Editor’s note: Linda Markus Daniels is a founder of and principal in the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.
RESEARCH TRIANGLE PARK—“The board of directors is meeting!” These words that send chills down the spines of many corporate officers and employees.
Directors are such nice people, too. Why would anyone react to a board meeting with fear and trepidation?
Well, board meetings often result in major changes in companies. Some changes are good, like raising capital, buying other companies and hiring new people. Other changes can have seriously adverse consequences for officers and employees, like bankruptcy, employee layoffs and firing the CEO.
Of course, not every board meeting has momentous consequences. Most board meetings are about the everyday affairs of the business and planning strategy. To maximize the efficiency of your board meetings, it’s helpful to devote some time to managing your board of directors. Companies that understand and manage their boards generally have better outcomes than those that do not.
Here are 10 points for managing boards of directors that are essential to successful outcomes.
1. Surprises. Boards of directors HATE surprises. Keep them informed of what’s happening between meetings. The worst thing you can do is to fail to meet projections by a wide mark and have the board find out for the first time at the board meeting or in the package of documents sent right before the board meets. Surprise your spouse, but don’t surprise your board.
2. Board Composition. Board members’ experience, contacts and willingness to devote time and effort, as well as the blend of personalities and willingness to act as a team, are the critical issues in selecting board members. The primary objective is to create a board that builds value in your company, not merely to solidify voting blocks to control the company. In a typical venture-capital-backed company, the board usually includes of members of the management team (specifically the CEO), representatives of venture-capital investors and independent outside directors. Choose your venture investors based on what types of board members they will be, not just on the highest valuation. Many founders regret choosing VC investors based solely on valuation every time the board meets. Get a commitment from your VC investor about which person at the VC firm will sit on your board and for how long. Founders and other management representatives should be chosen by the team based on ability to interact positively with other board members, not the number of shares owned by each founder. Founders who can’t get along with other board members should take a bullet for the team, i.e., resign from the board, if another team member can do better. The independent outside directors are key corporate resources. Don’t waste these positions on friends who add little value.
3. Business Plan. Most board members want management to formulate a reasonable business plan, take the board’s comments on the plan into account and execute the plan or give the board sufficient notice of deviations from the plan. Don’t rely on your board to create your plan, but encourage real critiques of the plan to improve it. Focus the board on areas of the plan that you consider weak, e.g., areas where the management lacks expertise or information; seek suggestions for improving these areas. If you expect deviations from plan, tell the board before they occur and explain both the reasons and your plan for rectifying deviations.
4. Know Your Authority. Not every decision by management needs board approval. There is a relatively short list of items that a board cannot delegate to corporate officers or to committees of directors. However, when in doubt, management should consult with individual directors as to whether a board meeting should be held to authorize a particular action.
5. Board Package Timing. Board members need sufficient time to review and evaluate information. They may sit on several boards or have their own businesses. Don’t assume they have nothing to do the day before your meeting except to review the package of material you send them at the last minute for your board meeting. Few things frustrate directors more than receiving a pile of papers the night before a board meeting.
6. Address Difficult Issues. Some CEOs address one set of issues at one meeting and address a completely different set of issues at the next board meeting. Board members may think the CEO is playing a shell game. Build credibility with board members by first reviewing the issues the board discussed at the previous meeting and updating the board on progress or lack of progress. Don’t wait for board members to force you into admitting lack of progress.
7. Organization. Boards should be organized into committees to maximize the real work the board does. If committees are doing their jobs, more time at board meetings can be devoted to strategy, rather than reviewing details.
8. Motivate Board Members. Board members are often directors of several companies and may also run their own businesses. You are competing with others for their valuable time. Incentives may be financial, such as awarding stock options, but in many cases motivation is as simple as getting a board member excited about an interesting project and conducting board meetings so that board members can devote more time to strategy and less time to reviewing details.
9. Remember You’re on the Same Side. On some issues, directors may represent different shareholder constituencies within separate interests. On 99 percent of the issues, the interests are aligned, but some boards tend to focus too much on the 1 percent where interests diverge. It’s a healthy sign that a board is striving to build value if from time to time one founder agrees with one VC board member about a strategy and another founder agrees with another VC board member. The formation of founder voting blocks and VC board member voting blocks is often a sign that the board is malfunctioning.
10. Don’t Isolate the Board. In many companies, board members are fairly isolated from the company’s team. Except for the CEO and the CFO, board members often spend little time with other team members. Integrating the board and the team is likely to result in a board that is more sympathetic with the goals and ideas of team members. Board members will also be better positioned to advise you about personnel matters if they know team members.
11. (Bonus Point) Liability Issues. Directors who violate their duties to shareholders can be personally liable to the shareholders. Therefore, management should make accounting, investment banking, legal and other experts available for board members to question. Also, consulting with board members about liability insurance and indemnification agreements shows management is concerned about the personal well-being of board members, which concern is likely to be reciprocated.
Hopefully, you are already doing all these things with your board.
If not, get with the program.
Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Linda Markus Daniels concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, technology and international matters. Comments or questions can be sent to ldaniels@d2vlaw.com
