The board of directors is a formal construct for every company that essentially provides governance for the company. Their duty, in a variety of formal and informal responsibilities, is to ultimately serve the best interest of the company. The CEO should create a transparency with the board that builds the board’s faith in the CEO as the person to run the company.
A board of directors is a formal construct for every company that essentially provides governance for the company. A board has a number of different functions and responsibilities. Think about them breaking into formal and informal. The formal responsibilities include things such as hiring and firing the CEO, representing shareholders, representing the different investors in the company, and representing the founders of the company. You have a responsibility, duty of care, to do things in a way that’s in the best interest of the company, and responsible for the company; and a duty of loyalty not to create situations that are conflicts for you and the company; and keep any information that happens as a board confidential to the company.
The informal responsibilities of the board are often the ones that have the most impact. As an investor, my responsibility is to do anything that that CEO needs to be successful. So whatever he or she wants as help from me as a board member, that’s my job.
When you think about the functional responsibilities around the company, and the division of labor between a CEO and a board, it’s very easy to define the boundaries. The CEO runs the company—period. The decision the board needs to make is whether or not they support the CEO. If the board supports the CEO, it should be easy for the board to let the CEO run the company. Now, a great CEO is very transparent with the board about what he or she is doing in running the company. So it’s important that that be a two-way street. It’s not, “Okay CEO, run the company, and we board will just close our eyes and ignore what’s going on.” It’s, “You, CEO, have the responsibility and authority to run the company, but communicate to us what’s going on, and include us in the hard decisions that you have to make. Make sure you use us for our expertise. And make sure we’re never surprised as a board about what’s happening in the context of the company.”
There are some very specific things that the board should take responsibility for doing, for example, for compensation for the CEO. And this compensation is both base, bonus, equity. Most boards end up having a compensation committee that the CEO and the head of HR or the CFO are reporting to in the context of proposing different compensation agreements that the comp committee then has to approve.
Another primary responsibility of the board is auditing the performance of the business. And oftentimes, you’ll have a formal audit committee of the board. This audit committee requirement of investors especially is important as a control mechanism and a governance mechanism in the context of the company. The audit committee pays attention to what’s going on from a financial perspective and provides advice back to the CEO and the leadership team about what needs to happen.
I think early stage companies benefit from creating boards early. And the reason for this is that it establishes a level of formality around the running and execution of the business. Now, the level of accountability that they have to the board in a formal way is pretty lightweight. Again, at those early stages, it’s mostly informal. But it does force them to interact with the board on a regular basis. It does cause the entrepreneurs to learn how to build the muscles of having board meetings, of having to talk about where they’re going with the business on, you know, a quarterly, annual, multi-year time horizon with an objective set of board members that in a lot of cases are good practice for what it’s going to look like when you scale up your company and have venture investors and a much more sort of serious heavyweight board. The other reason to have a board early on is that engaged board members can help you tremendously with the growth of your business. If you think about one of your roles as an entrepreneur, it’s to collect people. You’re trying to collect great people to the business—great employees, great investors, great customers, great advisors, great board members. And you can use the board as a tool to engage some people in your business in a much more substantive way that helps you build your business, and grow and expand your business. So don’t lose sight of the value, especially early on, of what a board member can do to help accelerate your business based on their own experience and their own connections.
The board of directors is a formal construct and has formal responsibilities. An advisory board is an informal construct that tends not to have any formal responsibilities. A lot of entrepreneurs create advisory boards for their companies for two reasons. One is to try to show that there are, you know, capable, interesting, famous people associated with their companies. And then the second is that a lot of entrepreneurs don’t want the formal relationship with a board, especially early in the life of the company. My general feeling about advisory boards is that they tend to be pretty weak. There are cases where entrepreneurs do a very good job of managing an advisory board, but in those cases, they have to be very proactive about managing the advisory board and getting the advisors actively engaged with the company. I encourage in those cases to consider which of the advisory board members would make good board members, and then formalize the relationship by having them be board members because then they’ll take a lot more responsibility and engagement both informally and formally.
Feld, Brad and Mahendra Ramsinghani. 2013. Startup Boards: Getting the Most Out of Your Board of Directors. New Jersey: John Wiley and Sons Inc. Chapter 2 “What is a Board?”.
Suren Dutia. Primer for Building an Effective Board for Growing Startup Companies (PDF). Kansas City, MO; Ewing Marion Kauffman Foundation. 2014.
Brad Feld. “Boards That Are Not Bored“. Feld Thoughts. Blog post, July 17, 2004.
Kate Mitchell. “8 Rules of the Road for Startup Boards“. WSJ Accelerators. Blog post, March 28, 2014.
Blumberg, Matt. 2013. Startup CEO: How to Build a Company to Success. New Jersey: John Wiley and Sons Inc. Chapter 32 “The Value of a Good Board”.
Questions for You
When should I form a board?
How could board members currently help me with the business?
Should I create an advisory board, a board of directors, or both? What best suits my company?
Does my funding model affect my need for a board of directors?
Tools and exercises
Advisory Board vs. Board of Directors: Make a list of the pros and cons of both. What does your company need at this point in the way of advice, help, and commitment?