How to Form a Board of Directors
A Board of Directors is a group of elected or appointed individuals who oversee the activities of a business or organization. The role of the board varies according to the type of business or organization it represents.
For-profit boards have a primary responsibility to protect the assets of the shareholders and to manage a nice return on their investments. The board appoints the company’s officers and determines their compensation; it also evaluates and distributes dividends, recommends stock splits and oversees acquisitions and mergers. Nonprofit boards focus primarily on program development, financial management and fundraising.
All states require corporations to form a Board of Directors. Some states allow the board to be as small as a single director (often the owner), while others require at least three directors.
Since corporations are regulated at the state level, there is no standardized method to forming a Board of Directors. There are, however, basic steps that all businesses should take while forming a board. Follow along as we guide you through these steps.
Step 1: File the Articles of Incorporation in Your State
The Articles of Incorporation should be the charter for your corporation. It should contain the name of your corporation and its incorporators, outline its purpose and status (profit or nonprofit), and it should detail the amount and types of stock to be issued.
Step 2: Draft Bylaws
In addition to the articles, your corporation should also draft a set of corporate bylaws. Your corporate bylaws should detail the structure, roles and responsibilities of the Board of Directors. It should outline, among other things, the following points:
- Directors: Included in your bylaws should be the number of directors on your board. There is no limit to the number of board members. Generally, larger companies have larger-sized boards, but an oversized board makes effective corporate governance impractical. For that reason, it’s best to limit the number of directors to about nine for smaller entities.
- Terms: Your bylaws should also determine how long a board member’s term can last. Term limits are not mandatory, but they can help to easily infuse fresh talent and ideas when the need becomes evident. Limits can be set on both length of term and number of terms served.
- Meetings: Many states require you to conduct at least one board meeting per year. Your bylaws should outline when those meetings take place and how and when notices of upcoming meetings are to be made. They should also indicate the size of your quorum (i.e.: the minimum number of directors needed to be present in order to validate the meeting).
- Chairperson: Your bylaws should detail the methods to appointing and dismissing chairs. In the case of smaller boards, the chairperson is often the CEO or founder of the business. In larger corporations, a chair can be voted and agreed upon by the members of the board.
- Vacancies: Vacancies are bound to happen on any board. As such, it’s important to outline your corporation’s protocol in regard to vacancies.
- Powers: The basic duty of the board is to oversee operation and ensure profit and progress, but fulfilling that duty requires many other obligations for board members. Planning strategies, making policies and approving finances are just a few of the powers that should be summarized in your bylaws. Powers can also include the authority to create and dissolve committees, appoint and dismiss officers, etc.
- Compensation: Deciding how much to compensate board members can be tricky. In general, a nonprofit board consists mostly of unpaid volunteers. Board members of smaller nonprofits should be present only to aid your cause; if a member demands monetary recompense, that member is probably not right for your organization. In for-profit corporations, compensation varies. Members of Fortune 500 boards can earn a few hundred-thousand dollars a year, but small businesses should generally avoid cash recompense. As with nonprofits, members of for-profit boards should be there to ensure the success of your company. In lieu of cash, stock is a great incentive for directors; it rewards the board members with earnings based on the performance of the company, which should motivate them to ensure the progress of the corporation.
Step 3: Hold Shareholders Meeting
Ideally, your bylaws or Articles of Incorporation should set the time, date and location of your first shareholders meeting. They should also indicate rules regarding proxies.
Proxies are substitutes for shareholders who are unable to attend a meeting. They are a legal agent of the shareholder they represent. Shareholders delegate their voting rights to their proxy. Some corporations also allow voting by proxy online or via mail.
The major objectives of the first shareholders meeting are to adopt the corporate bylaws and to appoint or elect directors.
Elected board members should have previous board experience. Veteran directors bring not only the savvy inherent with experience; they also bring prestige, reputation, contacts and networks. Directors should also be complementary. They should offer knowledge or experience otherwise lacking in you and your team.
Step 4: Draft Board of Directors Agreement
On top of your bylaws, a Board of Directors Agreement should be drafted. The agreement should outline the specific responsibilities of the board member to both the board and the corporation. It can also outline the specific responsibilities of the corporation to the board member. It should detail the minimums expected of the directors and the consequences of the directors’ failure to adhere to those minimums.
Step 5: Draft an Agenda
It is recommended to draft an agenda before conducting a board meeting. An agenda should provide direction and serve to accomplish your corporation’s goals. It should be an outline that guides your meeting.
While it’s ideally a collaborative effort between board members, officers and other personnel, the agenda should be drafted by the chairperson. Topics on the agenda should be thoroughly researched, and research results should be given to directors prior to the meeting in addition to an initialed copy of the agenda.
Step 6: Maintain Minutes
When you’re finally ready to hold your first board meeting, be sure to record notes in the form of minutes. Minutes are written records of the meeting. Logs of corporate minutes are legal documents that can be used during IRS examinations and as evidence in courts. It’s vital that the minutes are clear and contain pertinent information discussed during the meeting.
Board minutes should summarize the events that take place during meetings; they should not be a transcript of everything that was said. Verbatim minutes are difficult to comprehend, and recording what should otherwise be confidential or sensitive could cause future problems for the corporation.
General information—such as date and time of the meeting, names of directors and guests present, etc.—should start your minutes log. Beyond that, minutes should focus on motions and actions taken, and they should record the voting results of those events.
At the conclusion of the meeting, the minutes should be reviewed by the board. If approved, their approval should be noted in the minutes of the meeting. If they have to be redrafted or changed, minutes will need to be approved as “amended.”
Minutes do not have to be handwritten or typed; they can also be an audio or video recording.
Forming a Board of Directors is a vital step every corporation must take. Due diligence is a must when forming a board. As the governing body of your corporation, the quality of your Board of Directors can make or break your business.
If creating a large, formal Board of Directors is unfeasible for your situation, consider forming an advisory board. A Board of Advisors allows a business to benefit from the boardroom debate and brainstorming without relinquishing the legal/managerial authority and fiduciary responsibility inherent in a Board of Directors. Advisory boards have no governing authority over the corporation, and as such, the corporation is not bound to any decisions made by the advisors.
Whether choosing to go with a large Board of Directors or a sole directorship with an advisory board, keep in mind the benefits that industry veterans can bring to your corporation. An incompetent board can be bad for business, but a high-quality board can propel you to success.