Forming a board of directors is a critical step for any business that decides to incorporate. The board oversees major company decisions and provides guidance to executives. While the process takes some time and planning having a diverse experienced board sets up a company for long-term success.
This article will walk through the key steps companies need to take to establish an effective board. We’ll cover:
- Benefits of Creating a Board of Directors
- Legal Requirements for Forming a Board
- Selecting Board Members and Positions
- Holding the First Board Meeting
- Operating an Engaged, Productive Board
Why Form a Board of Directors?
A board of directors brings oversight, expertise, and accountability to an incorporated company. Directors offer an outside perspective on company strategy and performance.
Some key benefits of establishing a board include:
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Guidance for founders and executives Experienced directors can mentor less seasoned executives and provide an objective viewpoint to founder-CEOs, This guidance is invaluable as companies grow
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Industry knowledge: Directors often have deep expertise in a company’s market from their own careers. They can advise on trends, competition, technology, and other industry factors.
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Accountability: Boards oversee major corporate decisions, like acquisitions, CEO appointments, and budget approvals. This governance creates important accountability for executives and shareholders.
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Credibility: A strong, diverse board signals that a company is committed to good governance and strategic growth. This credibility can help attract investors, partners, and top talent.
For most incorporated companies, forming a board is legally required. But even beyond legal obligations, a board brings immense strategic value as a company scales.
Legal Requirements for Creating a Board
Most companies are legally required to establish a board of directors within a certain timeframe after incorporating. Requirements vary by state.
Common legal guidelines include:
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C-corporations: Must create a board at the first official shareholder meeting after incorporating. At least one director must be named in the articles of incorporation.
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S-corporations: No legal timeframe, but most create a board right away for governance. S-Corps can have just one director.
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Nonprofits: Must form a board of directors within 2-3 months after incorporating. Nonprofits require at least three directors by law.
Beyond these timeframes, board size and structure is flexible. Most boards have 3-10 directors, with 5-7 being common. Companies should choose a size that allows for diverse perspectives while still facilitating productive discussion.
Boards meet on a regular basis, like quarterly or biannually. If a board fails to meet within 18 months, a state may dissolve the corporation.
Selecting Board Members and Leadership Positions
Choosing the right board members is a top priority. Directors should bring relevant experience, strategic thinking, and diverse viewpoints.
Here are tips for selecting members and establishing board leadership:
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Determine needed qualifications: Consider the industry, growth stage, strategic goals, and current expertise when determining what backgrounds potential directors should have. Common qualifications include industry experience, financial expertise, legal/regulatory knowledge, tech skills, and diversity.
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Look internally and externally: Existing executives and advisors that have Institutional knowledge can make strong board candidates. But external directors from outside the company bring fresh perspective. Aim for a mix.
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Outline board positions: typical positions include the chairperson who runs meetings and a financial expert to oversee finances. Designate positions based on members’ backgrounds.
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Interview thoroughly: Have candidates discuss their experience, how they would govern, and what they see as priorities. Make sure they are aligned with company mission and values.
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Review time commitments: Directors need adequate time to fulfill board duties. Discuss any existing commitments upfront.
Taking time to find well-qualified directors ensures effective oversight right from the start.
Holding a First Board Meeting
Once directors are in place, the first board meeting kicks off operations. Use the initial meeting to:
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Elect officers: Official corporate officers are appointed by directors. Typical roles are CEO, President, CFO. Handle officer elections.
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Appoint committees: Form key committees on areas like finance and executive compensation. Name directors to lead each committee.
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Approve bylaws: Review bylaws that govern board operations and procedures. Bylaws need board approval.
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Discuss strategic priorities: Allow directors to share views on company strategy and priorities for the board. Start aligning on vision.
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Outline meeting schedule: Decide on a regular board meeting cadence, like quarterly. Schedule dates for the year. Special meetings can be added as needed.
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Handle legal documents: Directors should sign board agreements outlining duties and liabilities. Get all binding documents finalized.
A thorough first meeting gets the board functioning efficiently from day one. Take detailed meeting minutes to reference later on.
Operating an Engaged, Productive Board
With legalities handled and roles established, the board can focus on providing effective governance. Here are best practices to keep in mind:
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Communicate expectations: Be clear about what the board should – and should not – be focused on. Set expectations for meeting attendance, preparation, and participation.
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Send materials in advance: Give directors time to review meeting agendas, budgets, proposals, and data ahead of time so they can provide informed guidance.
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Focus discussions strategically: Board meetings should center on major decisions, not day-to-day details. Guide discussion towards long-term strategy and growth.
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Create transparency: Keep directors informed on company performance, plans, and issues between meetings through board portals or regular updates.
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Run efficient meetings: The chairperson should move discussions along and make sure all voices are heard. Follow up on action items.
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Assess performance: Have the board self-evaluate and assess functioning annually. Refresh membership if needed.
By engaging directors and clearly communicating priorities, companies benefit hugely from board guidance.
Key Takeaways on Forming a Board of Directors
Establishing a strong board of directors marks a major milestone in a company’s growth. While the process takes planning, the oversight and expertise a board provides is invaluable.
Key steps include adhering to legal guidelines for board creation, carefully selecting qualified members, running productive first meetings, and keeping the board engaged on strategy.
With diverse perspectives and governance, a thoughtfully created board helps executive teams focus on execution while benefiting from guidance that fuels smart, sustainable growth for the company. Taking time upfront to form a board well pays dividends over the long term.
Deciding on a Board Size
There is no mandatory set number of Board Members, and most range from 3 to 31 employees. Typically a board is always composed of an odd number to prevent tied votes. Analysts suggest that the ideal Board of Directors size is 7 members. Deciding on your Board size is up to you as a founder. Perhaps a smaller board is good to start with expansions being made as more investors come to the table, earning more seats, or as new problems or growth opportunities arise at the company that requires new expertise to be brought in.
What a Board of Directors Does
Even with great executives, a great product, and a great team, the success of a new startup can be determined by its Board of Directors. Choosing a Board of Directors is a critical process. The Board of Directors for your venture are the strategic advisors or final votes in major decisions and changes. With the right Board in place, a company can accelerate and take the right strategic steps to a favorable exit or IPO.
Building a Board of Directors is a crucial process and one that should be done deliberately and strategically. Decisions about the type of board your company needs, the types of board members and how they will strategically work together, and planning ahead for potential board obstacles and stumbling points are all aspects to consider when building a Board of Directors that will actually help your company grow.
How To Start And Manage A Board of Directors part 1 – Chris Guerriero
How do I form a board of directors?
Because each state regulates aspects of a board of directors, there is no single way to form one. There are several common actions to take to organize your board of directors, though, including these five steps: 1. Register articles of incorporation You must file articles of incorporation in your state to gain legal status as a corporation.
What is a board of directors?
A board of directors is a group of appointed or elected professionals who oversee an organization, company or business. They meet regularly to set policies or review data and their goal is to represent the viewpoint of shareholder.
Should you form a board of directors?
Forming a board of directors will expose you to assessments and criticisms that you may not have heard before. Be open to them, as the feedback of your board of directors will allow your company to set better goals and achieve them. As your board members are likely to have busy schedules, be sure to value their time.
How do I draft a board of directors agreement?
Draft Board of Directors Agreement On top of your bylaws, a Board of Directors Agreement should be drafted. The agreement should outline the specific responsibilities of the board member to both the board and the corporation. It can also outline the specific responsibilities of the corporation to the board member.
