Whenever a private company officially becomes a corporation, it's required by law that the company assemble a board of directors to represent the interests of shareholders. While limited liability companies (LLC) and nonprofits are not legally required to have a board of directors, many choose to anyway. Here's what you need to know if you are a business owner or nonprofit director who wants to put together a top-notch board of directors.
What does a board of directors do?
As mentioned, the role of a corporation's board of directors is to represent the interests of shareholders. The board elects leadership, makes important decisions--especially concerning financial matters; sets policies, and generally oversees the management of the company. Corporate board members are usually paid. The role of a nonprofit board is very similar, but with some noticeable differences. Nonprofit board members are usually unpaid volunteers with an interest in the company's mission. In addition to making decisions in order to keep the company sustainable and in line with its mission, nonprofit board members are often responsible for fundraising.
How to assemble a board
After a business owner incorporates, she or he is responsible for selecting the first board of directors (ultimately, they will be elected by shareholders). To begin with, the CEO often acts as the chairperson of the board, setting the agenda and leading board meetings. As the company grows, the board may choose to elect a non-CEO chairperson. In addition, top company executives are often given a spot on the board. Your board will also consist of several independent directors--people who don't work for the company but have an interest in its success. To put together an effective, high quality board of directors, seek out people with diverse expertise, backgrounds, and experience, who are willing to tell you the truth and who will be able to see potential problems in your ideas. Look for people who have proven experience in your industry, who can be trusted to oversee a company at a high level. The number of individuals you choose is up to you--board size can vary considerably, and your board will likely grow as your company grows--but make sure you have enough people to fill important roles and give you a broad perspective.
Your board of directors should be focused on pursuing your company's interests, so it's critical that you make sure that no member has a conflicting personal interest that might get in the way. At best, a conflict of interest can interfere with a board member's ability to do what's best for stakeholders; at worst, it can cause serious legal problems for your company. Most companies have a conflict of interest policy that spells out what entails a conflict of interest and how to avoid them. In many cases, conflicts of interest might not be obvious or intentional--so make sure you have a clear understanding and vet your board members thoroughly beforehand.
For all of your business insurance questions, call or contact Executive Insurance & Financial Services today.