I wrote recently about a new type of company, and have discussed the considerations for startups, as well as different sorts of company structures. (You can search the index for LLC, S, etc. to find more resources.) As part of the discussion of “B” entities, I alluded to the function of a Board of Directors.
The Board of Directors has a fiduciary duty to the stockholders of the company and to the Limited Partners they represent. They can serve as an advisor and mentor to the CEO and the officers of the firm- but that can never be their first priority.
This becomes highly evident if the Directors were chosen because they represent the venture capitalists that back the firm. These venture capitalists made their investment with the express desire to obtain capital gains from their investments. The Board may like the officers of the firm, but given a choice between what is best for the officers (who are typically the founders in such a scenario) and the best return for the company, there is no contest- the company (and, in particular, how the company can provide profit for the investors) wins.
I have served on the boards of various companies. My contact with the founders and officers of the firm is frequent- and candid. It was and is my job to provide them honest feedback. It’s my job to help with their financing, their business models, their hiring considerations- even to meet with potential hires to “seal the deal”. But, there are times when the needs of the officers are not in concert with the needs of the company. And, since I may be representative of the venture capitalist entity that backed the firm, the needs for the best return are what is paramount.
I have also served on Advisory Boards. These boards are constituted without the legal mandate to maintain the best interests of the stockholders or investors, but to serve as a trusted advisor and mentor to the founders and officers of the firm. In at least one case, I was placed on an Advisory Board by a large investor in the firm. I made it clear to the investor that, since this was an Advisory Board, my function would not be to represent the interests of the stockholders and investors, but to serve as a trusted advisor and mentor to the officers.
Therein lies the difference. If there is outside money (not friends and family, credit card debt, or personal loans) backing a venture, that venture must have a strong Board of Directors. It is the job of the Directors to insure that the company performs to its best and provides the best possible returns to the investors in the entity. And, it also means that the officers and founders of the entity needs a “kitchen cabinet”, a Board of Advisors, who can serve as mentors and trusted advisors, who can help the officers be “the best they can be”- which also means to help the company grow and get better returns.
If there is no outside money backing a venture, the firm still needs a Board of Advisors to serve as that “kitchen cabinet”. To help the founders and/or officers, to serve as a sounding board for various decisions that will be made along the way. It can even be called a Board of Directors (but that means that there is a fiduciary responsibility to the company- which entails liability for the Directors on that board).
But, make no mistake. the controlling interest of the Board of Advisors is to advise the officers and founders- not the firm. The primary responsibility of a Board of Directors is always the interest of the stockholders and investors of the firm.
We would love to discuss your needs, questions, and/or functions of Advisory Boards or Boards of Directors. Contact us anytime!
Interesting comment – just looking at committees who are supposed to represent member interest and I think the same holds true there too. Unfortunately egos are the biggest challenge on all levels. As is experience and the ability to provide good solid practical feedback or maybe more importantly ask those good questions that are slightly out of the norm. It always amazes me the cultures that want conformity rather that to be challenged
Roberta Budvietas, recently posted..3 Ways to Keep Motivated
Most of the boards upon which I have served have little ego problems, thankfully. I think that’s related to the fact that, with three exceptions, the boards were really instrumental in the entity’s growth, formation, and/or continuity. The first board I served on that was not my own company was a local non-profit (some 3+ decades ago)- and it was clear whose ego was more important. It took me two years to gain clout in the organization and retire those two fellows.
Roy
Hi Roy,
I am not sure I have ever seen this topic explained so well. I serve on a lot of boards and committees and often I feel as if we have no idea regarding our charge. When I run a board or committee, I try to frequently remind board/committee members why we are there. For some boards, this means a quick review at each meeting. Without an understanding such as the one that you provided, boards/committees are not efficient and members may fail to provide advice from the right perspective. I have attended many a board meeting and wondered what the leaders wanted or needed from me and also which “community” or perspective I was supposed to be representing.
Kristen recently posted..Planning a Child’s Birthday Party: Stress Management Tips
I never understand why entities don’t explain their goals and desires, Kristen. And, then feel that they never got the advice they wanted or needed…
Thanks so much for your kind comments about this blog. I appreciate it immensely.
Roy
I never understand why entities don’t explain their goals and desires, Kristen. And, then feel that they never got the advice they wanted or needed…
Thanks so much for your kind comments about this blog. I appreciate it immensely.
Roy
I have been watching my daughter’s company do a truly stupid thing and wondering where the directors and advisors are. It took me a little while to interpret your picture to even find the company, but when I did, I saw all the ways my daughter’s company fell down on the job. It’s too bad because I think jobs are on the line who are too far down the line from where the mess-up occurred. Thanks for the graphic, Roy.
I am always amazed at how some companies fail to obtain the best uses for their advisors. Glad you like the graphic, Ann. We use it with our clients to explain what to expect and what we feel we owe them when we serve on the various boards.