Do You Need a Board of Directors? Here's How You'll Know

Once a business gets off the ground and proves viable, the question ultimately arises: Could guidance from others advance the company to the next level?

That question is tailor-made for the National Association of Corporate Directors (NACD), which provides education, research, analytical tools and networking opportunities that enable its 20,000 members to lead with confidence in the boardroom.

Steven Walker, managing director and general counsel of the NACD, outlined issues to consider and missteps to avoid for companies contemplating whether now is the time to assemble a board of directors.

“At NACD, we feel that having a board of directors is truly a strategic asset to the management team and to founders and family,” Walker said. “It allows them to periodically step off the treadmill of day-to-day business affairs and try to grow the business – to look out over the horizon and have these people with wonderful backgrounds, unique perspectives, wisdom and guidance to provide advice and counsel.”

In a lively Q&A with CO—, Walker shared best practices for how and when to assemble a board of directors.

CO—: How do I know when it’s time to create a board of directors?

SW: First, what is your ultimate objective as a company? Do you intend to remain private indefinitely? Do you have ambitions to position the company for acquisition? To take the company public? Those are three different categories.

I see lots of companies putting together advisory boards as a first step when

• they stopped growing organically,
• they are diversifying into a new business, or
• competition is heating up and perhaps they are not ready to form a full statutory board, meaning [statutory] directors have fiduciary duties, liability and responsibility.

Companies may want to consider initially putting together an advisory board, which would give them an outside perspective from individuals who understand their business and can offer guidance on how to grow the business, diversify the business, lift their heads up from day-to-day responsibilities to see future opportunities for growth, and even to partner with other companies or consider going public. That way, they can dip their toes in the water and determine how often they need to tap into this group and how often they meet.

I see evolving into a formal board of directors when a company considers whether to go public, whether to seek financing or venture capital.

When you are looking to grow an organization or consider a business combination, like a merger or acquisition, your lenders and investors want to see that you have a formalized structure in place. It gives them much more confidence knowing there is an independent, formal board of directors providing advice, counsel and who have fiduciary responsibility.

CO—: How do I find directors who will be good stewards and help me achieve my goals?

SW: Historically, boards were often composed of close friends and confidantes. That doesn’t work anymore. Your company can be deemed obsolete overnight by some new innovation or competitor; therefore, you need to be very thoughtful about whom you ask to join the board.

The first thing is to establish what we call a skill set matrix, which is to identify the top 10 characteristics a company needs to accomplish its goals and objectives, and what type of talent is needed beyond traditional leadership qualities (i.e., a former CEO, someone with financial acumen.)

Then, go beyond that. Who could really help in terms of strategy and opening doors to get to the next level?

For some companies that have been around for 30, 50, or 100 years, my team helps them identify candidates based on their unique criteria, their business, and their industry. We are able to tap into the broadest network in the world. That is our NACD membership of 20,000.

CO—: How can I ensure diversity and balance across the board, without creating undue conflict?

SW: The default questions most folks ask themselves when looking to put together a board are “Who do I know?” “Who do I like?” and “Who do I trust?” This is the path of least resistance.

What you often find in that situation is everyone around the table nodding their heads while the CEO is going in his own direction. In this scenario, you are not getting the value of a board of directors. You are wasting your time.

You want a diverse group of individuals who add value. Sometimes, people have wonderful technical skills but personality is not the best fit. The soft skills are just as important as the hard skills.

At NACD, when we are helping companies identify and place candidates, a lot of times a company will say, “I want an active or former CEO.”

Well, if you look at demographics, we know it’s not as likely to find a woman or minority who is a CEO. We talk about the benefit for the next generation of directors below the C-suite – looking at senior vice presidents and division heads who offer more diversity and that next generation of thinking.

Think in terms of the full spectrum of where the world is today and where it is going: diversity of thought, life experience, generational experience. Make sure people are in touch with where technology is going, where competition is going, the supply chain, and consumer demand. You will not always find that with current and former CEOs.

CO—: How many directors do I need?

SW: For a smaller private company, five to seven, with a majority of independent directors. For a typical public company, eight to 11, with a majority of independent directors. We typically don't see boards larger than that unless it’s a larger non-profit.

CO—: I worry about hidden agendas. How do I protect against that when evaluating candidates for my board?

SW: First and foremost, if you have a statutory board of directors with fiduciary responsibilities, you should inquire about any potential conflicts of interest.

An example would be someone currently doing business with or seeking to do business with the company. When seeking new board members, look for someone who is totally independent and who can add value and offer constructive advice without being overpowering. And, of course, always conduct a civil and criminal reference and background check.

CO—: What are the top mistakes to avoid? What do companies fail to do?

SW: The first mistake is not getting out of your comfort zone. You have to go beyond your network of friends and family. You want really smart people around the table who are going to provide constructive tension to pressure-test ideas and strategy and provide a variety of alternatives.

The second mistake is not conducting appropriate due diligence, such as reference checks and talking to former co-workers about leadership and communication style. You want to know if your candidate came prepared to and actively engaged in at least 75% of meetings.

The third mistake is being too focused on someone’s resumé and not taking the time to see if they are a good fit from a chemistry point of view. You can have the smartest person in the world, but they may not be a team player. They may want to dominate discussions. They may intimidate the management team.

The fourth mistake is not starting out with a formal structure — bylaws and governance guidelines. While you may not need to utilize the formalities, [it’s key] to have them in place to manage expectations up front when you ask someone to join your board.

It’s important that directors get an onboarding letter that outlines what to expect in terms of compensation for their time and dedication. In return, the company will outline what they expect of directors, that reappointment will be looked at annually, and [directors] should know strategy may change, meaning that needs may change.

By setting expectations up front, you avoid those difficult conversations down the road when [a current director] is not adding value.

CO—: What else? What have I missed?

SW: While the vast majority of directors do not perform their service for the financial gain, it is important that you recognize what they are doing.

We have guidelines from NACD for director compensation for private and public companies. If you want to attract someone who will be obligated, it is best to find a way to compensate them either through meeting fees, a retainer or some type of equity depending on your corporate structure and your strategy.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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