What are the do’s and don’ts of smart company boards?

Early stage businesses are often confused when it comes to structuring their board of directors. Some opt for no non-executive directors while others seek to stack their boards with “brand name” appointments that generate publicity.

Here is a simple introductory guide to help you understand a bit more about the role of a board (particularly in a small business) and how to go about building a board that adds value to your business. It’s not exhaustive… but it’s a start.

1. First understand the essential function of the board. The board carries overall responsibility for the proper functioning of the business (including all of its compliance obligations). It may delegate certain decision-making powers to executives (eg. CEO, CFO, etc) but the board maintains ultimate responsibility and authority for all aspects of business operations and administration.

2. Many entrepreneurs are not interested in having to be accountable to a board and prefer to maintain absolute control over their business. Consequently, they may be sole directors or (in the case of multiple co-founders) all substantial shareholders may take board positions. This is understandable from a psychological perspective but very limiting in that the entrepreneur rises or falls entirely on his own abilities. It is also very difficult to hold ones’ self accountable and so such a structure lacks vital discipline and leaves the entrepreneur without a support structure.

3. Often substantial investors take a board seat on the basis that they are “looking after” their investment. Strictly speaking this is not the purpose of the board. The board is legally liable to act in the interests of the company itself (not individual shareholders) and the extent to which it does look after the welfare of shareholders it is required to look after the interests of all shareholders – not any one in particular.

4. A quality board doesn’t simply hold executive management accountable. It should assist the business with strategic insight, networks and know-how. Qualify your directors as you would any employee.

5. A wise entrepreneur recognises his own strengths and weaknesses and looks to populate his board with complementary skills to add value and discipline to the business.

6. Beware of appointing directors based on reputation or notoriety alone. All directors should be fully conversant with their statutory obligations and should bring real value to the business. As an investor I am always suspicious of start-ups that present with ex-politicians and/or celebrities on their boards. It suggests a focus on presentation over substance.

7. Quality start-up boards allocate specific sub-committee responsibilities to directors so that they remain accountable for their contribution… showing up for a meeting every month or two generally adds little if any value. Directors may be dismissed (following board protocol) if they fail to deliver.

8. Be prepared to properly compensate directors as they are taking on a legal liability as well as performing an important set of non-executive tasks on behalf of the business.

Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.

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