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How to create a board of directors: Building high-functioning boards

May 07, 2020

Good boards make good companies. An effective board of directors can have a tangible impact on company performance, improving financial results, opening doors and providing valuable professional support.

Whether you’re an entrepreneur just starting out, or an established organization in growth mode, a board of directors can be a strong contributor to your company’s success. To get started, understand what you hope to gain from a board and then set it up to help your organization achieve the best value.

Why do you need a board?

Your company may have any number of compelling reasons to form a board of directors. In some cases, a board may be necessary to attract investment capital. But for others, a board can be a critical step that helps your business expand.

Here are eight reasons why companies create a board:

  1. Expertise: Your company has opportunities ahead and needs new senior-level expertise to realize its goals.
  2. Advisory: You see value in having outside perspectives to inform your business decisions.
  3. Succession: You’re integrating the next generation of leaders into the business.
  4. Credibility: You’re seeking outside investment and want to build investor confidence with a certain level of oversight.
  5. Connections: A board can help you extend your network, providing access to people and opportunities you can’t reach on your own.
  6. Accountability to self: You want to put yourself in a place where other leaders keep you focused and push you to do better.
  7. Accountability to shareholders: You have a number of shareholders and need formal governance with fiduciary and legal responsibility.
  8. Requirement: You are legally required to have a board in some capacity.*

*A privately held company registered as a corporation is legally required to have a board. Many small business boards, often called advisory boards, operate as a formality, meeting the minimum requirements for membership and meetings.

What type of board of directors do you need?

In starting a board of directors, your size and stage will influence the kind of board you create. Many privately held companies use a less formal advisory board. These boards provide advice and insight to the owners.

At some point, however, your organization may decide to establish a formal board with legal and fiduciary responsibility to protect all the shareholders, not just the majority owners. 

A legally formed board of directors typically has governing responsibility for major business decisions. The exact nature of board responsibility and authority will generally be established in your corporate bylaws. Be clear about which decisions will be delegated to the board and where majority owners will retain control.

  • Advisory board: less formal, no fiduciary or legal responsibility to owners and shareholder
  • Fiduciary board: formal, fiduciary, legal responsibility to owners and shareholders

The graphic below maps out the difference between an advisory board and a typical fiduciary board structure. In the advisory model, management recruits and appoints board members who provide guidance and support. In the fiduciary model, the shareholders elect a board of directors who, in turn, appoint and monitor management.

Fiduciary board vs.  Advisory board

Board of directors’ responsibilities

When forming a board, make sure the group is clear about its mission and that members are a good fit for the owner’s needs. Be sure everyone is suitably qualified, has something valuable to contribute and is willing to put the time into strategic thought and deliberation.

Being a great board member involves more than just showing up at meetings. They should expect to put time in before and after meetings in order to understand your business challenges and consider the right path forward.

Here are some main responsibilities of board members:

  • Oversees short- and long-term strategic planning process
  • Provides insights and ideas related to achieving organizational mission and vision
  • Has strong involvement in the development of a detailed strategic plan, approves the strategic plan and understands the underlying assumptions

In order to effectively execute those roles, your board members need certain skills and attributes. In addition to any specific functional expertise you may need, here’s what you should look for when vetting board candidates:

  • Analytical skills to carefully assess situations
  • Ability to see the “big picture”
  • Strategic thinking to chart a strong course for the future
  • Strong dialogue skills to effectively process and resolve issues
  • Time and ability to prepare
  • Bravery/willingness to challenge groupthink and assumptions

Setting the stage and addressing issues

Head off potential issues by establishing clear expectations and a structure for a high-performance board. There are many reasons why boards may not operate optimally. Here are some questions to consider as you create your board, or as you evaluate how well an existing board is serving your business:

  1. Does the board have a strong board charter with clearly delineated roles, responsibilities and outcomes?
  2. Is the board chair skilled at the leader role?
  3. Are board members adequately informed of their role and supported to carry out their role effectively?
  4. Do board members have the skills necessary at the individual level and the collective group level?
  5. Are board members adequately prepared with the right information to participate in the dialogue and decision-making process?
  6. Do individual board members feel comfortable sharing concerns openly, safely and respectfully with the board?
  7. Do board members keep information confidential?
  8. Is there a clear understanding of the board’s responsibility versus that of management?

Once there is an understanding of what may be standing in the way of board success, you can then start working on the solutions. Clarity on the board’s role, necessary outcomes and decision structure are all important aspects of setting up the board for success. 

If these are firmly in place, then looking at the individual and collective board performance is important to determine what more can be done to ensure the desired outcomes are achieved. This is not an easy process, as it requires objective, honest assessment of potential root causes. 

Over time as the root causes are identified and mitigated, boards will evolve into a higher level of functioning and performance. 

Wipfli can help you build a high-performance board

In future years, you may look back at creating a board as a pivotal moment in your company’s growth story. Boards can be created to fill the distinct needs of any business, and you can get the support you need without giving up control.

As part of our strategic advisory and talent services, Wipfli assists private and family held businesses in the process of forming or “tuning up” a board of directors.

Talk to us about building a high-performance board, leading strategic planning sessions with your board or supporting an existing board for greater impact.

Author(s)

Tina Nazier
Tina Nazier, MBA, CPC
Director, Stategic Alignment
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