Think of directors as something like members of Parliament. In a democracy, the people have the power (through voting), but we don’t actually run the country. Instead, we elect representatives who run the country on our behalf. In fact, the representatives don’t even really run the country. The civil servants do that. The members of Parliament, through the government of the day, supervise the civil servants and direct what they should do, and how. 

By law, every incorporated business must have a board of directors. It is the legal responsibility of the directors to oversee the operations of the corporation, and to look after the interests of the shareholders. In Canada (and many other countries), the rule is that as a shareholder, you are just an owner, and all you are allowed to do is choose who is really in charge, the directors. It is the directors who, then, make the decisions. If the shareholders don’t like it, they can’t overrule those decisions. All they can do is kick them out, and replace them with new directors who, they hope, will make better decisions. It’s much like voting for a government (and then having to live with the results).

In practice, of course, the directors are often the same as the shareholders. In many small companies, the only directors are the founders and major shareholders. When outside financing is brought in, often the only change is to add some directors to represent the interests of the people providing the money.

But boards of directors, if properly recruited and structured, can give a major boost to startup companies in their drive to be successful. Startup companies often have management that are still learning many things, and don’t necessarily have an extensive list of business contacts. A well-chosen board of directors can fill in those gaps, bringing people with experience and connections to the table as a resource for management. It can also give comfort to financiers, who will see a solid board and know that better quality decisions are the likely result.

Too many small companies bring in their friends as directors, or “give” board seats to small early investors. The better approach is to assess, early on, what skills, experience and connections the company needs, and then go out and recruit independent people who can fill some of those needs.

It’s not easy to get those people, of course, but most entrepreneurs are surprised at the sort of top people they are capable of drumming up if they tap their network of friends and business contacts for leads.   While you may not know the right person directly, it is often that case that someone you know has a good friend who just retired from ABC Limited as Director of Product Development, or something like that. Remember that people have complex motives, and there are many capable people who will take on the director job for a combination of the financial rewards (stock options, usually) and the opportunity to help a startup business succeed.

When selecting independent directors, the following characteristics should be paramount:

·     Independence. A board of yes-men is not useful. You want people who are willing to be critical, in order to help the company improve.

·     Practical Experience.  The best board member is someone who has actually “done it before”, preferably successfully, and learned real world lessons from the experience. Academics, for example, have limited value. Sometimes professionals, if they have been on a number of boards, can be useful, but someone who has actually been on the firing line is better still.

·     Availability. The best people are usually busy, but someone who never shows up for meetings is worse than no one at all. Get a real commitment to help.

·     Problem Solvers. Good board members are almost always people whose reaction to problems is to find solutions.   If someone has a reputation for being a whiner or complainer, they are probably not going to add much value.

·     Willingness to Accept Shares. Early stage companies should not be giving cash payments to directors, even if they are very active. Directors should be willing to make a substantial effort in return for a small percentage of the company (rarely more than 1%, often much less). Their reward is the company’s substantial upside if they, and management, are able to make it successful.

·     Willingness to Resign. This may seem strange, but as the company matures, its needs on the board will change as well.   Don’t recruit anyone for your Board who will refuse to make way for someone else when the time is right.

If you can find one or two people who meet these criteria, and are willing to be directors of your company, you will be amazed at the value they will add.

Not everyone is willing to be a director, and usually the reason is the personal liabilities that can sometimes haunt directors when companies have problems. See the separate Essentials topic, Director Liabilities, for more information.

If you want to get the most value out of your board, you should ensure that you have regular, well-run meetings.

This summary is a general overview for the assistance of clients. It is no substitute for advice from an experienced and knowledgeable advisor, with full knowledge of the facts and issues relating to your particular situation. Please contact us, we would be happy to assist.