Developing Effective Board Procedures
Charles Mathews, Past President, San Diego Tech Coast Angels
Effectual boards of directors strengthen the companies they govern. Ineffectual boards can cripple a company, no matter the strength of its product or service. What’s the difference? Often it is not the capabilities of the directors but the nuts and bolts of how the board is set up to operate. Effective board procedures empower talented directors to be effectual.
The role of the board will change as the enterprise develops, but at each stage there needs to be a clear, written statement of the board’s role and its relationship with the CEO. Sometimes called a Delegation of Authority, such a document outlines what issues and decisions the CEO is required to bring to the board. This document also sets forth the limits in dollar amounts and qualitative assessments that the CEO can approve without board authorization, including what may be further delegated by the CEO.
How many directors should serve on the board and how often the board should meet requires careful thought – two keys to effective boards. The board should be no larger than the number of individuals needed to provide expertise in each critical area of business activities. For example, early on directors with expertise in governance, finance, technical, and marketing, and sales are usually needed. Many experienced directors believe that initially five directors, including only one member of management, is the ideal number. Then as the enterprise matures, the board might grow to seven, including at the most two members of management.
The board exercises its powers as a group in meetings. Early-stage companies frequently have monthly meetings, which often are focused on not only strategic issues but operational issues as well. Then meeting frequency may progress to a quarterly or bimonthly basis. In addition, most companies call special meetings on short notice (within the provisions of their bylaws) and often by telephone to address unique or unexpected issues. Other companies use written, unanimous consents for the board to authorize non-contentious actions. As companies continue to mature, the number of regular, in-person board meetings might decline even more.
Like any group, the meetings are led by one of its members, usually the board chairman. The role of the board chairman, which is a skill unto itself, is crucial to managing the board, to which the CEO reports. In closely held companies this reporting relationship is bound by the hard fact that the CEO may have enough votes as a shareholder to replace the directors (an issue best addressed in a shareholder agreement). For this and other reasons related to separation of power, many astute governance experts affirm that the chairman, or at very least a lead director, and CEO should be different persons.
The chairman conducts the meeting in accordance with an agenda, which he develops in concert with the CEO and after discussion with other directors. The agenda should invariably include an executive session with no management members present.
The executive session frequently occurs as the last agenda item. It is followed by a meeting between the chairman and the CEO in which they evaluate the meeting and the chairman passes on any private observations, including any assessment of the CEO and appropriate feedback from the other directors.
Following the meeting the minutes are published, first as a draft and then again following approval, at a subsequent board meeting. Writing meeting minutes is an art; they are recorded for posterity. In today’s corporate-governance world, the minutes are often taken by the corporate counsel, an expense maybe not appropriate in smaller, private companies. Whoever writes them should ensure the resolutions of the board are appropriately documented and the discussions well-summarized so the basis for action and scope of the discussion can be seen, possibly years later.
Most observers today believe board minutes should be written to show the proceedings’ due diligence compared with using exceptionally terse language that gives little flavor of the rationale of board actions. A best practice is for the minutes to be prepared immediately after each meeting. They should first be reviewed by the chairman followed by circulation to all directors for comment – while the details of the meeting remain fresh in the minds of the directors.
Marshalling the individual talents of directors and setting up the board to operate effectively is an art form that few entrepreneurs, working to grow their firms, have previously experienced. But it is a competency they should strive for that will help their enterprises progress toward maturity.
© 2006 Charles Mathews. All rights reserved.