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Board of Directors: A brief Introduction for StartUps & SMEs

About BoDs: A brief Introduction
This is the first in a series of weekly articles addressing issues related to BoDs and their efficient functioning, including all relevant Best Practices.

 

What is a Board of Directors.
Board of Directors (usually abbreviated as BoD) is a group (Board) of either elected or appointed people (BoD Members) who together they jointly oversee the activities of an organization. Think of an organization as any group of people who work together in an organized way for a commonly shared purpose. An organization can be a for-profit company but it can also be a football club like the Ghanaian Black Stars.

BoDs seem to appear in medieval times in Europe, when merchant investors put their money into trading companies so ships could be outfitted properly and sail to the …Edge of the World and bring back the profit of the trades (export) and new items to profit from (import). From the moment the Dutch East Indies (India) company sold the first shares in 1602, from those old trading companies to modern corporations, the institution of the BoD has come along for the ride as the perch from which all shareholders and creditors watched carefully over the men they had hired to manage their companies.

Both Profit and Not-for-Profit (e.g. Charities, NGOs, etc.) organizations can have BoDs. Actually BoDs in nonprofits, are usually actively involved even –sometimes- in the daily running of their organizations; nonprofit BoD tend to be the founders plus a hired executive director and staff to manage the daily operations.

In a For-Profit organization, the BoD works on behalf of the shareholders, thus the Board is elected by the shareholders. Since nonprofits do not have shareholders, its BoD appoints/ elects new Board members.

Depending on your geography and your company’s legal setup, in some countries, having / electing a board of directors is a legal process stipulated by very moment that you incorporate. Some of these laws even define when your BoD members need to be named and how many directors are required for your company.

FYI: a Director is a(ny) person appointed to serve on the Board of any type of an organization, such as an institution, an association, a business, etc. S/he could be an Inside Director – i.e. someone who has an operational role in that organization like a CEO or CFO or a meaningful relationship an an advisor/consultant like a Lawyer or an Accountant, or s/he could be an Outside/ External Director – i.e. someone who besides than serving on the Board, s/he has no other connections to the organization

The Executive Director – is an Inside Director who is also an executive within that organization; obviously a Non-Executive Director is not in any way in the payroll of that organization: neither as an employee nor as a consultant.

Btw, a Nominee Director is “an individual who is appointed by a shareholder, company or interest group and who has a continuing loyalty to the appointor/s or other interest in the appointing company”. All Offshore corporate structures in Tax Heaven countries are ‘run’ by Nominee Directors so the real owner can be hidden from his/her local tax authorities.

 

What does a BoD do?
The Boards of Directors set up Corporate Governance, oversee Organizational Strategies, Capital Investments, Share policies (e.g. Dividend / Profit), financial accuracy, etc. A BoD sets the direction of the company and it should never get involved in its operations! The CEO / Managing Director runs the company. The BoD’s job is to make sure the right executive team is at the helm, not to be at the helm themselves. If the BoD gets involved, that will immediately undermine the executive management team – thus hurting the organization instead of helping.

The Board of Directors is the governing body for a company and as such all major decisions will need to be approved by the BoD. For example, you need BoD’s approval: to fire or even fire a CEO, to acquire another company however small, to bring new investment in, to go public or to even sell your company. On all matters of major strategic importance, i.e. in anything that even remotely influences the direction of an organization, the BoD is (needs to) engaged, actively involved, and supportive of course.

BoD members address and debate/ discuss all the key issues of the organization. Boards should reach a consensus and then act on it. And like any other group of people, Boards need a leader: that leader is called the Chairman of the Board.

 

So, why the need for a BoD?
1. Expertise from Seasoned Professionals

The BoD will help the senior/ executive management team to step back from the daily routine and focus on the business strategy.

BoD members bring valuable expertise in Operations, IT, Finance, Mergers & Acquisitions, Marketing, Sales, Law, etc. Other BoD members bring along and put into effective use business contacts and their professional networks.

2. Corporate Governance
Simply put, for the moment think of Governance as a set of rules, principles, best practices, processes and procedures, by which your organization is directed and controlled. These are the guidelines as to how your company can fulfill its mission, realize its vision and to add value to all shareholders and stakeholders.

3. Independence & Accountability
Boards Directors should ideally be independent of the organization so they could act purely only in the interest of the organization and all possible shareholders (and possible stakeholders too) and they should be free from any conflicting interests that can compromise their judgment in decision- making.

4. Strategic Direction
BoD should set the direction/ strategy of the company’s future and they should make sure that there are mechanisms of implementing the strategy and monitoring, controlling and ensuring that everything in the organization -from processes to people- are aligned towards its strategic goals. They are the High Priests and Priestesses of Strategy Execution.

5. Accountability
Since the Enron scandal (and many more that have followed since then) , BoD members are expected to hold fiduciary / legal responsibilities. Board Directors now are more and more becoming collectively or even individually accountable for an organization’s performance, compliance, financial mismanagement and risk mitigation strategies.

6. Credibility & Legitimacy
The presence of a BoD presumes a sense of integrity and credibility for an organization. Customers, investors, even employees and vendors view the presence of a BoD as a reassurance mechanism for their interests.

A fellow Board member and dear friend, once told me jokingly that people believe that a company exists if it has a BoD.

 

Company Size and need for a BoD.
Most small companies are just 1 or 2 owners and a few employees. In this case, it might or might not make sense to have a BoD, depending if you need the expertise that potential BoD member can bring into your company. But, the moment when any outside investment is brought in, the VC (Venture Capitalists) and/or any other investors will require a few board seats so they can monitor the direction of the company and thus protect their investment. I have never witnessed or heard of any VC terms of the investment that did not include at least one seat on the Board.

As your company grows, there is a point where you will welcome new and needed expertise which can be brought in with the right BoD – if you are (very) selective as to whom who are inviting on your Board.

 

What is the Difference between BoDs and Board of Advisors?

An Advisory Board (or BoA) is a less formal association of individuals who do not have any fiduciary or legal responsibility towards the owners, shareholders and stakeholders. BoAs although they have a genuine interest in the success of the organization, they could be basically a set of hired high- level consultants and they have no time-bound commitment as to for how long they will serve or how many and which meetings they will need to attend etc…

The Advisory Board primarily advises and gives feedback, but is almost never involved in the decision-making.

A BoA is a consulting body that may be set up, maintained or disbanded at the discretion of the CEO / Managing Director of an organization. BoA members do not have the power to veto, nor the power to instruct executives nor the power to direct the organization. The BoA works for the CEO /Managing Director or a delegate.

 

In Conclusion
Please do not allow any common fears to keep you from having /setting up the right BoD for your organization:

  • Authority Dilution for the CEO or the owner(s)/ founder(s) of the business
  • Interference in all possible business decision- making (again BoD are not involved in Operations)
  • Cost –because it’s hard to see or calculate the value of a Bod in terms or ROI justifications)
  • Time-consuming…Hmmm. How much time will it cost a wrong decision which could have been avoided?
  • Right moment – can’t see the need for it at the moment. Well, the sooner you have set up a great BoD, the sooner you can benefit from it. Ideally Startups should have a BoD from Day-1.

Keep in mind that it takes planning & time in setting up the right BoD for your organization and align it with the organizational needs and requirements. So why not start right now?

 

Thank you,

Spiros

About the Author: Spiros Tsaltas is a Top-Tier Management & PR Consultant and a former University Professor (RSM MBA, CUNY, etc). Spiros has hands-on experience on setting up all sorts of Startups both in the US and in Europe. He is an active transformational leader and strategist with extensive experience on Boards of Advisors & Boards of Directors. He is currently assisting a couple of Ghanaian companies with the setup of their BoDs.

 

© 2018 Spiros Tsaltas &  © 2018 HireLoyalty