Hiring a board of directors: 8 tips

By Jeff Wuorio

The owner of a growing small business has a great deal on her mind.

A board of directors may not necessarily be one of her most pressing issues.

It should be. As a business expands and matures, so does its need for involved direction and experienced guidance—elements that a board of directors can provide.

Here are eight issues to bear in mind when considering a board of directors:

1. Do you really need one?Question number one isn't always easy to answer. It's essential that you think about the areas in your business where you may need help or input—such as finance, management, or other areas. Target potential problem areas and conceptualize how a board may help. Consider, too, what the presence of a board may mean for your company's image. "Having independent directors on a company is generally considered beneficial to prospective investors," says Ft. Lauderdale attorney Greg Balder. "Independent directors can oversee auditing and can be beneficial in preventing management abuse and corporate fraud." An exception: Corporations are required by law to have a board of directors, although, in many states, one director—often the owner—is all that's required.

2. What sort of board is best? How binding do you want your board's role to be? Many small businesses maintain advisory boards for feedback only. That may be adequate for some businesses, but a formal board of directors carries greater clout. If it's a legally formed board, it assumes a fiduciary responsibility for how the company is run. That can boost a sense of responsibility to board members, but it has a downside: "Formal boards can outvote you on key decisions," says John Reddish, a Drexel Hill, Pa., consultant. "As principal shareholder, you can often override them, but that will only cause the best directors to resign. Go with an advisory board if you want advice but don't want it mandated."

3. Whom do you choose? Another question without a single defining answer is whom do you choose to serve on your company's board? One company's needs differ from the next. Here are a few things to consider: If you aim for diversity on your board—from gender and political preferences to professional experience—you will help to ensure a diverse set of skills, expertise, and feedback. Consider a broad range of people, including attorneys, CPAs, fellow executives, educators, and even directors from other boards. Look for expertise in the kind of business you operate.

4. Avoid mirror images. Unless your approach to business mirrors New York Yankees baseball team owner George Steinbrenner's, the last thing you want in your board is a cowering mass of “yes” droids. An effective board is comprised of people of diverse backgrounds and viewpoints that can differ from yours. This board shouldn't be the least bit afraid about offering guidance and feedback that may be disconcerting. A solid board of directors is comprised of "people who don't think like you and who are not afraid about standing up to anyone with their ideas," says Dr. Ted Sun, a Columbus, Ohio, consultant. "You need strong-willed people with a great deal of experience."

5. How will the board function? Once you've decided on a board, you need to address the mechanics of its activities. Figure out the areas of your business that need a board's involvement. Are they company audits? Help with raising outside capital for a project? Or management decisions? "Create an accountability structure between the executive team and the board of directors," says Sun. "Each needs to be accountable about implementing what's discussed. The worst thing is to let your board meet and talk, but nothing actually happens."

6. How often will the board meet? The frequency of board meetings will differ from one company to the next. Although the average is every quarter, structure your board's schedule to address your needs. If issues are regularly occurring that require the board's attention then monthly meetings may be appropriate. No matter how often, take the time to prepare for each meeting. It's also critical to set up a thoughtful agenda for the board to hit issues that warrant attention, but to avoid gatherings that melt into a college dorm bull session—great give and take, but little to show for the effort.

7. How long should they serve? Experts suggest that terms for board members (or the boards themselves) only run from one to three years. Reddish also suggests term and age limits for board members: "That can be a blessing when a friend should leave but you're afraid to ask or if someone just becomes too disinterested." Additionally, stagger terms so that you don't have too many board members leaving in the same year.

8. How much do you pay board members? Again, size, frequency, and other variables dictate how much you should pay your board of directors. But at the very least, look to pay your directors a per meeting fee of several hundred dollars plus some sort of annual retainer. Rule of thumb: The bigger the company, the greater the importance of a board member's role so you'll have to pay them more. Even relatively small companies which ask a fair amount of their board members can expect to pay upwards of $30,000 a year per member. Of course, advisory board members without legal responsibilities can expect to receive a good deal less.

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