All CEOs need help running their businesses — whether they admit it or not.
A great resource for help is a board of directors, a group of people whose obligation
is to serve the best interests of the company.
But, creating a board is not easy. You need
the right people in the right places, and everyone needs to know their roles and be on the
same page. These key individuals not only
serve your company’s best interests, but they
also help you face the scrutiny and watchful
eyes of the public and the government.
“The role of a board is more important now
than ever,” says Steven C. Karzmer, an attorney at law with Calfee, Halter & Griswold
LLP. “All companies need effective boards to
keep them on the right track.”
Smart Business spoke with Karzmer about
boards, how to create them and why they are
so important in today’s business climate.
What are the functions of a board?
Generally, under corporate law — except
for items reserved for shareholder votes,
such as electing directors and approving certain major corporate actions — all authority
of a corporation must be exercised by, or
under the direction of, its board of directors.
Practically, a board’s function is twofold:
advising management on strategic issues and
monitoring the company’s performance.
What are the board members’ primary roles
and responsibilities?
Under law, board members have two legal
duties: the duty of loyalty and the duty of
care. The duty of loyalty means that directors
must act in the best interests of the corporation and not in their own interests or that of
another person or company. The duty of care
requires directors to be reasonably diligent in
discharging their duties — they should regularly attend meetings and be well informed
about the issues. Board members are responsible for all aspects of a corporation’s affairs.
The specific responsibilities of each board
vary based on the company’s industry and
stage of development, but all boards should
review and monitor operating strategies and
results, management succession plans, annual financial performance, cash flow issues,
corporate conduct and legal compliance, and risk management. Board members are also
accountable for selecting auditors and overseeing the compensation of senior executives. A board also has to actively monitor
how management implements decisions.
How can board members stay on top of it all?
Many boards develop an annual calendar
for addressing those items that arise on an
annual basis, such as financial performance,
succession planning and long-term corporate
strategy. Having a calendar ensures that
these material items are addressed on a regular and timely basis. Management can also
help ensure the success of its board by providing it with regular updates of material
information, presented to board members far
enough in advance of a planned meeting so
they can review it and provide management
with meaningful feedback. If the company is
considering a significant transaction, management should present it to the board in a
number of smaller decisions instead of all at
once, allowing the board to give each segment the focus and attention it deserves.
How do you decide what to take to the board?
That is not an easy question. Boards can try
to develop guidelines to help a CEO with this decision process. For example, the board
may require its approval on issuing options to
acquire company stock, becoming a party to
any litigation or incurring any debt above a
specified limit. To this end, the board, along
with management, should review decisions
that could have a material impact on the
company’s affairs and try to establish some
guidance for the CEO. Beyond these fixed
guidelines, however, there is a lot of gray. The
relationship between a CEO and the board of
directors is an evolving one. Over time, the
CEO should get a sense of how much information the board wants and what matters
the board believes are within its purview, and
the board will get a sense of the CEO’s judgment and those issues that are appropriately
delegated to the CEO.
So, what makes a good board member?
A good board is filled with accomplished
people who fit into the company culture and
have good reputations, solid thought processes and strong financial backgrounds.
Board members should know your industry,
and they should be people who have experienced crises, who have been successful and
who can provide guidance to help you be
successful. Board members bring not only
what they know but also whom they know.
Look for potential directors who have connections in your industry and who will provide additional opportunities. Consider outside directors, those who are neither employees nor affiliated with company management. Sometimes, particularly in privately
held companies, boards are filled with the
CEO’s family members or close personal
friends. This almost always is not a good
idea. To grow the company and achieve your
goals, you need to have challenging and
thoughtful discussions. This is difficult with a
group of people who are going to agree with
everything the CEO says. CEOs need to be
secure enough in their position to realize they
do not know everything and that a fresh set
of eyes can be invaluable. A board also needs
to be filled with people who can handle their
specific functions. You cannot just divvy up
responsibilities without taking into account
each board member’s area of expertise.
STEVEN C. KARZMER is an attorney at law with Calfee, Halter & Griswold LLP. Reach him at (614) 621-7013 or [email protected].
