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Establishing a Board of Directors

written by: •edited by: Michele McDonough•updated: 10/23/2009

As your business grows, you should consider putting together a board of directors to help you grow more effectively and gather funding, if needed. Who should be on this board? How can they help? What should their responsibilities be?

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    As a small business expands, the need for hiring a board of directors that could effectively direct the business with its experience, guidance, and expertise is greatly needed. The article puts together a set of tips designed to help small business owners decide whether it is time to have a board of directors and how that team can help.

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    Tips for Selecting a Board of Directors

    boardmeeting Tip 1: Does the business need a Board of Directors?

    This is, in most cases, the most difficult question to answer. To answer this, consider all areas where help and experienced expertise is needed such as management, marketing, finance, operations, etc. It is also important to consider all potential issues and see if the Board of Directors would help tackle them. Thirdly, think over what an effective Board of Directors would mean to the image of the business. Many times, having an experienced Board of Directors helps investors invest confidently.

    Tip 2: What type of Board of Directors is needed?

    Many times, small businesses hire a Board of Directors only for advisory or consulting purposes. However, many businesses go for a formal legally-formed Board of Directors that have a great interest in the way the business is run. Business owners would have to decide what kind of responsibility and decision power they want to give up. If the owner wants to hold on to the decision-making, he or she must only hire an advisory Board of Directors.

    Tip 3: Who is best for the small business?

    Since all businesses differ, the need is also different. It is important to consider and aim for diversity in terms of gender, age, experience, etc. on the team. It is always advisable to select a team that would come with a diverse set of expertise, background, and skills to help make a complete team by itself. It is also advisable to select the team by choosing expertise that the business lacks. For example, if the business strategy making team is not very aggressive, it is a good idea to hire someone with such experience. The potential team could include chartered accountants, attorneys, educators, etc. It is a good idea to select a team in which the members have different viewpoints and are not afraid of standing up for their views.

    Tip 4: Functioning of the Board of Directors

    The mechanism of the activities needs to be clearly defined. There could be many areas in the business where the involvement of the Board of Directors is needed. Make these known to them. It is also important to create an accountability structure between the executive teams and the Board.

    Tip 5: Frequency of meetings

    The Board of Directors should decide how often they would meet to discuss the progress, objectives, and issues of the business. Most businesses chart out a meeting on a quarterly basis. However, since businesses are different, these needs would be different as well. The meetings should be well structured with appropriate agendas that are well written and informed before the actual meeting. The team should also be able to meet on an ad-hoc basis when challenges arise.

    Tip 6: Duration of engagement

    Most positions on a Board of Directors only run for a period of one to three years. This should be well defined in the terms and conditions to avoid any issues and confusion.

    Tip 7: Payment for services

    Many variables like frequency, size, experience, etc. help in deciding what the appropriate payment for the Board of Directors would be. The general idea is: the smaller the company, the smaller the need of a Board of Directors, the lesser the amount of pay and vice-versa.

    Tip 8: Do not ignore non-CEO candidates

    Many business owners look for only CEO, COO, or CFO candidates for their potential Board of Directors team. This often leads to loss of great experience and expertise. Many individuals who have worked in large organizations can bring in valuable experience.

    Tip 9: Size of team

    It is important to keep the size of the team manageable. It is advisable to keep a small but focused group rather than a large one for a mid-sized business. Hire a team for five members for a small to mid-sized business whereas nine is a good size for a large business. It is also recommended to have an odd number of members to avoid all deadlocks.

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    To conclude, all businesses, whether small or big can benefit from the involvement of a qualified Board of Directors, as the advice from insiders is always limited and narrow. The advice and outlook of a diverse team of Board of Directors would be much broader in its range and skills that could help avoid problems and make the most of potential opportunities.