Barry's Accounting Services, Corp.
1852 Flatbush Avenue - 2nd Floor
Brooklyn, New York 11210
(718) 677-4006
E-mail:
clembarry@aol.com
 
Client Update - quarterly newsletter
 
 

 

Forming a Board

Forming a Board

Private Corporations
Three reasons why the owner(s) or shareholders of a for-profit corporation may want to form a board:

1) It's the law in the country where the business is formed or incorporated.
2) The corporation has or wants to attract private investors. Those investors would want their interests represented in the governance of the corporation, especially if they are absentee shareholders/owners. Hence, forming a board would add credibility and attract potential investors.
3) The owner(s) plans to take the corporation public and sell shares on the open market (stock exchange). There are legal requirements (SEC rules and Sarbanes Oxley law) that require every public corporation to have a board of directors. Hence, forming a board of directors as soon as the business is incorporated would give the owner an opportunity to experience working with a board before the corporation goes public — IPO.

Forming a Board
Board members are selected for the experience and skills they bring to the Board to address current and strategic priorities of the corporation. The first board member is appointed by the owner or shareholders who formed the corporation. Subsequent appointments would follow the same procedures. The number of members on the board will depend on the number of strategic and priority areas of concern that management plans to work on. The maximum number of board members the corporation plans to recruit should be set out in the Articles of Association/Incorporation.

1) Communication. Clearly communicate your expectations of each board member and be prepared to answer the following questions: Does your corporation pay compensation to directors? Does the corporation provide directors' and officers' liability insurance coverage? Will the corporation reimburse directors for legal expenses and damages awarded against them if they are sued for negligence or breach of duty or corporation failure?
2) Priority. Progress takes time so prioritize and set a schedule. Will the board meet monthly or quarterly?


Board Members Responsibilities as "Principal-Agent"

1) Oversight. Preside over management activities and ensure management acts in the best interest of shareholders.
2) Advice. Provide advice to management and help make decisions that fit the company's strategic plans.


The Purpose of the Board

Board members serve many purposes. Here are two:

1) Talent search. Board members seek out skilled and reputable candidates who have specific knowledge or experience that the company needs. Candidates are screened, interviewed, hired, and held accountable by the board. When a business owner wanted to add new products, the board was entrusted with a talent search and it recruited people who understand product development and marketing. When the priority was to communication and selling products and services to a diverse customer base, board members searched for and recruited qualified people to represent different racial, ethnic, and gender groups. Board members usually have brainstorming sessions in the board room.
2) Operations oversight. Environmental sustainability issues are hot topics. Every company is trying to make an impact by capitalizing on this trend. It builds relationships with stakeholders and it gives companies a competitive edge and new opportunities for profitable growth. However, some companies can't easily embrace sustainability issues unless demonstrable cost savings are provided to their boards. Those boards have asked management to demonstrate how those companies response to a new trend/product will impact their bottom lines. Those boards have thoughtfully undertaken a risk assessment, presided over competing interests, and exercised a degree of skill that was reasonably expected. Hence, while management and staff were elated about the new trend, those boards have kept them grounded in their corporate policies, missions, and corporation/company laws — a form of checks and balances. However, boards have not always acted like that. Court cases involving Tyco, WorldCom, etc., have revealed their boards have acted like rubber stamps for the CEO's.

Fiduciary Duties of Board Members
Board members are legally obligated to act on behalf of the corporation's shareholders. Their fiduciary duties lie at the heart of corporate governance. They are selected and hired to bring a healthy dose of skepticism to proposed transactions and ensure the corporation is properly managed. They are there to keep the company's management team in line when they believe, with reasonable certainty, that the management team is putting its own interest in front of shareholders' interests. Board members must consider a number of statutory factors including the long-term consequence of their decisions, the corporation's reputation, and the interests of stakeholders such as employees and the community.

Public Corporations
In addition to the information above, public corporations must abide by the SEC rules and Sarbanes Oxley law. Every public corporation must have a board of directors. The board appoints the Chief Executive Officer (CEO). The CEO reports to the board. The board holds all executives accountable to earn a return for shareholders and increase shareholders' value in the corporation. Hence the CEO could resign from the corporation or get fired by the board for improper conduct, unsatisfactory performance, or incompetence.

Every public corporation is required to have three committees.

1) The audit committee
2) The compensation committee
3) The nomination or governance committee

(Excerpts from the book: "Sweet Success", by Clemson Barry - pages 97-98 "Business Advisors" and pages 45-57 "Leadership".)