1. How a Board of Directors Is Appointed
2. Does Your Small Business Need a Board of Directors
3. Roles of a Board of Directors for a Small Businesses
4. Disadvantages of Having a Board of Directors

A small businesses board of directors oversees the company and ensures accountability by the company's management. The board of directors is a requirement for public corporations but optional for privately held companies. The board should consist of a diverse group of people with entrepreneurial and management skills who can help the organization garner vital business connections. A board of directors may be a financial burden to some small companies, and, for that reason, some entrepreneurs choose to function without boards or appoint advisory boards instead.

How a Board of Directors Is Appointed

It is common for founding members to be appointed to the board of a small business. For bigger companies, wealthier shareholders with more stock are naturally represented on the board. Although the company's founding members, CPA, attorneys, and other company staff can be appointed to the board, it is a good practice to include outsiders who have business experience and do not work for the company on the board. The outsiders are usually innovative and will help the company's management to make the right decisions without giving in to sentiment.

The board should be composed of people who can complement the skill set of the company's founders. Retired former CEOs are among the ideal people to appoint to a board of directors. It is a good idea to set term limits of about four years for the board members. A board of seven to 15 members is ideal for most businesses.

Does Your Small Business Need a Board of Directors

A board of directors is a requirement for all public corporations even if they are small startups. For private companies, having a board is optional, but there are compelling reasons to seriously consider instituting a board of directors:

Having a board of directors will create an independent level of accountability and usually creates stability in a company. But many small private companies cannot afford to have boards. Such companies can appoint unofficial advisory boards to be formalized later when the company's situation improves. An advisory board may not have the authority to oversee the management and finances of the business.

Roles of a Board of Directors for a Small Businesses

Public companies usually have bylaws that stipulate the responsibilities of the board members. Private companies should also make sure the roles of their boards are well documented. There are many typical functions of the board of directors:

  • A board can guide the company if the business plans to raise capital or do an initial public offering (IPO). The board can help the business with corporate governance issues.
  • The board of directors is required to hold at least one meeting every year, although four meetings in a year is seen as the practical minimum. Some company boards meet every month.
  • The board may have the authority to hire the company's senior management, including the CEO. Depending on the situation of the company, the board may also have the authority to replace the CEO.
  • The board can guide the CEO and act as a protection to the top management. The CEO will have a forum to discuss issues he cannot discuss with anyone at the company, such as matters pertaining to employee performance.
  • The major function of the board is to ensure accountability by the business's management. The board sets goals and puts the company's management to tasks to meet the goals. The board is involved in strategic planning for the company. It will shape the management of a business and make adjustments to the long-term vision of the company if there is need.
  • The business connections of the board can help to get investors, suppliers, and customers for the company.

Disadvantages of Having a Board of Directors

  • Founding members will have to relinquish some control over the direction of their company. The board typically has wide-ranging powers, including the ability to replace the business's top management. This is a prospect some business owners, especially of family-owned businesses, cannot stomach.
  • Having a board may necessitate a company to incur extra expenses. Incentives like salaries and allowances may need to be offered to attract experts to sit on a company's board. In addition, board members may face personal liability as a result of their work for the company. Many businesses are forced to buy liability insurance for the directors, thereby incurring extra expenses.

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