Adapted from content excerpted from the American Express® OPEN Small Business Network
If you have chosen to organize your company as a corporation, you are legally required to have a board of directors. Whereas your management (i.e. CEO and president) oversees the daily decision making of your company, your board guides the overall direction of your company.
The size of the board you must have varies by state, but the number of directors on the board cannot exceed the number of corporate shareholders, and in many states a board must be comprised of no fewer than three people. The CEO and president of a small business report to the board of directors, who can, in some cases, vote them out of the company or override their decisions. In many cases, however, the president or CEO owns a bulk of the company's stock, limiting the power of the board to override their decisions.
Large, public companies pay directors for their membership, but small companies are more likely to provide board members with an interest in the company or just a free lunch or dinner when the board meets.
When you are creating a board of directors, you must decide on an "inside" or "outside" board. An inside board is comprised of friends, family, and contacts you trust, and is what most small business owners form first. An outside board is made up of people you recruit based on their skills because you need them to expand your business. If your company is looking for an acquisition, or thinking about an Initial Public Offering (IPO), you may need talent that you can only get from an outside board of directors.
If your business is not incorporated, you may want to form a board of advisors. An advisory board is more informal than a board of directors in that it generally does not have regular meetings, and even in larger companies advisory board members are often not compensated for their services. An advisory board is also not usually authorized to oust a CEO and is created primarily to provide business advice to a company.
Tips on putting together a board of directors
Create a board that complements existing managementLook for people who bring new areas of expertise to your company. For example, if you own a small technology company but don't have any marketing background, search for board members who can provide the marketing experience you need.
Chart your management needs
Create a chart to determine the kind of talent needed to move your company ahead. List the skills your management possesses. You can then make a list of the skills sets you need to acquire and the people who possess those skills.
Use a headhunter
Some executive recruitment companies specialize in recruiting directors and management professionals/executives. For a fee they will locate board of director candidates for you. If you choose this route, keep in mind that the search firm must have a good understanding of you, your company, and the talents you seek in order to be able to recruit effectively for you.
Use your network of colleagues and friends
A well-rounded board of directors can be formed from your former school mates, vendors, professional service providers and social acquaintances. Make a list of candidates from this field and then vigorously scrutinize the list to ensure you are choosing the right talent for your company, not just people you like.
Keep board size manageable
The smaller your board, the more efficiently it is likely to operate. Unlike large companies that recruit high-profile board members to enhance corporate image, the board of a small company is usually a working board. The exception to this rule is if your small company is going public and needs a larger board to guide you through the process.
Make sure the CEO contacts board prospects
Once you have identified board member prospects, the CEO should call those individuals. If you are the CEO, you should explain who you are, provide details of the corporation, how the individual's name came to your attention, and state that you would like to have an appointment to talk about possible participation on the board.
Look for people who know how to raise capital
Even if your company does not need to raise capital now, it most likely will at some stage. Board members who have a strong financial background and knowledge of how to raise money are always an asset.
