Understanding the Purpose of Your Board
This post is for entrepreneurs as part of a series of observations and tips on building an effective board. This is Part 1.
About two hours into a recent board meeting, I was fried. My eyes were glazed and I found my mind wandering randomly before settling on a question: Why do some board meetings leave me energized and others seem to suck the very life out of me? I then started to do the math and came to the sobering conclusion that in the past fifteen years, I’ve spent thousands of hours in meetings like that one.
If Malcolm Gladwell’s ten thousand hour rule is true, by now I should be something of an expert on the topic. I’m not, but in this series I try to answer some key questions, including:
What is the purpose of the board?
How do you compose your board?
What you can expect from your investors?
What makes for a great meeting?
For the first post of this series, let’s start with a general overview of the purpose of your board.
The Purpose of the Board
In its simplest form, the board of directors is a group of elected or appointed members charged with the responsibility of overseeing your company’s activities.
The structure of the board is spelled out in the company’s bylaws and typically includes:
- The number of directors
- How each director is appointed
- The minimum number of times per year the board must meet
The primary responsibility of your board members is to represent all shareholders—not merely their individual interests. You will often hear this described as a fiduciary obligation and is comprised of the three legal concepts of good faith, loyalty, and duty of care. Good faith is the presumption that all directors will deal honestly and fairly when making decisions, regardless of the outcome. Loyalty simply requires that directors put the interests of the company ahead of their personal interests. Finally, duty of care attempts to define a standard, often referred to as the business judgment rule, whereby a director owes a duty to exercise the judgment an ordinary person would use under similar circumstances.
For venture-backed companies, your investors will typically exercise control over their investment by requiring one or more board seats, a series of protective provisions, and special voting rights spelled out in the investment documents. A good example of this: A sale of the business may require their consent. A subtle (and often misunderstood) distinction is that it is perfectly acceptable for your investors to vote in favor of something as board members but block the very same activity by exercising their voting rights or control provisions.
The concepts of fiduciary obligations and voting rights may seem foreign to you at first (or may even feel like overkill for an early stage company). But if properly observed, they form the very foundation of your relationship with the board—and through it, with your stakeholders. There will be times (e.g., when raising capital, selling the company, or taking it public) when your stakeholders may question if you have properly fulfilled your obligations to them, so developing, understanding, and acting on these basic principles will serve you well.
The next area of consideration is how to compose your board, which is the topic of the following post in this series. Stay tuned!