A famous Hellen Keller saying goes, "Alone we can do so little; together we can do so much." While Helen Keller might not have meant this for the business world, it certainly holds true in the corporate circles of today.
As all successful entrepreneurs know, having the right people on your team plays a crucial role in determining the future success and sustainability of your organization. For board members, this is fundamental given the enormous responsibility of each board director and the immense decision-making power that boards have.
There's no question: You need the right people around the table to provide your business with the right vision, strategic advice, and effective leadership.
Building the perfect board of directors (BOD) for your organization is a massive challenge, especially with filling board of director positons. According to the Leading With Intent 2021 report, almost half of (49%) chief executives stated that they do not have the right board to establish trust with the communities and clients they serve.
A successful board includes members with diverse skill sets and backgrounds who can work together toward a common goal. It can be extremely challenging to recruit the right group of directors who not only have the required skills and expertise but also share the organization's vision and passion.
What is a Board of Directors?
A board of directors is a group of people elected to represent the shareholders of a business. Generally, the board of directors includes the Chief Executive Officer (CEO) and sometimes senior managers and eminent individuals not involved in the company's day-to-day operations.
The BOD is responsible for setting high-level strategies for a company and overseeing the management of the firm by meeting at regular intervals. Additionally, the BOD plays a crucial role in assisting the corporation in achieving its goals by supporting senior management with timely guidance and mentorship.
The New York Stock Exchange (NYSE) and Nasdaq require all publicly-listed companies to have a board of directors with a majority of independent directors. The size and structure of the board are determined based on the company's articles of incorporation and other corporate bylaws. While a board of directors is not essential for private firms and non-profit organizations, they often find it valuable to appoint a board.
Roles and Responsibilities of the Board of Directors
While the actual position and responsibility of the board of directors vary from company to company, here are the broad responsibilities expected from the board of directors:
- Protect the interests of the company's stakeholders. The board ensures the company's operations do not risk investor and shareholder assets. It frames the policies for payouts and dividends and presents their opinion to the organization.
- Conduct the annual shareholders' meeting. It's common for companies to announce annual revenues, elect and appoint new board members and other chief executives, and the company's plan for the upcoming year during these meetings.
- Build the company's vision, mission, and purpose. The board ensures that all chief executives work towards the organizational plans and goals.
- Hire and terminate corporate executives. The company's chief executives, including the CEO, are answerable to the board and must act in the best interest of the firm and stakeholders.
- Make crucial strategic decisions like mergers and acquisitions, stock splits, new product launches, etc.
- Handle high-level finances like ascertaining the compensation of top executives and approves or amends the company's annual budget.
- Manage crises. When the company faces a major crisis, the board acts as a shield, representing the firm and remaining accountable for its actions. The chief executives rely on the board's counsel on the best ways to mitigate the crisis.
Board of Directors Positions
The structure of the board varies depending on the company's bylaws. The company's rules determine the number of board members, how they are elected and how frequently they meet.
Since the board balances shareholders' interests and the management's vision, it usually includes representatives from both inside and outside the organization. The internal director is a board member actively involved in the company's daily operations, while the external director represents the interests and opinions of those who function outside the company, like the shareholders.
Some of the common designations in the board of directors in public companies are:
- Chairperson: Head of board and committee meetings (also known as the president). Usually, the directors vote among themselves to elect the chairperson. It's common for the CEO to serve as the chairman of the board of directors.
- Vice-Chairperson: Fills in for chairperson when they are absent. Sometimes referred to as "vice president," They might also be known as "chairperson-elect" if the company has plans to appoint them as the next chairperson.
- Treasurer: Responsible for the overall financial health of an organization but doesn't take part in the day-to-day operations. They oversee the company's annual budget, financial audits, investments, and other high-level financial policies.
- Secretary: Maintains the board's corporate records including board meeting minutes and other documents.
- Managing Director: Responsible for managing, guiding, and monitoring specific business functions. A company might have several managing directors to handle different functions like MD of Marketing, MD of Operations, etc.
- Executive Director: Participates actively in business operations, finances and sales. The executive director is a senior company employee who is also part of the board. They receive a regular salary from the company.
- Non-Executive Director: Provides critical advice from someone who is not an employee of the company. Companies bring in non-executive directors to offer an unbiased, objective, third-person perspective. Additionally, they represent the best interests of the stakeholders and investors outside the firm.
- Shadow Director: Also known as the de-facto director, this person retains complete control of the organization, though they are not officially listed as a director.
- Celebrity Director: Adds the celebrity factor to the board like goodwill, credibility, and public image and help influence public perception about the company. You can find celebrity directors on the boards of several US companies.
- Other Designations: Besides these common designations, there are different positions on the board, including vice president, CFO (Chief Financial Officer), COO (Chief Operating Officer), vigilance chief, zonal head, audit chief, etc.
6 Steps to Board of Directors Recruiting
Step #1: Determine the gaps that need to be filled
Before approaching potential board members, you must define what you're looking for in a director. You can conduct an internal survey among your senior managers to assess the skills and experiences that your organization is lacking.
For example, hiring a board full of engineers might not be the best choice if you already have senior and expert engineers in your team. You can invite managers and other team members to submit names of potential board members.
Step #2: Define the responsibilities of board directors
Just like you would never apply to a job without knowing the role's duties, you cannot expect board directors to join your team without having a clear picture of the role's responsibility. Regardless of the type of organization and its mission, all board members must fulfill three specific obligations.
- Duty of Care: Being a board director is more than a mere formal designation. Members are committed to attending meetings regularly and actively participating in board discussions. They also promise to follow through on assignments and support the organization's goals.
- Duty of Loyalty: Board directors should do more than show up for meetings. They must put aside their professional and personal interests and work in the company's best interests. They should reflect the organization's mission and be loyal to the company's goals.
- Duty of Obedience: The final responsibility of a board director is to follow the company's guidelines. A director who strays away from this duty could steer the company in the wrong direction and even hurt the company's public image and standing.
While interviewing and recruiting potential board members, ensure that you provide them with the applicable rules and responsibilities so that they have a clear idea of what they can (and can't) do. This gives them an accurate picture of their duties and helps them decide if they should take the position.
Step #3: Connect with qualified prospects
The best-case scenario here is to have a pre-existing list of qualified potential candidates that you can invite to join your board. However, if you don't have a database of potential board directors, it's a good idea to develop a process to gather and store information on potential candidates. This way, you can come back to this list whenever you need a new member to join your board.
If you don't have a list of potential board members, here are a few ideas to help you find recruits:
- Spread the word: Let your employees, friends, colleagues, and professional acquaintances know you have an opening on your board. You can also spread the message on LinkedIn and other professional online networks.
- Publish a blog post or newsletter article: This helps to connect you with interested professionals.
Relying on qualified candidates to connect with you can cause you to miss out on some of the best people in the industry. So, if you have a specific person in mind, take the time to reach out to them and see if they are interested in serving on your board.
Step #4: Interview and screen prospects
Just because a person has the basic skill sets and experiences, it doesn't make them the right fit for your board. Once you have shortlisted potential candidates, you need to create a streamlined process to interview and evaluate candidates before you add them to your board. Here are a few ways to screen potential candidates:
- Invite them to attend a board meeting and see in person if their contributions are suited for your organization and vice versa.
- Ask them to spend time watching the firm's typical operations to help them decide if they want to be on your board.
- Ask a senior board member to interview the potential candidate and see if their skill sets match the needs of your organization.
Step #5: Make an informed decision
Don't rush through the decision-making process. Evaluate the skill sets, experience, interests, and passion of each candidate to decide if it adds value to your company's goals and objectives. You can also ask your existing board members or senior management team to provide their input to help you make an informed decision.
Step #6: Provide a formal orientation and onboarding
Once you have selected and recruited the board member, it's time for a formal orientation. This can be done in several ways:
- Provide them with relevant reading materials like a board manual
- Match the new board member with a senior board member who acts as their mentor
- Inform them of their role, responsibilities, and perks
A formal orientation session helps the board member get a clear picture of the overview of the company, its evolution, goals and objectives, finances, staffing, and other critical information. This helps new board members take charge of their role with a stronger knowledge base and a clear idea of their role.
How Big Should a Board of Directors Be?
There is no ideal number that suits all companies. Instead, the number of directors depends on factors like size, complexity, function, regulatory requirements, and representational requirements. Choosing an uneven number of board directors like 7 or 11 helps avoid ties during voting on crucial decisions. The general rule of thumb is that smaller companies can choose five to seven people and bigger organizations need at least 9 to 11 people at the minimum.
Having enough people on your board ensures that even if a couple of members are absent, others can make critical decisions. However, too many board members can slow down progress and complicate decision-making. A study by GMI Ratings for The Wall Street Journal reveals that smaller boards are more efficient than larger boards. The report states that the average size of corporate boards is 11.2 members, and companies with smaller boards produced better returns over three years than those with larger boards.
Even large publicly-traded companies have small boards. To give a few examples, Netflix has only eight board members, and Apple has just seven directors on its board. However, the actual board size also depends on regulatory concerns. For example, Bank of America has a relatively large board comprising 14 directors due to regulatory requirements in the banking sector.
Board of Directors Qualities to Look For
Business leaders and entrepreneurs sometimes make the mistake of surrounding themselves with "yes people" who don't challenge their decisions. This is a crucial mistake as it prevents them from gaining a fresh perspective. The key to organizational success is to surround yourself with an experienced and diverse team of outsiders who provide you with newer views and challenge you to push boundaries.
Here are the top traits to look for while recruiting star directors to join your board:
- Creative problem solvers and innovators: Creative thinkers help you come up with new and alternate solutions that drive your business to new heights and help you emerge as the leading authority in your industry.
- Challengers: All boards require a member to play devil's advocate, someone who weeds out potential weakness and helps you challenge assumptions.
- Strategic thinkers: Entrepreneurs and CEOs find it difficult to recognize future opportunities as they are busy dealing with the present. Strategic thinkers help you design and execute long-term plans for the business.
- Diversity: All successful boards are highly diverse. Including people of different ethnicities, skills, gender, educational backgrounds and experiences help you gain newer and broader perspectives.
- Sales experience: Often, boards are made up of people with technical or financial expertise. While both these skill sets are valuable, including a member who has in-depth insights into the sales aspect of a business can help your company capitalize on market opportunities and accelerate growth.
- Niche experience: Look for people with diverse expertise like marketing, financial, and capital-raising experience to build a well-rounded board that helps you drive business growth. Many corporations include a financial advisor and an attorney on their board to get legal and financial insights into crucial problems.
- Commitment to the business: This is a key requirement. The director must be interested in the well-being of a company and they should not just be on the board to serve their personal interests.
- Time to devote to board duties: Board members are expected to attend board meetings regularly, spend time preparing for the meeting's agenda, and serve on additional committees. A member who doesn't have time and energy to devote to their responsibilities is not a good choice.
- Integrity: Board members usually sign a conflict of interest statement and act in the company's best interests. For example, a board member who profits from being on the board of directors can steer the company in the wrong direction.
- Investment raising ability: While this is not a requirement, it's an added advantage. A board member with experience raising capital can help scale up your startup or business by connecting you with interested investors.
Who Should Not Serve on a Board of Directors
Here are a few people you shouldn't include on the board:
- A friend or relative who has no expertise or experience.
- Someone who hasn't been checked thoroughly. Ensure that you screen all potential directors to ensure that there are no surprises that could damage the integrity of your organization.
- Someone who has a potential conflict of interest with your business.
Board of Directors vs Advisory Board
While the duties may seem similar at the outset, there's a vast difference between both roles. The board of directors has a fiduciary responsibility to the business. This means they are legally responsible for the high-level decisions of the company. Directors also get the right to vote on who leads the company. This means that even if you are the company's founder, the board can vote you out, as Apple's board fired Steve Jobs. A shareholder can sue them if they deem the board's actions are against the company's best interests.
Generally, the directors receive stock options as compensation for being on the board. When VCs invest in a company, they usually require a seat on the board of directors to oversee its management.
Advisors, on the other hand, do not have fiduciary responsibility. As their name implies, their primary role is to advise the company as and when needed. They have no voting rights or any say in the company's management. Think of advisors as a team of mentors who guide the business. Companies compensate advisors with stock options or cash.
Does the Board of Directors Get Paid?
Yes, companies have varying terms on the compensation they pay their board of directors. Generally, serving on a corporate board is lucrative as it offers an impressive income. The average compensation per board member is relatively high and can easily reach $300,000 to $500,000. Most companies usually pay an annual retainer fee to the board for their services. Besides monetary compensation, organizations might offer other perks, including:
- Stock grants: The organization provides a specific number of shares to the director at no cost. Usually, stock grants come with a predetermined timeframe, say two years. If the director quits their post before the two-year mark, they lose their stock grant.
- Stock options: This benefit gives the director the right to buy and sell a specific number of shares in the organization at a particular price.
- Reimbursements: Board directors often receive reimbursements for the costs of traveling to and from board meetings.
- Liability insurance: Several organizations offer liability insurance as part of the directors' compensation. This insurance helps to protect board members from lawsuits alleging wrongdoing or improper actions.
- Meeting fees: Some companies might pay meeting attendance fees for every board meeting attended by the directors.
Recruiting Director Jobs
The right board members assist you in steering the business in the right direction. They ensure that the organization stays true to its core culture, strategy, and focus while not losing sight of financial growth and long-term sustainability. While it may seem challenging to recruit the right candidates to join your company's board of directors, you can give your organization the best chance of building an efficient and strategic board.
With that said, even a superstar board with rockstar directors does not guarantee your company's future success if you do not have a skilled and experienced team to implement and execute the board's vision and strategy effectively.
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