A few months ago, the world’s richest man, Elon Musk, openly criticized Twitter. Days after, he was invited to join the Board of Directors of Twitter. Even though he declined, Twitter understood the importance of having someone as critical, passionate about Twitter, and influential as Elon Musk.
Creating a board of directors is crucial for a company, requiring diligence, planning, and thoughtfulness. A solid board can enhance a company’s reputation, success, and profits. Hence, knowing how to form a board of directors is critical, mainly because the last thing you want is to bring someone who isn’t getting any value to the table.
This short piece briefly shares tips on constituting your Board of Directors.
Who Is the Board of Directors?
The Board of Directors (‘the board” is a group of individuals elected by the shareholders to represent them in corporate governance and strategic matters. In the early stages, most companies are owned and managed by a single or a small group of individuals.
As these companies grow, the owner is likely to be shared by a larger group of stakeholders and investors who are less connected to the business’s day-to-day activities. However, not all these shareholders actively participate in the company’s management. Thus, they elect a board of directors to oversee the company and protect its interests. Constituting a board of directors is not a mere formality. Instead, it is required by law that all public companies have a board of directors in most, if not all, modern jurisdictions.
Board Composition
It is usually a mix of executive, non-executive, independent non-executive directors, and managing directors. Each of these different directors is quite similar, but the differences lie in their scope of operations and power.
A non-executive director is a member of a company’s Board of directors who do not take responsibility for the company’s daily operations and is also not part of the executive team. They are not employed by the company but act as independent advisors or directors to help it achieve its goals. A managing director is a senior-level manager responsible for a company’s daily operations.
In Nigeria, the Nigerian Code of Corporate Governance 2018 issued by the Financial Reporting Council of Nigeria (the “Code”) recommends that the Board of directors should be of sufficient size to effectively oversee the management of the business and constitute a quorum. However, a typical startup board comprises the founder(s), a VC, and independent directors.
At the early stage of a startup, the composition might not be something to worry about as the Board will most likely evolve as the company continues to expand, grow, and scale. However, as a startup goes through more funding rounds, the Board begins to develop, especially regarding number and decision-making power. The evolution typically looks something like this:
- Seed Stage – 3-Person Board – A seed investor and two co-founders
- Series A – 5-Person Board – A seed investor, two co-founders, and one independent director
- Series B – 5-person Board – 1 Series A investor, 1 Series B investor, two co-founders, and one independent director
- Series C – 5-7 person board – 1 Series A investor, 1 Series B investor, 1 Series C investor, 1-2 co-founders, 1-2 independent directors
What does a Board do?
This is a ubiquitous question by founders. The Board of directors is responsible for the overall direction and management of the company. They participate in the core decision-making process of the company, ranging from approving budgets, hiring or firing senior management employees, and supporting investments, among others.
What should You do when starting a board?
To create a board, you must hire an experienced lawyer. The lawyer would inform of the core obligations of the Board about meetings, and fiduciary duties, among other things.
When creating a board, consider all you need to create a venture. Even every member of the Board is meant to be there. A company is only as strong as its Board. For a company to be successful, its Board must be solid.