Establishing and Working With Your Board of Directors An Edward Lowe Quick-Read Solution Shrewd, reliable advice

takes on more importance when your company reaches a development crisis. An outside board of directors can bring you experience, expertise and guidance to see you through a fiscal emergency or a growth surge. OVERVIEW A young company might not need a strong board of directors. Your own vision, creativity and enthusiasm can be enough to propel you safely through the startup phase. But your need for guidance shifts dramatically when your company faces critical turning points in its development. Perhaps a serious fiscal crisis threatens the very survival of the business. Or you find yourself poised for a surge of growth but are unsure how to take your business to the next level. To navigate such important and difficult issues, you'll need shrewd, reliable advice. Establish a strong outside board of directors to provide the experience, expertise and knowledge necessary to help solve key problems and guide your company's growth. In this Quick-Read you will find: • • • What a board of directors can do for you. How to select board members. Tips for working with your directors.

SOLUTION Company owners appoint boards of directors. As owner or majority shareholder, you may decide to appoint yourself and rely on an informal group of advisers, or even on a more formal advisory board, as described in the Quick-Read "Working With an Advisory Board". Or you might opt for a CEOfriendly board of directors made up of family and old friends. Fear of losing control of the company is the main reason entrepreneurs resist appointing an outside board of directors. Yet with a board of directors you can gain even more control over the running — and growth — of your company. Here's what a strong board can do for your business: • • • Enhance your company's credibility as well as your own. You'll be seen as a CEO who is eager for input and willing to consider the ideas of others. Bring experience and knowledge to bear on issues that may be impeding your company's growth. Provide access to resources and contacts, including potential strategic partners, customers and sources for financing. Stack the board with outsiders. They'll bring the most objective approach to the table. Experts advise including 75% to 80% outsiders. Thus you, as CEO, would be the sole

Selecting Board Members •

insider on a five-member board. If you want another insider, select the head of a key function of your business, such as finance. • Choose people with solid track records. An entrepreneur who has been through a growth phase similar to the one your business is entering would be ideal. Board members also should have extensive and useful connections in the business world. Recruit from other industries. This will give breadth to your board and contribute to creative thinking. Go for directors with strengths you need. Find someone with expertise in sales and marketing, for instance, if that's a weak area for you.

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How to Screen a Board Candidate You might want to hire an executive search firm to help find directors. But if you're conducting the search yourself, ask your business network to recommend top-flight candidates. Then hold as many interviews as necessary to get the right people.
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Look for a match between your candidates and yourcorporate culture and business style. Explore previous or current board experience. What specifically has the individual contributed? You want an active board, not directors in it for money, prestige and a gilded resume. Mention reimbursement only to top choices. Wait at least until the second interview. People in it primarily for money might even ask about cash or stocks in the initial interview. They won't serve your board well. Interview at varying locales. Hold first interviews during breakfast, lunch or dinner at your offices or in restaurants. The relaxed circumstances will help you get a feel for individual personalities and character. Visit candidates' offices also. Observe the culture: Is the atmosphere positive? Do peers and subordinates seem comfortable? How do candidates handle interruptions? Are they gracious to visitors and employees? The answers indicate how well they'll get along with the rest of your board. Establish bylaws that give the board just the powers you want it to have. ○ Will the CEO be board chairman? Will the owner or majority shareholder? ○ Will the board be able to add members? Fire them? ○ Will it set executive compensation? For all executives? ○ Will it determine governance structure?

Working With Your Board •

Will it decide when to issue more stock? When to go public? When to pursue operations or a merger with another company? When to go out of business?

Remember: If you get funding from a venture capital firm, it probably will expect board representation to protect its investment. • Appoint board members who agree with your business philosophy. For instance, if you plan to accept short-term losses to invest capital in research or expansion for long-term gains, you'll need board support.

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Use the expertise of board members. If you're developing a new marketing plan, consult whichever directors have relevant knowledge and experience. Give the board full access to management. Make it clear that the board can contact any member of your management team directly at any time. This will provide a broader picture of the company's operations. Be well prepared for board meetings. You want members to deal with key issues during each session. To facilitate this, provide them with adequate background information before the meeting. Be honest. Don't paint so rosy a picture of your financial situation, for example, that you distort the facts. Board members can't help grow your business if they're unaware of key problems. Work with the board's audit committee. Their job is to keep you out of trouble by making sure your financial accounting matches standard accounting practices. Meetings of the committee should be held at least every six months. Ask open-ended questions that will bring out the information that can help you most: What is your main area of concern? In what area did your opinion differ most from that of our chief financial officer? Is there anything more I should know? Let the board help you. If your company is in any kind of trouble — including financial — ask for the board's input. Follow the advice you get. Consider getting professional liability coverage, with a policy that protects your board of directors and officers. Some insurance pays for financial loss resulting from errors and omissions made by board members or officers. Any bodily injury or property damage they cause is often excluded.

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REAL-LIFE EXAMPLE John Alexander, president and CEO of StreetWise Urban Wear, found out the hard way that "you don't lie to your board of directors. And lying is what you're doing if you don't give them the full picture of what's going on." In the first few months after recruiting his board, Alexander says, he "just couldn't bring myself admit how bad our financial situation was. We had almost no cash flow, and our reputation with vendors was virtually shot. And yet I kept telling the board things looked great — and asking what we could do to grow the business!" When board members learned the truth, Alexander says, "they asked why I'd hidden crucial information from them. And I had to be honest. I told them I was afraid if they knew how bad our financial situation was, they'd try to take control of StreetWise." His board of directors assured Alexander that "they weren't out to grab my company. They were there as my advisers and guides. They were there to build me up, not tear me down. And they proved it by using their connections to find the financial resources we needed to turn things around." DO IT 1. Consult with other entrepreneurs who have set up an outside board of directors. Find out how they handled the process.

2. Contact the National Association of Corporate Directors (NACD) (see Resources). NACD advises entrepreneurs on selecting and working with directors. The group also offers assessments of current boards. 3. Be prepared to pay your directors adequately. According to NACD, annual pay ranges between $3,000 and $10,000 for an outside director. Additionally, count on expenses for regular meetings and communication to make sure all members have the latest information about your business. 4. Choose board members who are likely to be compatible with each other. They'll work better as a group on your company's behalf. 5. Limit your board to between five and seven members. A larger board won't be as productive. 6. Be dependable. Don't cancel meetings arbitrarily. Pay board members' expenses (travel, accommodation and food) promptly.
7. Be open to your directors' ideas. They will propose changes to benefit your company.

RESOURCES Books
Creating Effective Boards for Private Enterprises

by John L. Ward (Jossey-Bass, 1991). by Susan F. Shultz (AMACOM, 2000).

Board Book: Making Your Corporate Board a Strategic Force in Your Company's Success

Articles "Boards That Are Not Bored." EntreWorld.com, 1997. "Ultimate Board Game," by Stephanie L. Gruner. Inc., 19:11 (August 1997), 97 (2). "Building a Board," by Jill Andresky Fraser. Inc. 21:16 (November 1999), 131 (5).
Corporate Governance Choosing a Board of Directors

. American Express, 2000.

Associations
National Association of Corporate Directors

; (202) 775-0509

Article Contributors Writer: Kathleen Conroy This Quick-Read Solution was originally published in 2000. © 1992-2007 Edward Lowe Foundation. All rights reserved. To contact us or to read the foundation's disclaimers and notices, go to EdwardLowe.org.

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