When you incorporate your business, there are certain legal requirements to uphold. Federal and state-level laws, as well as a company’s incorporation documents, require public and private corporations in the U.S. to have boards of directors (BoDs). Although private LLCs do not have the same requirements, some choose to elect a board of directors after incorporating.
What is a board of directors?
A board of directors, also known as “the board,” is a group of people at a company who oversee upper management and provide guidance on high-level strategic decisions. Board members are typically experienced executives or investors with expertise in operating a business.
What does a board of directors do?
The role of the board is to represent the best interests of the company and its shareholders. Under U.S. law, members of a board of directors have a fiduciary duty to act in good faith to make diligent, prudent decisions they believe will benefit the company.
Who is on a board of directors?
In corporations, stockholders elect the board of directors. A startup’s CEO is almost always also on its BoD. Other board members at a startup might include co-founders, other executives such as the CFO, and venture capitalists who own a stake in the company.
Many startups also have one or more directors who are not otherwise affiliated with the company. These board members are also known as independent directors.
At publicly traded companies, both the New York Stock Exchange and the Nasdaq require the majority of a company’s board members to be independent directors, an effort to restrict the influence of a company’s executives over the board.
How many people are on a board of directors?
After an equity round, board size is typically negotiated between the investors and the company. In general, most private companies have between three and nine directors. But a young startup might have just one or two board members, and a more mature company might have 10 or more.
Most companies have an odd number of board members to avoid voting ties. There is no upper limit for how many directors can serve on a board, but larger groups can be less efficient and more difficult to convene.
When choosing board size and who the directors will be, founders should also be mindful that each director has an equal vote when it comes to board decisions. Board composition may affect the balance of founder control versus investor control, which can come into play when making decisions about day-to-day business strategy and the company’s ultimate exit strategy.
The role of the board of directors
The board of directors is not typically involved in day-to-day operations of a company. That’s the job of the CEO and other upper management. Instead, the board focuses on longer-term, high-level decision-making, including situations where upper management might have some potential conflict of interest. These decisions include:
Executive personnel
The board of directors is fully or partially responsible for hiring and firing a company’s CEO and other senior executives.
Executive compensation
The board signs off on compensation for the CEO and other senior executives, including base salary, stock options, golden parachutes, and other benefits.
Major transactions
The board typically provides strategic guidance on and must approve any merger or acquisition (M&A) that a company undertakes, either as the buyer or as the target company being acquired. At private startups, the board also typically advises on and approves major decisions related to conducting an initial public offering (IPO).
High-level strategy
The board of directors counsels the CEO and other executives in several other areas related to a company’s long-term direction, including its strategic goals, capital allocation, and new products or initiatives. The board’s fiduciary duty makes it responsible for approving major strategic shifts and ensuring the company has sufficient resources to achieve its goals.
Administrative tasks
The BoD ensures compliance with any applicable state corporation laws that may require board approvals or oversight, which vary based on the state in which the business was incorporated (e.g. the Delaware General Corporate Law [DGCL] if the company was incorporated in Delaware).
Corporate governance also includes abiding by the company’s charter ( Certificate of Incorporation) and bylaws, as well as other stockholder agreements, such as equity financing documents, which may require the board to approve specific actions.
When does a board of directors meet?
Most companies hold quarterly board meetings where the CEO and other executives update the board on the progress of the business. These meetings are a time when the board can ask questions and help shape the company’s strategic direction. Some boards might meet on a different cadence, but quarterly is most common. Boards may also convene on short notice to discuss major decisions, such as a potential acquisition or major developments in the market.
When does a company need a board of directors?
Corporations are typically required by law to have a board of directors, starting from the time of incorporation.
Many private startups pick their board members from an existing board of advisors. Advisors play a crucial role in your startup’s growth and overall success. Similar to your company’s advisory board, you should choose your board of directors carefully. Ideally, your board members should help fill skill gaps, bring expertise, and have experience that aligns with your overall vision for the company.
How to get on a board of directors
Members of a company’s board of directors are typically highly successful investors or business people who have some connection to company leadership. They’re asked to serve on boards because founders think their knowledge and connections are valuable. As such, serving on a corporate board of directors is typically a function of a person’s success in other roles.
