A CEO’s Guide to Creating the Perfect Board of Directors

One of the first decisions interested CEOs should make is whether a true fiduciary board of directors is needed or whether an advisory group is better suited.

A fiduciary board of directors has the responsibility to represent the interest of owners/ shareholders and usually has several roles: auditing of the company’s books, risk management, approval of strategic plans, compensation/succession planning for the senior leaders and performance appraisal of the CEO. They typically have approval power over several of these, which can cause friction with an owner/founder/CEO, who is usually the largest shareholder.

An advisory group does not have the ethical or legal responsibility to look out for the welfare of shareholders. Typically, advisory group members are selected for their specific industry experience and contacts and their ability to open doors and make introductions. Advisory groups usually meet less regularly than boards of directors and often are given assignments to undertake between meetings. Advisory groups are usually paid a modest stipend and sometimes receive some equity in the company to provide an incentive for helping the business grow profitably.

For fiduciary boards, who are typically elected by the owners/shareholders, there should be specific terms, typically one to three years, a mandatory retirement age, and an annual performance review. Great boards usually consist of a majority of outside directors (non-employees) with perhaps one or two inside directors (who are also employees, such as the CEO, CFO). Advisory groups are much less formal and members often serve at the pleasure of the CEO.

For advisory groups, owners/CEOs usually select members themselves. Advisory group members should be selected for their specific, relevant industry experience and contacts. Board of director members are often selected more for their particular functional knowledge and skills. I advise CEOs to select members who complement each other in their skillsets. Selecting experts in sales and marketing, finance and controls, manufacturing, human resources and compensation, business law, accounting, and even having a therapist or mediation expert in the mix, will result in a well-rounded group that is prepared to respond to an array of business challenges.