Avoiding the pitfalls in setting up your board for the first time

The owner of a growing small business has a great deal on their mind. A board of directors may not necessarily be one of their 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.

The first step is figuring out what kind of board your business needs.  Many start-ups or small companies choose not to set up an official Board of Directors until they either get some outside investment or start to grow quickly.  Instead, some companies opt for a less formal advisory board, which doesn't have an official role overseeing finances or making business decisions, but can still help guide. 

Choosing the right people to fill your board is the most crucial part of the process and can often be the most difficult.

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

1. What type of board is best? Many small businesses maintain advisory boards for feedback only. That may be adequate for some businesses, but a formal board of directors assumes a fiduciary responsibility for how the company is run.

2. Whom do you choose? Do not automatically choose people from your immediate network.  The best board members are those who understand your business, have the necessary time to commit to the role, are of a supportive disposition but are also prepared to challenge and debate, have a strategic perspective, and bring excellent connections to the business world.

3. Avoid mirror images. An effective board is comprised of people of diverse backgrounds and viewpoints that can differ from yours. The board should not be afraid about offering guidance and feedback that may be disconcerting. A board meeting should embrace robust debate when it arises to reach agreed consensus.

4. How will the board function? Once you've decided on a board, you need to address the mechanics of its activities. Create an accountability structure between the executive team and the board of directors.  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.

Every company must have at least one director and public companies must have at least three directors. Collectively, the directors are known as the board of directors. In the case of some other organisations (e.g. incorporated associations), an organisation will be run by a Committee which consists of ‘members’ rather than ‘directors’.

The board of directors acts on behalf of shareholders in overseeing and governing a company. Generally, it is the board’s responsibility to identify an organisation’s direction and goals and management’s responsibility to decide how to implement these plans.

In practice, the role of the board is to supervise a company’s business in two broad areas:

Overall business performance — ensuring the company develops and implements strategies and supporting policies to enable it to fulfill the objectives set out in the company’s constitution. The board delegates the day to day management of the company but remains accountable to the shareholders for the company’s performance. The board monitors and supports management in an on-going way;

Overall compliance performance — ensuring the company develops and implements systems to enable it to comply with its legal and policy obligations (complying with statutes such as the Companies Act 2003 in New Zealand, adhering to accounting standards) and ensure the company’s assets are protected through appropriate risk management.

The differing emphasis of these two areas of business performance and conformance/compliance responsibilities can result in conflicting pressures on directors. For example, personal liability for breaches of the law encourages concentration on compliance while institutional investors and an increasingly aware investing public are insisting on better business performance.

Henri Eliot is CEO of Board Dynamics