We’ll cover what a board is, what it does, and how it’s chosen. Then we’ll look at which businesses are legally required to have a board, and which ones can elect one by choice. Finally, we’ll explain how you can set up a qualified board of directors, and chair board meetings of your own.
What is a board of directors?
A board of directors is a group of professionals who are elected to represent the shareholders of a company. The shareholders are people who have money invested in a company. That could be because they purchased stock, invested venture capital, or founded the company on their own dime.
Typically, the board is chosen by the people who first incorporate the business—usually the founders. Later on, those members are either re-elected or replaced, once shareholders hold a vote.
Non-profit companies have boards of directors as well. In their case, since there are no shareholders, the board members select new members themselves.
The board’s job is corporate governance. That means they establish policies for how the company is run; set broad, long-term goals; make sure the company has enough money to keep operating; and choose who to hire for executive management positions. They also decide how stock options and dividends are issued.
Board members may or may not be compensated for their time and effort.
Do you need a board of directors?
Some types of business are required by law to elect a board of directors. Others can make the choice for themselves.
Companies legally required to elect boards
Every C corporation or S corporation is legally required to elect a board of directors.
Companies not legally required to elect a board
Meet the members of the board
The typical board ranges in size from three to 31 members. Some business analysts claim the best number is seven. But there’s no magic number.
There are two different types of people on the board—inside and outside directors. Then, there are specific positions those members fill.
Inside and outside directors
An inside director already plays a role in the operation of the company before joining the board. Usually, this means they’re an executive, major shareholder, or another stakeholder whose decisions make an impact—like a union rep. An inside director should have the best interests of major shareholders, officers (CEO, COO, etc.) and employees in mind. They aren’t typically paid for serving on the board.
An outside director isn’t involved in the day-to-day workings of the company. Their duty is to bring an external, neutral eye to board and company disputes, and help settle them. People filling this role may be venture capital investors, or experts in the company’s industry. They’re often compensated for serving on the board.
Positions on the board of directors
- The Chairperson of the Board: Organizes and runs board meetings. Typically the CEO, or another individual who plays a major role in the company.
- Vice-Chair: Covers the Chairperson’s duties when they are absent.
- Treasurer: Oversees, and is responsible for, board and company finances.
- Secretary: Takes down minutes at every board meeting, and manages the board calendar.
- Committee Chairs: Members can form and lead committees. Common ones are the Governance Committee (oversees membership and roles) and the Finance Committee (oversees spending).
- Members: Attend meetings, and handle tasks assigned to them by the board.
What does a board of directors look like?
Remember the oak-panelled room and the guys smoking cigars? The boards of directors for most businesses don’t look like that. If you’re unsure whether your business needs one, consider a few example boards of directors:
- A married couple, who have a business lunch twice a year with the inlaws who have invested in their dog grooming business
- The employees at a worker-owned pizza cooperative, voting on how the restaurant should be run
- A group of stay-at-home parents, working together to run their side hustle—an online store specializing in plastic-free toys
- Four college friends who just raised funding for their new app, and need to plan how the money is used—under the watchful eyes of their investors, of course
You don’t need to be Global Megacorp Inc. to have a board of investors. That being said, take into account the pros and cons before you form one.
Should you form a board of directors?
You aren’t a business tycoon. Your company is small—maybe it doesn’t even issue shares. So why should you care about having a board of directors?
Pros of having a board of directors
You can draw on a deeper well of expertise
Brian Hamilton, a seasoned entrepreneur, has consulted with hundreds of companies of every size. He says,
Entrepreneurs, founders and CEOs have common characteristics, one of which is that they are, on average, very strong-willed individuals…. They struggle with the process of obtaining (and then integrating) advice from outside sources.
If your business has traditionally been a one-person show, with you as the star, bringing on a board can be a good way to make sure more opinions are taken into account.
Even if you’re an expert in your industry, hearing new perspectives—and talking through differences of opinion—can help you break out of traditional patterns and make new strides.
You’ll put official processes in place
Once you’ve got a board of directors, you’re more or less forced to formalize some aspects of business planning. These may be tasks you’ve always done on the fly—but, once the board is handling them, they get the treatment they deserve.
Examples of these processes include:
- Thoroughly assessing business risk when making major decisions
- Formally developing and outlining long-term strategy
- Periodically making sure your business complies with industry regulations
- Approving the company budget
You may especially benefit from a board of directors if….
- You’re expanding into new, uncertain markets, and your business could use high-level steering and oversight
- You’ve taken on a new loan or line of credit, and you need to make sure it’s spent effectively
- You’ve experienced recent setbacks due to bad business planning, and want to avoid making the same mistakes in the future
- Your profits or growth have stagnated, and you need to break out of your rut
Cons of having a board of directors
Having a board of directors means adding another layer of organization to your company. You’ll need to select initial members, create regulatory guidelines, hold meetings, and keep minutes.
If your business runs lean, you’re confident in the leadership, and you don’t have shareholders clambering for representation, you may be better off without a board.
You also likely won’t benefit from a board if:
- You’re a sole proprietorship, with one or two employees at most
- You’ve operated for years without one, without suffering any setbacks as a result
How to form a board of directors
Depending on whether you’re incorporating your company at the same time, the process for putting in place a board of directors will differ. But generally, you can follow these steps:
1. File for incorporation
Again—this is only necessary if you’re incorporating. Corporations are regulated at the state level. So, you file your Articles of Corporation with the Office of Secretary of State in the state where your business operates.
The Articles of Corporation act as your corporate charter. They include the name of your corporation and the names of the people incorporating, its purpose, its status (non or for-profit), the amount and types of stock being issued.
While it varies state by state, typically you must select an initial board of at least three people.
2. Draft bylaws
Your board bylaws lay out corporate governance rules—the structure of the board, and the rules it follows.
The bylaws describe:
- The number of directors on the board, and how they’re selected.
- Directors’ terms—how long they serve, and how many times they can serve.
- Director powers, namely what they are able to do. Examples include forming committees and hiring executives.
- The board’s policy towards vacancies—what to do if a board position is left open.
- Meeting protocol—how often meetings are held, and how relevant people (ie. shareholders, employees) are to be notified.
- Quorum, or how many members need to attend a board meeting for it to be valid.
- Chairperson rules, namely how they’re appointed and dismissed.
- How much compensation, if any, board members receive.
You can create your own bylaws from scratch, or sign up for an automated online service that will draft bylaws according to your needs.
3. Hold a shareholder meeting
Once a board is selected during incorporation, it needs to be validated by shareholders. A shareholder meeting is a chance for the shareholders to officially accept the board, or elect new members.
4. Draft and sign the board of directors agreement
The board of directors contract lays out the duties of the board members, the purpose they serve as members, and what happens if a board member fails in their duties. Every member needs to sign this agreement.
To get you started, here’s a simple agreement. Fill in the blanks to customize it to your business.
5. Hold your first board meeting
Once the board has been selected and put in place, it’s time to go ahead and hold your first board meeting.
How to hold a board meeting
Board meetings happen on a regularly recurring basis—as set out in your bylaws—and follow a standard format. It’s the Chairperson’s duty to plan, call, and preside over a board meeting.
Before the meeting
Before the meeting starts, the Chairperson needs to notify the right people in advance. These are usually board members, shareholders, and employees. Precisely who get notified, and how, is outlined in your board’s bylaws.
Also, the Chairperson is responsible for drawing up an agenda for each meeting—an outline of what board members will discuss. If the agenda calls for any research to be presented, it’s up to the Chairperson to send the results of that research to board members before the meeting starts. Examples include research into new markets, competitors, or products.
During the meeting
It’s up to the Secretary of the Board, during the meeting, to take down minutes. These can take the format of a typed document, an audio recording, or a video recording.
At the next meeting, the board votes to approve the minutes. This time between two board meetings doesn’t just give the Secretary time to type up the minutes. By approving them as a group, the board is agreeing on one official version of reality—who said what, and what they decided.
Why keep minutes?
Minutes make the board meeting a matter of official record. You can use them to look back and recall decisions the board made. Also, in the case of an IRS audit, you’ll need to provide comprehensive minutes for all your board meetings.
What do board minutes look like?
Meeting minutes aren’t a verbatim copy of what was said in the meeting. They’re an outline that summarizes decisions, debates, and points made. Most importantly, they include the outcome of board votes.
Every copy of board minutes begins with the time and date of the meeting, and the names of everyone present at the meeting, including guests.
The board meeting format
With only a few variations, the following series of events needs to take place during every board meeting.
- Recognize quorum. The Chairperson recognizes quorum—a head count of everyone present. If there aren’t enough people to reach quorum, the board meeting isn’t valid. The number for quorum is usually laid out in your bylaws. If not, then a simple majority (50% or more of board members present) covers it.
- Call the meeting to order. With a brief statement, including notes of welcome to all members and visitors, the Chairperson calls the meeting to order.
- Approve the agenda. The Chairperson asks the board to approve the agenda. If amendments are requested by members, the Chairperson may approve them without a vote.
- Approve the minutes. Minutes from the last board meeting are presented, and the board votes to approve them.
- Deliver reports. The CEO, plus heads of committees, deliver reports. Financial reports may be delivered.
- Cover old business. If there is any business carrying over from the last meeting, it’s considered old business. If the board is ready to vote on old business, this is the time to do so. If it needs further discussion, it may be bumped ahead to “further business.”
- Cover new business. After old business, the Chairperson introduces new business—decisions that need to be debated and voted on. The Chairperson may set a time limit for discussion. If the time limit arrives and the board isn’t ready to vote, the business can be carried over into the next meeting as old business.
- Other business. As the “miscellaneous” section of the meeting, the other business section is when board members can make announcements, carry forward topics from old business, or discuss and plan future new business in advance.
- Close the meeting. The Chairperson thanks attendees, and declares the meeting adjourned.
There’s one final step the Chairperson can take. They may follow up with the CEO to review anything from the meeting they need to discuss before the secretary writes up the minutes.
How to choose the right board members
A board of directors is an important decision-making body, not a recreational softball team—you can’t just call up a few friends and see if they’d like to join.
When you’re picking board members—whether to nominate them, or to appoint them when you incorporate—ask yourself the following.
Do they have conflicts of interest?
If they stand to benefit financially or professionally from any decisions they make on the board, a person’s choices could be impacted. Or, for instance, you don’t want any board members whose spouse works for a competitor.
What kind of expertise do they offer?
Ideally, each board member will be a specialist in one field relevant to your business. That could mean they’re a CTO with decades of software development experience, or an investor who has backed other, successful companies like your own.
Do they have leadership experience?
It’s not enough for a board member to know your business well. They need to be familiar with making big decisions. The most experienced employee at your auto body shop may know everything there is to know about cars. But unless they’ve run their own department—or independent business—before, you probably don’t want them on your board.
Are they committed to the business?
Your board members should have a personal stake in the long-term success of your business. No matter how knowledgeable they are, the freelance business consultant you’ve contracted may not care all that much about whether you succeed or not.
Do they have the time?
If one of your investors already sits on three other boards, and runs her own business, she may not have the time and energy to devote to a role on your own board.
Can they raise money for you?
Many board members have value because they know how to get your business funding. That could be because they’ve helped bring on hundreds of millions in Silicon Valley venture capital for other companies, or because they’re on a water polo team with the captains of industry in your town. Either way, if you’re planning on taking on new investors, they’re the person you want on your board.
Are you thinking about issuing shares of your company? Learn the ins and outs of how to form a C corporation.