Let’s say that the time has come for your closely held corporation to take the next step for growth and credibility — the choosing of a board of directors. Or, let’s say that you are a major shareholder in a publicly held company and are concerned about whether your corporation is in compliance with the Sarbanes-Oxley Act (SOX), and whether you have the right board to properly oversee that compliance.
Whatever the reason, a properly constituted board of directors is critical to the success of your company.
This article will address the proper composition of a board and how to create a board that will serve the mission and needs of your company. Please keep in mind that there is no one, correct formula for constituting an effective board of directors. However, there are certain underlying principles that will guide you in the selection of your board members.
How Many Board Members?
Please take a look at some of the articles that I’ve written for the E-Commerce Times. Several of them address duties of a corporate board as well as SOX compliance.
My feeling is that, in most cases, a board of eight is sufficient. This number is based on specific specialties in which your board members should have some competence. If you get much beyond eight members, my experience is that the board becomes too bureaucratic and unwieldy. This can reduce its effectiveness and its ability to respond quickly to crises or opportunities as they arise.
Following is a list of possible categories for your board members. It is not etched in stone, but it is, in my opinion, a somewhat common array of board member specialties.
1. Insiders. All boards that I know of have a certain amount of insiders. Please see my article, Martha Stewart and Insider Trading. This article describes insiders and tells why they have certain inherent fiduciary responsibilities.
The fact is your company needs insiders on the board. They portray to the board the mission of the company, its inner workings, and its current problems and opportunities. And, if you are a member of senior management and/or a majority stockholder, you certainly want and deserve representation on the board. Two insiders is a good number because management will get the representation it deserves, yet the other board members won’t feel overwhelmed by too many insiders.
2. Legal representation. Today, more than ever, I believe that it will behoove you and your company to have some legal representation on the board. For one thing, SOX compliance can be complicated and fraught with hazards. Choose an ethical attorney, preferably with securities experience and more than a passing knowledge of SOX.
3. Financial representation. SOX requires that you have an audit committee. By choosing someone with financial experience (preferably a CPA) he/she can serve as a financial watchdog, can advise the board if anything improper is happening with the company’s books, and can aid you in SOX compliance.
4. Technical representation. It is important to have someone serve on the board who is totally familiar with the workings of your industry. This person preferably has important contacts in the industry and can assist the board and management in any technical and strategic decisions.
5. Marketing. I feel that it is quite important that you have a marketing person on your board who can help you grow. This person should know the industry from a marketing perspective and should be able to strategically advise the board as to new marketing directions, including new products and services.
6. Public Relations. This person is usually a prominent individual who connects with the community at large and thereby brings comfort to stockholders, customers and the general public. Besides being a highly visible person (at least in your immediate corporate community) this person should have impeccable ethical standards. I’m sure that you are aware of prominent people who have retired from corporate or government service and have been chosen to serve on a board. A highly regarded board member really helps with the public perception of your company.
7. Other. This position can be filled by someone who is highly respected in one of the following fields:
- A. Corporate Governance — this will please the SEC.
B. Environmental Issues — this would apply if your company’s products have an environmental impact.
C. Stockholder Relations — this person has the expertise to deal with touchy stockholder questions.
D. Labor Issues — this would apply if your company is highly unionized and needs an inside advocate who can help you deal with the unions.
E. Regulatory Matters — this applies if the company is in a highly regulated field, for example nuclear energy.
The above listing will fill about eight seats on your corporate board. The number in and of itself is not that important. What’s important is that you have a real board that can rein in management if they see it’s going in the wrong direction. Some boards are thinly veiled rubber stamps for management. Anyone who gives such a board more than a passing look can quickly determine that the board is there just to do management’s bidding.
Why Bother with an Independent Board?
Believe it or not, an independent board protects management more than one would realize. If things begin to go bad with your company because of matters beyond your control, there is nothing as shielding to management as an independent board that is totally aware of what is happening with the company and that has performed their fiduciary duties with dignity and competence. In such a case, no regulator, stockholder, or law-enforcement person could effectively charge management with malfeasance.
My feeling is that having a competent board is the safest and most productive route for your company to take. You can’t go wrong. Good luck!
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at [email protected].