your board to be small enough to be effective. So you're not getting bogged down and big deliberative processes that can slow down the business. You want it to be small enough and agile enough to get things done quickly, but you need it to be large enough so that it can actually handle all of the responsibilities and obligations that the corporation has. A good rule of thumb is 5-9. Most corporations find that a board size in that range, 5-9 directors, is a good size to meet the standard. Functional skills. Now you want to have a good group of skills on the board, and so you should start by asking yourself, what is my corporation's competitive advantage and where are we? What distinguishes us from others in the market? Then think about, what are the demands that will be on your company in the future? What threats exist in the future? What skills do we need to be in a position to maintain our competitive advantage? Then you want to make sure you broaden out those skills so that they're complimentary. Having too many technical people may not be ideal. You want to have a good mix of industry, and technical, and financial, and marketing. All of these aspects represented on the board. That goes hand in hand with diversity. You want to have a good mix of people from industry backgrounds, from whether they've worked with big companies or small startups, different cultural backgrounds, different personalities. This diverse set of people will lead to better results, better creative thinking, and oftentimes a more well oiled machine for your board. Now, one thing to note about diversity, I have seen board of directors that really take this diversity point very seriously. They get perspectives from all different walks of life, from different segments of the market. The wish that you have there is that you're board turns into a situation where the directors are representing certain constituencies, almost like a legislative body. That's what you want to avoid, because you don't want your board of directors meeting to be a legislative process. That's not what it is. You want your board of directors to provide strategic input to the corporate objectives and not to debate issues endlessly in an effort to represent certain entrenched interests. Keep that in mind when you're building out a diverse board that ultimately you want the board to be agile and have the ability to make decisions fairly quickly. Now, let's talk about the roles on the board. The board's job is to be laser-focused on long-term strategic planning for the corporation. The job is to review and approve the financial outlook, to serve as a check on the CEO. The board should not be getting and meddling in the day-to-day management of the company. That's the CEO's job along with the company's officers. The board serves as a check on the CEO, but shouldn't get into micro-managing the CEO and the officers on a day-to-day level. Now, oftentimes I see this a lot with startups, you have the position of Chairman and CEO of the business. This essentially means that this individual is both the chairman or President of the Board of Directors and the CEO of the corporation. Given the different roles that a CEO plays versus the board of directors, I'd like to suggest to early companies that to the extent you can, you separate those roles so that the chairman of the board is a separate person from the CEO of the corporation. This allows there to be a very effective delineation between the role of the board and the role of the CEO and the officers of the company to get things done. One is much more focused on long-term strategic planning. That's the board. The other is focused on the day-to-day management of the company and that's the CEO plus the officers of the company. What are responsibilities of the board? The first is the duty of loyalty. This duty is very important, and it's one that you have to get right. Breaching this duty can have very serious legal consequences, including opening yourself up or opening your board of directors up to personal liability for actions that they're taking in connection with the cooperation. The duty of loyalty essentially says the company come first. As a director of a company, you cannot use your position as director to take away opportunities that rightfully belonged to the board. If an opportunity comes up, and it's one that's in the same space as the company for which you serve as a director, you must fully disclose that to the board of directors and get board approval before taking advantage of that opportunity. Conversely, say for example, I own a website design company and corporation is looking for a designer for their website. Now, we can open that process up and bid for other web designers, or I can just do the web design myself through my company. Now, while that is perfectly okay to do that, because of this duty of loyalty and to not mix loyalties between my company and the company I'm representing as a board, you want to be sure that you give full disclosure to the board, that the board understands that this individual director on the board stands to have a financial gain from this particular board action, and that you document all of this, so that conflicts of interests are resolved, everyone understands the decision that's being made. That's all wrapped up in this duty of loyalty to keep in mind. The other is the duty of good faith. This is essentially a requirement that you behave in a way that's fair. With respect to the corporation and anyone that's engaging with the corporation with third parties. Thirdly, is the duty of care and oversight. This is one that gets a lot of directors in trouble. This goes back to the point I was making earlier about directors who were just rubber stamping what the CEO or officers are putting before the board. As a board member, your job is to thoroughly review the information that's presented to you. You can't just rubber stamp. In fact, not adhering to this duty of care and oversight, could really open up the board to personal liability. You want to make sure that you are carefully reviewing financials, carefully reviewing board proposals, carefully reviewing reports from the CEO and officers of the corporation. Now, as a board director, you can rely on reports from the CEO and the officers. You can rely on those. That's perfectly fine, unless, the circumstances are such that what's being reported to you requires further inquiry. In those circumstances, under your duty of care and oversight, you are obligated to ask the right questions, ask tough questions, to do a further inquiry in order to satisfy yourself that what's being reported passes muster. Now, another responsibility of the board is liability. Now, failure to adhere to these duties can open you up to personal liability as a board member. I want to highlight this point because as an entrepreneur, not only are you looking to attract people to the board of your corporation, if you decide to incorporate, but as an entrepreneur, oftentimes, other people in your industry will want you to serve on their board. As an entrepreneur, when you're looking to bring on board members as well as you're entertaining the idea of being on a board, you should really take these duties in the mind. Understand that by taking on that obligation to be a board member, you are accepting these duties, and that you will carry out these duties to limit the chances of you running into a situation of having a personal liability for things that go wrong. Now, you may ask, "Look, I can be well-intentioned. I could be on the board, I can review all the statements, but a lot of the stuff is speculative, a lot of the stuff is high risk. We don't really know all the right answers. What if I get something wrong?" That's a fair question, and it comes up a lot. That's why we have this concept in the law called the business judgment rule. This is essentially a legal provision that accounts for things going wrong. What it basically says is, if you follow the right processes, you adhere to the duties of loyalty, the duties of good faith, the duty of care and oversight, and the decision just happens to turn out wrong, then you won't be held personally liable for those decisions because you actually went through a thorough process. Remember, the business judgment rule will help protect you from liability for bad results, but it won't protect you from bad processes. You have to go through a thorough process in order to avail yourself of the business judgment rule. Just to wrap up here, for corporations, a board of directors is actually legally required. But for other business forms that don't legally require a board of directors, it's still not a bad idea to have a board because board brings extra expertise and skill, outside perspective to your business operations that could add strategic value. Factors that you want to consider when you're building out your board include getting the size right, getting the right skills represented on the board, the right make-up of personalities and different backgrounds. You want to think about having a very clear delineation between the roles and responsibilities of the various players. The board is responsible for long-term strategic planning. The CEO and the officers are responsible for day-to-day management of the company. Then finally, as board members, whether you're attracting board members to your corporation, or whether you as an entrepreneur are serving on the board of another corporation, keep in mind that board members have a heightened duty to the corporation for which they're serving on the board. Those duties include the duty of loyalty, the duty of good faith, and the duty of care and oversight. Failure to exercise these duties could open you up to personal liability for breach of those duties. Keep those in mind, and good luck finding a good board of directors.
