Could your board of directors use a refresher on their roles and responsibilities? Boards of directors are essential to the success of any organization, as they are responsible for creating and implementing strategies that move the company forward.
A board’s work includes making investment decisions, overseeing executive performance, approving major transactions such as mergers or acquisitions, providing legal advice, and much more—we’ll dive deeper into their roles and responsibilities in a moment.
In the meantime, know this: to fulfill all of these duties (and more), board members must have the right knowledge and skills.
What exactly does it take to ensure your board functions optimally and is adequately equipped to tackle its responsibilities?
This article will fill you in on exactly that.
What Does a Board of Directors Do?
At a high level, the board of directors is there to advise and manage the organization. Think of it as the steering committee of the greater company. Each board member can be an expert in a specific field of business, from finance to operations, and they all work collectively to make decisions in the company’s best interest.
1. Set the framework for how the board operates
When elected to the board, the directors adopt a handful of responsibilities that will set the framework for how the board operates for the company’s life. They control who runs the organization by electing officers to lead the day-to-day operations.
They also have the power to make significant decisions. Things like merging with another company, acquiring a competitor, or even selling or shutting down the organization fall on the shoulders of the board of directors.
3. Oversee corporation’s prosperity
At its core, the directors focus on the big picture and oversee the corporation’s prosperity. They also keep the interest of shareholders and relevant stakeholders in mind as they direct the company’s affairs.
Their goal? To keep things moving in the right direction. To do this, directors must keep a strong pulse on the company and review relevant reports that mirror the company’s health before each board meeting.
What Drives a Healthy Board of Directors?
Now, it’s time to figure out how to dial in on the details of what drives a healthy board of directors for your startup.
To keep it simple, it comes down to two things: the board’s functions and board responsibilities. If these two components are crystal clear to all board members and owners alike, you’re setting yourself up for success.
This is the board’s role: overseeing and advising senior management.
- Defining strategic direction for the organization
- Developing policies to guide future activities
- Appointing, evaluating, and terminating top executives
- Monitoring performance and compliance with laws and regulations
- Approving major business decisions that involve considerable risks
- Establishing and monitoring corporate goals, objectives, and strategies
- Ensuring the organization’s financial integrity
- Identifying potential risks to the organization’s success (including social media risks)
- Helping to set remuneration for senior executive positions
The board of directors has specific responsibilities associated with each of its functions.
These responsibilities include:
- Understanding and assessing the organization’s objectives, strategies, risks, and performance
- Ensuring appropriate systems of internal control are in place
- Advising on the selection, appointment, and dismissal of senior executives
- Reviewing financial statements regularly to ensure accuracy
- Establishing an audit committee to deal with external auditors
- Developing effective corporate governance policies and procedures
- Ensuring the organization is compliant with relevant laws and regulations
- Guiding strategically important decisions such as acquisitions, divestitures, capital investments, strategic alliances, etc.
Here’s another post you don’t want to miss next: 5 Documents You Need Before Starting Your Corporation
Liability and Protection for Boards of Directors
With all these functions and responsibilities in mind, liability and protection for boards of directors are equally important. All board members must understand their role and commitment upon being elected.
Not every decision or vote of a board member needs to drive profits. However, there does need to be a rational business purpose behind every move they make in connection with the company.
The Business Judgment Rule
The good news for the board of directors is that the “business judgment rule” legally protects board members.
It assumes directors act on the golden standards of good faith and in the honest belief that what they do is in the corporation’s best interest with a sound understanding of all the information available.
This rule stands true for those board members who have good intentions but seem to have made decisions that didn’t necessarily align with expectations. Of course, as with almost anything, this rule can be refuted with evidence.
Conclusion: How to Have a Healthy Board of Directors
So, as you formulate your board of directors, ensure each member up for election is fully aware of the commitments they will be responsible for if elected.
Be sure to clearly outline their fiduciary responsibilities, including the details behind their duties of loyalty and care. Even more importantly, help them understand the repercussions of the breach and what exactly a breach would entail.
Each element can be clearly outlined with expectations specific to your organization in the initial documents you file and complete as you open the doors to your business.
To create these initial documents and set your board and your company up for success, contact Contiguglia Law. As Denver business lawyers who work closely with startups and small businesses, we understand the importance of having a well-informed board.
We can help you and your directors understand precisely what they need to know when setting up your company’s legal framework. Schedule an appointment today to begin creating the documents necessary to establish a successful board of directors.
My book “Don’t Skip the Legal: The Start-up Guide for Entrepreneurs and Business Owners” covers boards of directors and other topics relating to running a business in much more detail. It’s available on Amazon—buy your copy today!
Did you learn a lot about how to have a healthy board of directors in this post?
Here are three more to read next:
- Founders’ Agreement: Essential For the Success of Your Business
- 6 Business Risks & Mitigation Strategies Every Business Needs to Plan For
- Legal Advice For Startups That Are Recruiting And Hiring Employees