What Is A Board of Directors?
I welcomed the co-founder of Foundry Group and author of the book Startup Boards, Brad Feld, and during our discussion we highlighted board of directors.
What is a board of directors, why are they important, and why should an entrepreneur care?
A Board of directors, or board, is the governing body of a company, elected by shareholders in the case of public companies to set strategy and oversee management. The board typically meets at regular intervals. Every public company must have a board of directors. Some private companies and nonprofit organizations also implement a board of directors, according toInvestopedia.
Briefly, a shareholder is any person, company, or institution that owns shares in a company’s stock. It can be as little as one share or many more, but enough about shareholders - back to board of directors.
Think of a board of directors as a group of individuals from diverse backgrounds making decisions as a fiduciary, which means someone who manages property or money on behalf of someone else and its shareholders.
The board helps set goals, supports senior leadership, and makes certain the company is well-managed. The board determines hiring and firing of senior executives such as Chief Operating Officers, they determine investments, mergers and acquisitions, executive compensation, and they even determine how much dividends to pay shareholders.
Dividends are given out to shareholders when the company’s board determines the company’s earnings warrant a dividend payout to shareholders.
AT&T has one of the higher dividend payouts, issuing $2.08 a share in 2021. So for every share of AT&T owned, that’s a quarterly payout of $2.08. Not bad for being a shareholder, but you really should thank the board of directors who ultimately could determine to reinvest those earnings into the company instead of paying dividends.
Some boards are paid some are volunteer roles, and there are different roles and responsibilities within each board. One board may call the lead role a chairperson or president of the board, but the main purpose of this role is to lead the board and facilitate meetings.
I am currently the president of the board of directors for the American Association of Physician Liaison, and I have been an active board member for the past 3 years. I sit at the head of a national professional network, but my role is not to tell anyone what to do. In fact, I would say my main goal is to listen and provide value to our members.
That can be done by adding diversity to boards - bringing in professionals from a variety of professions, ethnicities, and sexual orientation is extremely valuable as it provides views through lenses we may not be accustomed to.
A vice-chair or president-elect is the second in command and fulfills the chairs role when the chair is unavailable.
A secretary serves mostly as the official recorder of meeting minutes and reports those minutes back to the board at the start of every meeting to ensure accuracy and alignment between all members. When minutes are read from the previous meeting, those minutes are approved and seconded by a board member before the meeting can continue.
A treasurer supports finance and budgets, and reports out monthly, quarterly or annual financial reports.
As I mentioned, these members will help recruit, supervise, retain, evaluate, and compensate senior executives, and that is why board of directors are important.
The goal is to provide direction for the organization - they help provide vision, mission, and goals of the organization. And these members do not have to be a part of the same profession in which the entrepreneur resides. In fact, the more diverse the board the more innovative the company becomes.
For example: Nature, the leading international weekly journal of science first published in 1869, did a study on the importance of diversity on boards of directors’ effectiveness and its impact on innovativeness in the bioeconomy which showed bioeconomy companies have more business majors than engineering majors on their boards even though bioeconomy companies are highly engineering oriented.
The important of diversity is further highlighted in the study by stating, “the average age of board of directors’ members in bioeconomy companies is 61 years. In comparison, the average age of those in the most innovative companies is 4% lower, 59 years”.
The study concluded that the most innovative companies are 27% more ethnically diverse than are bioeconomy companies, and that is why the entrepreneurs should care.
Finding the right board members to help support the entrepreneurial endeavor is very important because that group of members will help support the growth of the endeavor.
Things to think about when selecting board members: relevant expertise and experience, business acumen, complimentary skills, support of management, is this individual a team player.
According to Forbes, successful board members have several qualities in common, including being consistently engaged in dialogue with management, making proactive efforts to forward business objectives, and providing expertise and credibility within the company’s industry.
After all, a board member is just another entrepreneur in a world of entrepreneurs.