One of the first acts of a new corporation is to set up a board of directors. This group of elected individuals is responsible for representing the company's shareholders.
This article describes the legal duties of a board of directors and how to select board members for your small business.
- Every business should have a board of directors to oversee its operations.
- The board creates governing documents, sets policy, and hires and directs executive employees.
- Board members have a fiduciary duty of responsibility for the corporation's assets and its shareholders.
- A good board member must have integrity, leadership experience, and a commitment to the company.
Who Are Board Members?
The individuals who are selected to be on the board of directors of a company have overall responsibility for its activities.
Boards of directors do not participate in day-to-day decision-making; instead, they set overall policy, based on the company's mission and vision, and exercise an oversight function, reviewing the actions of its officers and executives.
Think of it this way: The board of directors operates like an airline pilot at the 30,000 feet level, overseeing everything, seeing the big picture, and changing course when necessary. The executives operate at the 1000 foot level, while the employees are on the ground.
Primary Duties of Board Members
A board of directors has several important duties. They
- Recruit, supervise, evaluate, and compensate management and executives
- Provide direction for the business through a mission statement
- Establish bylaws and a system of governing the business
- Act as fiduciaries to protect the business assets and shareholder investments
- Monitor and control business functions
A company's board members have a fiduciary responsibility to care for its finances and legal requirements. They have financial and other responsibilities to keep the corporation running efficiently, so the shareholders don't lose money.
They must act in good faith and with a reasonable degree of care, and they must not have any conflicts of interest. That is, the interests of the company must take precedence over personal interests of individual board members.
The board must have at least one meeting of the stockholders each year. At this annual meeting, the board announces the annual dividend, oversees the election of board members, elects or appoints officers and key executives, and amends the bylaws, if necessary.
The annual meeting may be held virtually, or as a hybrid (in-person and virtual) meeting, depending on state laws. Several states have changed their laws to allow virtual meetings.
Liability of Board Members
What liability does a board of directors' members have in their board positions? Not as much as you might expect. A company's board members have a good deal of latitude within the scope of their duties as part of this group. Board members must be free to act in the interest of the shareholders to run the company in the best way they see fit and to take appropriate risks to help it grow.
Many companies include officer and director liability insurance in their insurance packages, but this insurance doesn't cover certain lawsuits against individual board members for acts they commit outside their scope of duties.
Board members may be liable individually for actions outside their scope of duties. For example, a board member who harasses or assaults employees or customers isn't protected and may face criminal charges.
How To Choose Good Board Members
Select an uneven number of board members to avoid ties. The number of board members depends on the size and complexity of the organization. For a small organization, five to seven people are plenty. For a larger, more complex, business with several committees, you might want nine to 11 people at the minimum.
You need enough people on your board so that, if several people are not present, you can still have enough to make a quorum to be able to make decisions. But too many board members can slow down any meetings and progress.
It's tempting to put friends and relatives on your board of directors, but these may not be the best people to guide your company.
Look for these characteristics in potential board members.
Experience and Leadership
Your board members should have experience and leadership positions in a specific area which can help your company. For example, many businesses include an attorney and a financial advisor on their boards. If your business is in a technical area like computers, you should have people who have held leadership roles in in that area. They know others who can help you, and they understand the specifics of the management and operation of this type of business.
Your business can also gain a significant advantage if you select one or more board members who have experience raising capital for business startup or expansion.
Commitment to the Company
Board members will be expected to spend time preparing for and attending board meetings and to serve on additional committees, so they must make a time commitment. Board members must be interested in the business and its continued well-being and not serving just for the money or for personal interests. You don't want to have to pay your board members.
Integrity and Lack of Conflict of Interest
Integrity and lack of a conflict of interest are important qualities for board members. They will need to sign a conflict of interest statement, and must act in the best interest of the business, not their individual or professional interests. For example, a board member who profits from their service on a board of directors may put the entire company in jeopardy.
Don't select someone who hasn't been checked out thoroughly. Do a background check on all potential and get references.
Before you form your first board of directors, create job descriptions for board members and specific job descriptions for board officers. Having these documents will help you give information to potential new members and make the process of removing a board member easier.
Frequently Asked Questions (FAQs)
At what point does a company need a board of directors?
Your company should have a board of directors right from the beginning to get it off to a good start. Decisions made by the board are called resolutions, and these should be documented, approved, and filed in case of an audit.
Some preliminary board resolutions include:
- Appointing an attorney (an outside law firm)
- Deciding on a name for the business
- Designating a bank and opening business bank accounts
- Electing board officers and top executives
One major task of a new board of directors is to create and implement bylaws to guide board decision-making and policies to guide the work of the board, like conflict of interest and financial policies.
How does a board remove a board member?
There are several ways to remove a board member. The most common is by vote of the board members. The corporation's bylaws should include details on what type of vote is necessary for this action:
- Must the vote be a majority, two-thirds, or unanimous?
- For what reasons may a board member be removed?
A board member can also be removed for cause if they have committed a felony, like fraud, or a conflict of interest.
Follow the process outlined in your bylaws and get help from a licensed attorney to guide you through the process.
You may also consider letting the board member's term of office expire and not renewing it. Your bylaws should specify the length of a term and put limits on a board member's ability to renew indefinitely.
To protect the board from lawsuits resulting from removal of a board member, you should have job descriptions for board members in general and specific job descriptions for board officers. Having specific policies that govern board actions, like a conflict of interest policy, can help you navigate the termination process.