Developing A Board Of Directors In A Small Business

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Reprinted From: Delaware Business Review
Regular board meetings, considered essential to operating a business, have been instituted by about three-fourths or 77 percent of family businesses with revenue over $10 million. Only 49 percent of smaller family businesses have a board of directors and conduct meetings.

Why have only one-half of the smaller companies developed a board of directors? Many companies don’t develop a board because they are not ready for it. The owner or owners may feel threatened (of their authority) by a board, so they choose not to develop a formal acting board.

A company and its CEO and shareholders need to be prepared to develop an effective board of directors.

How will they know the time is appropriate?

There are several factors that signal readiness:

The company should be successful.

  • A reasonable stable management structure must be in place.
  • The CEO and active shareholders must have a sincere desire to create a working board.
  • The shareholders are cohesive in their desire to manage the company to its fullest.
  • The management must be receptive to the advice of a board.

Once the company is ready to develop an effective board, members of the board must be chosen carefully. Members may include: other family business owners, senior management, CEOs from noncompeting companies analogous to the family business, and division heads in publicly held companies. The board should include no more than eight, but at least four members. The length of time a board member serves should be limited.

The advantages to establishing these limits are that this assures the directors stay fresh and current, provides for new skills to meet the business’ changing needs and establishes a discreet way to terminate ineffective board members.

To protect both the company and its board members from legal liability, the corporation should indemnify board members from any costs resulting from litigation. In addition, the company should consider the purchase of directors' and officers' liability insurance in a sufficient amount and/or take other legal steps to protect board members.

The frequency of board meetings may vary from corporation to corporation. A minimum of four per year and a maximum of eight meetings a year should be held. Depending upon meeting frequency, board meetings may last a few hours to a full day.

Members of the board of directors should be compensated for their time. The fee should reflect the time the director is expected to devote to the company at a rate similar to the CEO's salary for comparable time. Fees per meetings vary depending on the company and industry ranging from $250 to $1,250 per meeting.

When boards are used effectively, members can help set general objectives and major policies, fill board vacancies and elect corporate officers. Members of the board can also play an important role in assisting management in selecting the right successors. When boards are used effectively, members can contribute to the success of a family business.