This post has been reproduced from my other blog.
In the past few weeks, I've been asked by three folks about the
legal and practical requirements of implementing a board in an
early-phase organization. There is a lot of information around on the
subject of corporate governance - probably the most notable resource
that comes to mind for me is National Association of Corporate Directors. There are also books on the subject (e.g., Corporate Governance), but there can be a lot to wade through depending on how deep you want to go.
Here's my introductory $0.02 on the subject:
- The board's primary purpose is to work on behalf of the
ownership of the organization both a) to see that the organization
achieves what it sets out to do and b) to provide a monitoring
framework that ensures what management is doing is acceptable.
- Boards then, can be viewed as the balance point between the
shareholders (which own) and the management (which controls day-to-day
operations).
- Laws and articles of the organization may dictate the minimum
requirements, but generally speaking, two key roles that are basically
the minimum to organizations (profit and non-profit) are the
chairperson and the secretary.
- The chairperson is often referred to as the servant leader of the board - that is, the integrity of governance starts with the board, and the chairperson is basically a facilitator.
- The secretary has responsibility for accurately documenting (guardian of) what the board has done.
- In some situations, the secretary may also play a key role in
helping the chairman put together board documents and doing
behind-the-scenes work to facilitate the board meeting (so that it is a
non-meeting in many cases). Tends to be more true in environments where
more legal mechanics and knowledge of confidential organizational
infrastructure is required.
Early-phase organizations may have some wiggle room (e.g., number of
directors, amending by-laws) as to how governance works for numerous
reasons, e.g., the management largely represents all of the
shareholders.
Some key things that I would consider (in the case of wiggle room) include:
- Speed and convenience - larger boards may slow you down unless one of the following counterbalances the effects.
- Leverage - boards can be a way to get help at no to minimum cash
cost. Here some key things to capitalize on are the board directors'
networks, skills (e.g., legal or accounting), etc.
- Advice - although this is one I personally put the less stock in
because one can get some of this without a board director relationship,
it depends on the makeup of the management team and desire of the
owners. Board directors can complement the management team's
experiences.
- Independence - as the owners of the organization differ in total
composition as compared to management, the need for board directors to
be non-management and independent increases.
As a final closing thought, fund raising is huge timesink that
affects both for-profit and non-profit organizations. Some non-profits
have even segmented their board into operating and fund raising groups.
The former group looks at current operations, controller activities,
etc. The latter group is more forward-looking and gets involved with
the strategic direction and milestones for the group. Fund raising is
something that should not be forgotten because it is buried in the
notes I've outlined above (probably could be categorized as a way to
get leverage). Consideration should be given as to how the board makeup
should look based on putting fund raising in the proper perspective.
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