Formation, LLC, Corps How to Select a Board of Directors

It is of critical importance to choose a strong Board of Directors for a new corporation. This article will explain the functions of the board and provide best practices on the selection process. This is the third article in the "How to Create a Nonprofit Organization / Corporation" and fourth in "How to Incorporate a Business (For-Profit)" series.

What is a Board of Directors?

Every for-profit corporation and non-profit organization has a board of directors who represent the stockholders or the public. The board of directors do not manage the day to day activity of the company. The board mostly guides, governs and directs the company as a whole, ensuring that the organization and its employees follow and accomplish its mission. The initial board of directors usually includes the incorporator(s) of the company and, as a group, they will create the first set of policies and rules for how the organization is to be run. Selecting a good board of directors can be critical to the success of any company and a primary force that moves a company beyond the startup stage.

Responsibilities of the Board of Directors

The board of directors of a for-profit corporation or nonprofit organization is responsible for the following:

• In new companies, the initial board of directors creates and sets up the new corporation, determines the organization's purpose and mission, forms the plans of and creates overall company policies.
• Creates, develops and enacts the corporate bylaws and board policies, recruits other board members, conducts board meetings and evaluations.
• Selects and appoints the executive officers of the company who manage the day to day business of the company, such as the President, Vice President, Treasurer and Secretary, CEO (Chief Executive Officer), CFO (Chief Financial Officer) and COO (Chief Operations Officer).
• Acquires and ensures that there are sufficient resources for the organization to operate, both from the outset and as a going concern.
• Reviews and governs broad policies and objectives of the organization through discussion with the chief executive and management team, including supervision and assessment of the performance of the CEO.
• Accounts to the stockholders (for-profit corporations) or the public (nonprofit organizations) for the products and services of the organization, as well as accountability for its expenditures and policies.
• Provides support and assistance to the chief executive in order to move the company towards accomplishing its mission.

Legal Duties of the Board of Directors

The governing members of the board of directors have a legally required "fiduciary duty" to the corporation, such as a duty of care and duty of loyalty. They cannot have a material conflict of interest with interests that would compete with the organization's well being.

How to Select a Good Board of Directors

• Number: How many board members should you select? State law determines the minimum number of members necessary to be appointed to the board of directors. States such as New York and Delaware only require one board member while Massachusetts requires three. The optimal number of board members to appoint can be determined after assessing the overall needs of the organization and taking into account the other selection factors below.
• Compensation: A significant difference between the board of directors in nonprofit organizations and for-profit corporations is that nonprofit board members are usually not compensated – they are only reimbursed for reasonable expenses. When choosing a board member, make sure that you are realistic as to the amount of support and assistance you can expect to receive, especially if they are not compensated or potentially under-compensated.
• Fundraising and Capital Investment Efforts: Nonprofit organizations usually rely upon board members to actively participate in fundraising efforts and events to solicit funds from individuals, foundations, corporations and government entities. In for-profit corporations, board members can be the key link to successfully raising additional venture capital and strategic partnerships.
• Special and Unique Skills: Consider people who have special skills, qualities and business experience that may help the organization best achieve its goals. For example, if the company is a nonprofit organization in the entertainment business, it would be beneficial to have a board member who is both a former performer and someone who may be well suited for attracting charitable donations from benefactors and patrons of the arts. In for-profit corporations, board members who have a strong network and can connect the company to major players within target markets are invaluable. Directors with prior industry experience are highly beneficial in guiding the company towards success.

The next article in this series is "Determining Tax-Exempt Status for Nonprofit Organizations".