Does Your Business Need a Board of Directors?

As you are founding or growing your small business, you’ll confront this question: Do I need a board of directors?

Typical entrepreneurs and CEOs are attracted to the role because they’re driven, single-minded, and have a powerful vision. That sounds like good stuff, right? It is… but it also has its downsides, such as excessive stubbornness and a narrow focus. It’s precisely for these reasons that a competent board of directors can offer tremendous benefits to a business of any size. If a board of directors is effectively selected and groomed, it can provide crucial alternative perspectives and expertise.

One consideration is your business’s legal structure. Check with your attorney for specifics, but according to QuickBooks, a board of directors is legally required in some circumstances:

C corporations and S corporations have no choice but to elect a board of directors. Exact rules and regulations for boards vary by state. All states require that corporations form a board of directors elected by shareholders, hold at least one annual meeting, and maintain meeting minutes that document topics discussed and actions taken. Sole proprietorships and LLCs are not required to have a board of directors, but can choose to elect one if they choose.

State law determines how many directors you must appoint to the board. Joe Hadzima [PDF], chairman of MIT’s Enterprise Forum, notes that corporations in Delaware and Massachusetts can have as few as one director, but most require more. The U.S. Small Business Administration notes that typical titles include president, secretary, and treasurer.

The role of a board of directors is to provide regular, ongoing peer review of your company and its functions. The group examines existing practices, solves problems, and crafts plans for growth. Simply establishing a board of directors full of family members and golf buddies won’t bring the results you need: you’ve got to hand-select a group of people who represent diverse skills and experience, have strong opinions, and who respect one another’s contributions. A board full of yes-men and yes-women will not serve your interests.

A good candidate for a board member:

• Offers diverse experience and perspective. If you are deeply into finance, or manufacturing, or branding, it’s easy to pack the board with people who share a similar focus. That’s a mistake: your board of directors derives its strength from bringing in broader views.
• Is strong minded and team oriented. You want people with strong, considered opinions who are also capable of really listening to other people and learning new things.
• Is financially independent from the business and from you. If they have too much skin in the game, they have a hard time being independent and effective.
• Shares your vision of where the company is going. Unless the board agrees fundamentally on the direction to take the company, there are bound to be conflicts.

High-performing businesses enlist the power of the board of directors to ensure smart growth. If it’s your goal to be an attractive acquisition or IPO target, or simply to dominate your market, a board of directors is essential. While typical entrepreneurs may be inclined to believe they know everything and can do it all, they actually benefit immensely from the support of a cohesive board.