Getting on board Featured

8:00pm EDT May 26, 2008

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 skarzmer@calfee.com.