Frequently Asked Questions About a Board of Directors

Leadership

Nov 20

While conducting some research to develop a program to help companies grow a board of directors and to help aspiring candidates find a board position, I discovered something shocking.

There are lots of people that don’t know anything about the functionality of a board of directors.

When you’re experienced or knowledgeable in a specific area, it can seem ludicrous that other people lack an understanding of what you would have thought was common knowledge. I decided to take this as an opportunity to answer some of the frequently asked questions about what a board of directors is and why they matter in business.

What is a Board of Directors?

A board of directors is an appointed or elected group of individuals that oversee a business and helps to guide it forward. A board of directors can work for various types of businesses, including non-profits, public businesses, and private businesses. In most cases, non-profits and public businesses are more likely to take advantage of a board of directors than a private business.

There are misconceptions that a board of directors is only beneficial to big businesses. However, small businesses can also benefit from the objectivity, direction, and experience a board has to offer.

What Does a Board of Directors Do?

A board of directors is tasked with protecting the assets of the shareholders by assisting in key decision-making processes for the business. They can makeup either a fiduciary board or advisory board. An advisory board does as the name applies-- provides valuable advice to help the owner or CEO of a business make decisions. They’re less formal than a fiduciary board, and the business is free to take their advice or leave it.

A fiduciary board gets the final say in decisions and is thus liable for the results. The board can vote to make a decision, even if it directly contradicts the founder of the business. Many people also ask “is a board of directors liable” and the answer is yes when they’re in a fiduciary board.

There are a lot of business owners who are worried that having a board would mean they would have to relinquish control of their organization. For private companies, it’s worth it to have an advisory board that can make recommendations and assist with strategization and planning. The individuals on an advisory board will be able to share their expertise and gain valuable experience, while the private business owner maintains control of the company and ultimately gets the final say.

When Should You Create a Board of Directors?

Though it varies from state to state, some corporations are legally required to have a board of directors. In that case, the answer would be to put together a board while putting together a business. If you have run a private business without a board and made the decision to go public, you may require a board of directors to make the transition. Additionally, there are a lot of investors who require a board of directors to be in place to protect their assets.

For other scenarios, especially for private businesses that have hesitated to form a board, the best time to create a board of directors was ages ago; the second best time is right now. It’s never too early to become agile and adaptable in the marketplace, which serves as a strong asset against the competition. Startups should consider having a board of directors from the get-go to bring in industry knowledge and experience. While the idea of selling a business may not be prevalent when starting one, it’s essential to build a business that would attract a buyer if the situation arose.

Friends and family are great for entrepreneurs who need to share their stress and practice self-care, but they aren’t suitable for gaining industry knowledge and an objective opinion on the future of a business.

How is a Board of Directors Appointed?

Both. This is a bit of a grey area. In many cases, the members of the board will be asked to make recommendations about who would be a good fit or business owners will consider their contacts to form a new board. Another approach is to go through a recruiting process to find the best possible candidate for the board. A nominating committee may be appointed within the board to help narrow down candidates.

Depending on the situation, the best candidates may be brought forth to the board for voting by the other directors. It really depends on where you are in your business, your business structure, and the legalities in your area. If you’re looking to join a board of directors, it’s worth working with an experienced coach to find opportunities and work through the process.

Is a Board of Directors Paid?

Again, this isn’t a straight answer as it depends on the board in question. In most private or public boards, a director is compensated for their time. However, sometimes other arrangements are made for start-ups or for board members who are looking to build their resume to move onto a paid position later on. Many startups are finding the resources to offer compensation now, as they see the value in attracting industry experts from day one.

Most non-profit boards are unpaid positions and can often have stipulations regarding donations from the board member. This is a starting point for many professionals looking to land a more prestigious board position further down the road.

Why is a Board of Directors Important?

A board of directors has a lot of important functions. They are responsible for hiring an executive leader, should the situation arise that it becomes necessary. They play an important role in strategizing, as well as setting goals for the organization. The board can help navigate change as a company evolves and overcome stagnation. They can also act as a panel of mentors for leadership within the organization and help make the tough decisions.

For a private business, a board of directors is a significant edge over the competition, as so few private organizations have shifted in this direction. That being said, many private organizations are starting to realize the benefits of having a board and starting the process of appointing one. As a result, more opportunities are becoming available for those looking to land a board position.

How Do I Join a Board of Directors?

I’m so glad you asked! Joining a board of directors is as simple and complex as applying. Start by evaluating where you are in your career. Do you have the experience and perspective to add value to an organization as a board? Consider your complementary skills: do you have strong judgment and the ability to work well in a team while sharing your opinion in a constructive manner? There are a lot of tools you’ll need-- a resume and bio for starters. Additionally, you’ll need to network like a boss to convey your interest as many board positions are landed through connections and a wide network as seen as an asset during the hiring process.

Consider working with a coach or getting a board program certification to help stand out against the competition and get paired with opportunities that will bolster your career.

Hopefully, this gives you a better idea of what a board of directors is and how they help take a business to the next level. For more information on how you can create a board of directors or land a board position, contact us at Bloomleaders.com