Key Considerations: Board of Director Composition and Director Recruiting in Early Stage Companies
The board of directors governs the activities of a company, overseeing and advising management while upholding its fiduciary duties to the company’s shareholders. A board is tasked with making high-level decisions, approving major policies and supervising performance and company strategy. Given its significant role, there are several important and strategic factors to consider when structuring a board of directors.
Number. The number of directors will be set forth in a company’s organizational or financing documents. Most often, each director will have one vote on all matters that are subject to a board vote. As such, in order to avoid decision deadlock, it is helpful to structure boards such that there is an odd number of directors. In addition, because approval by at least a majority of the members of the board of directors is required for major corporate decisions, it is important to strike a balance between having enough directors to appropriately consider all aspects of a decision, while also having a manageable number of directors such that obtaining approvals is not unreasonably difficult.
Inside versus Outside Directors. Having both inside and outside directors allows internal corporate and unaffiliated perspectives to be heard at the board level. In the early days of a company’s life cycle it is common to have only inside directors. However, as the company grows, outside directors are often elected to add independence. Inside directors include upper management and shareholders, who are often friends and family. Outside directors are meant to be independent of management, bringing an unbiased view to board decisions. Since both types of directors share the same responsibilities, these differing viewpoints can help the board to maintain the corporate vision, while avoiding conflicts of interest and upholding corporate integrity.
Value Add and Commitment. Each director should possess skills and experience that the shareholders believe are important to furthering the company’s goals. This may include a director having a background in the particular industry that a company operates in, having early stage company expertise or having access to key relationships that could serve the company in the future. Important skillsets to consider for board members include marketing, product development, financial, exit strategy and business development. The entire board should have a diversity of backgrounds, expertise, experience and perspectives. This diversity ensures that the board will act independently of management’s influence, take a holistic approach to its decisions, and therefore always act in the best interest of the company’s shareholders. Investors have been increasingly focused on board diversity. Further, all directors should be engaged and motivated to participate in the company’s decision making process. Shareholders should be confident that their directors aren’t passive actors and are committed to acting in their best interests and the company’s best interests.
The two most important aspects of recruiting are appropriate candidate identification and proper recruiting process.
Candidate Identification. A successful recruiting process will identify candidates who, as noted above, are committed and add value to the company. First and foremost, the company should have a clear vision as to the skills and expertise it is looking for in a new director. This means properly assessing the strengths and weaknesses of the existing board members and determining qualities of an ideal candidate. Once a focused profile is developed, the company may choose to leverage the company’s relationships with its existing board members, management or investors or reach out to a third party recruiter to identify appropriate candidates. Remaining open and objective throughout the candidate identification process is key. A strong candidate may not be a close companion.
Orderly Process. Running an organized process is crucial to proper director onboarding. Assigning a single point person, whether an existing director or member of management, to manage communications with potential directors or a recruiting agency helps to avoid too many cooks in the kitchen. The company should share its expectations with respect to the recruiting process, including timing considerations, with any potential candidates. In addition, to the extent possible in light of any confidentiality obligations the company may have, the company should be as transparent as possible with any candidate as to director expectations and existing or potential future corporate issues. This candidness will avoid discontent in the future. Finally, before making any onboarding choice, the current board members should have an opportunity to meet with and talk to the potential candidates and provide their feedback.