Who should be on the board of directors, and often whether a particular individual should be a director is a common dilemma for a start-up.
The first thing to be clear about is the role of a director versus the role of a shareholder versus the role of any employee. The three are not mutually incompatible – you can be a shareholder and an employee, or all of them at the same time. They are different, just as owning a house and living in a house are.
In order to keep this post short, I will have to keep an explanation of the three short. Bear in mind that the following is simplified.
An employee is someone who works for the company. He or she may have responsibilities. However, as an employee, he or she has no liability to anyone other than the company for the work done.
A director is someone who, along with the other directors, is responsible for the majority of decisions about the management of the company, particular those day to day ones. Directors don’t have to be make all the decisions – some can be delegated to other people within the company. But they are responsible for the outcomes.
That responsibility is to the company, which is its own person in legal status, and to the shareholders (note that there may be legal obligations to other stakeholders as well). The shareholders choose the directors and give powers to them to make certain decisions. The powers can be broad, such as to do what they think is best with regards to balancing having a competitive edge in the technology developed by the company with cost controls, or very narrow, such as to take on a loan from a specific lender.
Who should be on the board of directors is therefore an equivalent question to who are the best people to make sure that the company is run as the owners wish and that the best decisions are made when the owners don’t give specific instructions.
You may read articles on other sites that talk about having independent directors who can hold executive directors to account, or making sure that the board is diverse with committees to decide matters that might require independent thought not influenced by other board members. Those points are very valid, if and only if, your business has enough funding to employ committees of directors and it is large enough so that many directors are needed.
Keep your board small
A new company only needs a small number of directors. Most UK companies (regardless of age) have three or four. An odd number is good because it forces decisions to be made (a vote cannot be tied).
Small numbers are also good because decisions need to be made, not deliberated. Every additional director will bring opinions that have to be considered. Deadlock becomes more likely.
In the early days, all the founders should be on it
If you have started the company, you’ll probably want a say in how it is run. Of course, owners have that to some extent, but they may also want control of day to day decisions made by the board. In an early stage company, there will be many decisions that have a large impact on the future success of the business and where time is of the essence. Founders are best to be making those decisions.
By having the founders on the board, the directors are most likely to be able to run the company as the shareholders would like. There are likely to be fewer shareholder-level disputes that could disrupt the business.
If you can afford it, do bring in expertise
Some decisions require experience or knowledge or both. Founders may not have those things. You can compensate by hiring someone else, either as a non-executive director or as an advisor. The difference between them is voting rights and responsibility. The former has both, the latter does not.
When you start, you’re unlikely to need non-executive directors. They are advantageous in some circumstances, but not necessary.
Good advisors are worth their weight in whatever precious material you want to choose. There is less commitment to keeping them hired all the time; you can bring in expertise in certain areas as required; and you can still take their opinion without being bound by their opinion.
Being a director is a responsibility, not a reward
Directors have legal obligations. There is cachet in being able to say you run a company. But it isn’t all roses.
If someone wants to be a director because of position alone, decline him or her. He or she has to be able to handle the responsibility.
Someone can still make high level decisions without being a director (although be careful of shadow directorships). He or she can still have a job title that includes the word “director” or “officer”.
If you take on someone new who expects to be appointed as a director, give him or her a long probation period before agreeing to a directorship. He or she needs to be familiar with the company and its aims in order to serve successfully as a director. The other directors need to know that the skills he or she brings are those that are needed, and that they can trust him or her to act in the interests of the shareholders and the company.