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.

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.

Now, there is a cost to creating both groups, for things like compensation, travel, meeting time, preparation for meetings, including board books and minutes, compliance activities and filings, and director and officer liability insurance to protect members. One $300 million public company estimated that going public and establishing the required board of directors cost them over $5 million per year for these activities. Don’t worry, a smaller privately-held company should spend far less.

CREATE YOUR BOARD FOR THE RIGHT REASONS
Too frequently, owners/CEOs form boards for the wrong reasons. Encouraged by their CPA or legal counsel that they should have a board of directors, they proceed, only to wish they hadn’t as they realize the implications. One owner/CEO I know started his board and then chafed at the decision-making power he had given up. He finally chose to disband the board because he didn’t like having to work in tandem with it. This not only wasted a lot of time and money, but caused significant friction between him and the members for over a year.

Consider the return on investment (ROI). From an advisory group, there should be new business opportunities and relationships that help an entrepreneur break into new markets, gain customers and broaden their network. Performance is fairly easy to measure and can be objective; for example, “Acquire 5 new clients in year 1”. For fiduciary boards, you’re paying for experience and knowledge in areas that may be unfamiliar to a CEO that could result in revenue growth, cost avoidance, leader development and retention, strategic planning, and more. (Think Target and cybersecurity expertise.)

Boards can be a great help to a CEO if assembled for the right reasons, with the right charter and governance, and with the right mix of experienced members. If you’re unsure, start with an advisory group. This can help you decide whether or not to form a fiduciary board of directors. In either case, make sure you clearly understand what you are getting and how it will change the way you will operate compared to when you were a pure owner/CEO.