November 8, 2022
As the all-seeing eyes of your enterprise, your board of directors are a pretty important bunch. From guiding your company strategy to raising hard truths, a brilliantly built board of directors will steer your business in the right direction. However, if poorly managed, your board can disintegrate into disagreements and ill-fitting advice.
We’ve supported countless companies as they build, bolster, and dismantle their board - and in the process, we’ve witnessed many of their mistakes. From bad hires to forsaking shareholders’ agreements, we’ve seen it all. In this article, we discuss the top five mistakes founders make with the board of directors - and explain how you can avoid them.
Directors have a shared goal: to act in the best interest of the business and its shareholders. With that in mind, it’s crucial that the board is empowered to make decisions quickly and effectively. When there are 10 board members to contend with, that can become challenging.
Some founders will opt for hiring more than less when it comes to directors, airing on the side of bringing in a broad variety of expertise across a span of fields. However, this often has the opposite effect, diluting the impact of your directors and instead making decisive action almost impossible. A good rule of thumb is to keep your board relatively small and, if you can help it, to keep the board to an odd number to ensure voting never comes to an impasse.
While we’re on the topic of too many members on the board - many investors will seek a spot on the board to control their best interests. While this might be tempting, take the time to think about whether your investor is truly the best fit for your board, or whether they’re just one more bum on the seat you don’t need.
While having too many people on your board of directors is a problem - it’s also a glaring issue if your board lacks expertise. As the seat of strategy, governance, and decision-making, it’s important that the expertise of board members is an active asset to your business. Take the time to think about what your business needs. This might include things like:
While it can be tempting to simply hire friends, family, or loyal employees - it’s a danger to your business to hire them if they’re not the fit for the job. Populate your board with experienced decision-makers unafraid to shy away from hard truths, which brings us to…
Honesty is a two-way street and this is particularly true of the success or failure of a board of directors. At times, for fear of failure, a founder might be tempted to withhold information from the board. Similarly, for fear of repercussion, the board might be tempted to avoid communicating issues with the business at large.
Dishonesty and poor communication can be stifling for a business, triggering a long list of issues including,
The list goes on. When it comes to interacting with, or running a board of directors, brushing things under the carpet is not a strategy - it’s a risk not worth taking.
Taking up a post on the board of directors is a huge commitment, that at times some fail to grasp. It’s a role that demands a commitment of time, effort, and duty of care, and when building your board it’s important you communicate this. Your recruits need to understand the demands of the role and be ready to pull up their sleeves and dive in. Without this commitment, you run the risk of building a passive board that gives you the green light without challenge. Worse yet, you run the risk of developing a board that is ill-equipped to advise you.
Often, a founder or co-founder will double up as a director of the board. While for many this is a good idea - as it’s in your personal interest for the business to do well - for others, it’s not the solution. Your role as a founder is demanding as it is and it’s crucial that you have the time and means to do what the business needs. Equally, being a director is demanding, and you’ll be required to attend frequent meetings and discussions to drive the business forward. Can you do both? Can your co-founders do both? Does it make strategic sense for you to do both? Or, is there someone better suited to the role, ready and willing to commit the time and energy?
The business world has been plagued with issues of diversity since its inception. While progress is being made, there remains much more to be done when building a truly diverse board of directors.
As a seat from which company-wide decisions are picked, pulled, and placed back together, it’s crucial that your lineup represents a diverse spectrum of people. It will quickly become a challenge if your board of directors lacks the perspective that many of your employees and customers will share.
For example, if your board of directors lacks diversity, it’s highly likely that there will be blindspots in your strategic approach. In fact, firms are 33% more likely to experience industry-leading profitability if their executive teams represent more cultural and ethnic minorities. When building your board, be sure to ask yourself whether it delivers a diversity of thought, background, ethnicity, gender - you name it. There are few things more stagnating in the modern age than a beige boardroom.
So, we’ve covered the top five mistakes that founders make when building their board of directors. But what are some of the responsibilities of the directors you put in place?
Firstly, directors have a number of general duties, which include:
Understandably, there are risks involved in not getting your board of directors right. From ineffective advice to a loss of credibility, it’s important that you can trust the board to act within the best interests of your business at all times. But what happens when things go sour? And what steps can you take to prepare for the worst?
When building your board there are a number of agreements that will set expectations, alongside protecting your business in the event of a fallout. Let’s explore…
There are a series of documents that will be relevant to your board of directors. These help you to define expectations, duties, and responsibilities, in addition to putting a process in place in the event something goes awry. Let’s dive in…
What happens when you want to add a director to your board? Enter: the director service agreement. The clue is in the name with this one, your director service agreement defines the relationship between your director and the business. This agreement serves as an employment contract that sets out the rights and responsibilities of your new addition to the board. A director’s service agreement is also likely to include information relating to restrictive covenants, which restrict and regulate the ability of the director to pass on business sensitive information.
You’re likely to have heard of the term NED or “non-executive-director”. This is when a director is appointed to the board but is not an employee of the business itself. However, non-executive directors are still bound to the same duties and responsibilities as an employed director and it’s still important for you to define the relationship between the business and your NED. For this, you would use a non-executive director letter (sometimes referred to as a “letter of appointment for a non-executive director” - catchy). This document will include key information relating to your NED, the relationship at hand, how to end it, and any remuneration the NED can expect from the role.
A shareholders’ agreement is important for a number of reasons when dealing with your board of directors. Often, directors and shareholders will be the same people within your business. But what happens when a director leaves? Do their shares go with them? Can they be forced to sell their shares? Answering these questions can become remarkably difficult without a shareholders’ agreement in place.
In addition to regulating the relationship between shareholders and the business, a shareholders’ agreement will also include information relating to confidentiality. For directors and shareholders alike, confidentiality is absolutely paramount when it comes to business matters, trade secrets, and any information you want to be kept under wraps. A shareholders’ agreement will include information on restrictive covenants, designed to provide information from falling into the wrong hands.
What happens if you hire a new director who is also a shareholder? For this, you would need a deed of adherence, which in simple terms binds the new shareholder to the terms set out in the shareholders’ agreement. Simple stuff.
We’ve spent years supporting fast-growth businesses from idea to exit, and in the process, we’ve helped countless founders with their board of directors. From setting robust legal infrastructure in place to supporting the business as its scales, we’ve perfected our expertise when it comes to building bold businesses. Do you need support with complex board matters? Or simply in need of key documents? Discover how we help founders.