Tuesday, April 28, 2015

Building an Effective Board of Directors

A board of directors can be very beneficial for the growth of your organization. While there are benefits, there are also pitfalls. Whether you are a nonprofit or for profit enterprise, before you choose members, it’s important to be clear about the role of the board.

In smaller nonprofits, the intent may be to have a
working board. In most cases, a working board does a lot of the duties required to fulfill the entities mission. If there is an executive director, they will support that person with event planning, recruiting new directors, fundraising and other tasks. For this type of board, it is useful to have people who have a strong network. They will be required to leverage that network for venues, volunteer support and fundraising. While it’s great to have people from various professional backgrounds, their ability to raise money can be the priority.

In a privately held business, diversity of professions and ethnic backgrounds becomes more essential. The board can support executive management in a variety of ways. In most cases, the directors will be well networked. They can open doors for capital, new customers, suppliers, legislators, the community, media, etc. In addition, with an array of professional backgrounds, they can help the CEO look at the business from a number of perspectives as they develop strategy. More importantly, they are in a better position to ask the CEO tough questions that his direct reports have not asked.

However, in some cases, the founder of the company often hand picks the directors. These relationships can be somewhat incestuous. The CEO may choose someone who is a good friend. Another person could own a company and the CEO sits on his or her board. It could be a family member, etc. While these close ties imbue trust, they also impede the ability to ask tough questions. If used ineffectively, this type of board tends to be more for show, if the CEO is seeking capital.  

For a publicly traded company, selection of the board becomes more important. They are hired to protect the shareholders interest. They oversee management. In fact, it is the board’s job to hire and/or fire the CEO. While they do not get involved in day-to-day operations, it is in their best interest to fully understand the business and how it performs.

In the publicly traded company, they too should be well networked. They should also be very savvy with financial reports, strategy development and corporate governance. Furthermore, it is wise to have a diversity of thought, ethnicities and professional backgrounds. The complexity of a publicly traded company requires expertise in finance, legal, IT, regulatory, marketing, industry, and legislative issues, to name a few. Moreover, the liabilities in today’s regulatory environment require the board to constantly ask tough questions to ensure the company is not in violation of SEC or other government agency regulations. Enron and Worldcom were great examples of corporate boards that did not ask a sufficient amount of tough questions.

In contrast to privately held companies, while it is important to have great chemistry between the board and CEO, it is counterproductive to have an incestuous board. When the entire board is handpicked by the CEO, there is a chance tough questions will be subordinated to close relationships. This is almost never in the best interest of shareholders. Therefore, it is paramount to have a board that has its own selection and recruitment process.

As you can see, building a board is no simple task. It requires one to be thoughtful and aware of whom the stakeholders are. An effective board can help you protect the interest of all stakeholders, while you successfully grow the organization.

What do you think? I’m open to ideas. Or if you want to write me about a specific topic, let me know.

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