July 13, 2021 | 4-minute read (605 words)
Many entrepreneurs are unclear whether their small or medium-sized company should have a board of directors. To put it simply, if your company is a corporation — even if it's a small startup — by law, you must have a board of directors. Depending on your state and company structure, one or two directors may be all that's legally required.
On the other hand, a board of directors is optional for businesses that aren’t incorporated. In this scenario, you might want to explore forming an unofficial advisory board. Keep in mind that an advisory board may not have the authority to monitor your company's finances and administration like a board of directors would. So first consider whether forming a board of directors is the best option for your business.
Basic functions of a board of directors
A board of directors can help your company maintain stability and establish a degree of responsibility independent of management. Although some corporate boards meet every month in their early years, the board is obliged to have at least one meeting every year since this sets the tone for the smooth operation of the business.
While public businesses often have bylaws that outline all board members' obligations, private firms must ensure that their boards' functions are well-defined and recorded.
The following are some of the most common advantages of having a board of directors:
• If you want to raise outside cash or sell your company, the board can help you get there. It can also assist your firm with matters of corporate governance.
• If required, the board of directors has the power to nominate and remove senior management, including the founder/CEO.
• The board can serve as a guide and a shield for senior management. You gain access to a forum where you may discuss topics that you can't discuss with others at work, such as employee performance and so on.
• The board guarantees that senior management is held accountable. It establishes objectives for which they are held responsible.
• The board can handle your company's strategic planning. It forms the firm's management and, if necessary, can make modifications according to the company's long-term goals.
• The business relationships of the board members can assist you in obtaining clients, leads and suppliers for your company.
• Having a board can assist you with succession planning.
Drawbacks of having a board of directors
The following are some of the possible cons of having a board of directors:
• You will almost certainly have to cede some influence over the company's direction, and you may have to pay additional costs to establish a formal board of directors.
• To recruit professionals to sit on your company's board of directors, you'll need to provide benefits such as a salary and allowances. You may need to get liability insurance for board members, since their employment for the firm may expose them to personal responsibility.
This raises the issue of how much board members should be compensated
According to USA Today, board directors are typically rewarded with a combination of cash and shares, as well as a retainer, fees for attending meetings and extra retainers allocated for committee chairs and members.
The problem, however, is determining what reasonable and adequate remuneration is. This is determined by various criteria, including the size of your company, industry, location and so on. If your company is located in a major city, for example, you may be expected to pay more than if it were found in a small town.
If you want experienced directors, such as senior executives from major organizations, you'll have to pay more than if you hire people from smaller companies.