Entrepreneurs are often advised that they should have a board of directors, but due to their lack of familiarity with such groups, they don't understand why they need one, what they'll get from having one, and what it will cost to assemble.
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One of the first decisions interested CEOs should make is whether a true fiduciary board of directors is needed or whether an Advisory Group is better suited.
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A fiduciary board of directors has the responsibility to represent the interest of owners/shareholders and usually has several roles: auditing of the company's controls and books, risk management, review and approval of strategic plans, compensation/succession planning for the senior leaders and performance appraisal of the CEO. They typically have approval power over several of these, which can cause friction with an owner/founder/CEO, who is usually the largest shareholder.
An advisory group or committee does not have the ethical or legal responsibility to look out for the welfare of shareholders. Typically, in early stage entrepreneurial companies, advisory group members are selected for their specific industry experience and contacts and their ability to open doors and make introductions. Advisory groups usually meet less regularly than boards of directors and often are given assignments to undertake between meetings. Advisory groups are usually paid a modest stipend and sometimes receive some equity in the company to provide an incentive for helping the business grow profitably.
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For advisory groups, owners/CEOs usually select members themselves, often following interviews to understand experience and skills of the candidate. They should put together a wish list of knowledge, experience and skills that would benefit the company and then go look for people who can bring that talent. Advisory group members should be selected for their specific, relevant industry experience and contacts. Board-of-director members are often selected more for their particular functional knowledge and skills.
I advise CEOs to select members who complement each other in their skillsets. For example, selecting experts in sales and marketing, finance and controls, manufacturing, human resources and compensation, business law, accounting, and even having a therapist or mediation expert in the mix, will result in a well-rounded consultative group that is prepared to respond to an array of business challenges that might arise.
For fiduciary boards of directors, where members are typically elected by the owners/shareholders, there should be specific terms, typically one to three years, a mandatory retirement age, and an annual performance review. Great boards usually consist of a majority of outside directors (non-employees) with perhaps one or two inside directors (who are also employees, such as the CEO, CFO). Advisory groups are much less formal and members often serve at the pleasure of the CEO.
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Now, there is a cost to creating either a board of directors or an advisory group, for things like compensation, travel, meeting time, preparation for meetings including board books and minutes, compliance activities and filings, director and officer liability insurance to protect members, etc. One $300 million public company estimated that going public and establishing the required board of directors cost them over $5 million per year for these activities. But don't worry, a privately-held entrepreneurial company should spend far less.
Too frequently owner/CEOs form a board for the wrong reasons. Encouraged by their CPA or legal counsel that they should have a board of directors, they proceed, only to wish they hadn't as they realize the implications. One owner/CEO I know started his board and then chaffed at the decision-making power he had given up. He finally chose to disband the board because he didn't like having to work in tandem with it. This not only wasted a lot of time and money but caused significant friction between the members and the owner/CEO for over a year.
Now for the good part — the return on investment (ROI). From an advisory group, there should be new business opportunities and relationships that help an entrepreneur break into new markets, gain new customers and broaden his/her network. Performance is fairly easy to measure and can be objective, for example, "Help us acquire five new clients in year one." For fiduciary boards, you're paying for experience and knowledge in areas that may be unfamiliar to a CEO that could result in revenue growth, cost avoidance, leader development and retention, better strategic planning, and more.
Boards can be a great help to an owner/CEO if assembled for the right reasons, with the right charter and governance, and with the right mix of experienced members. If you're unsure, start with an advisory group to leverage some short-term business opportunities and to experience what it feels like to work with such a group. This can help you decide whether or not to form a fiduciary board of directors. In either case however, make sure you clearly understand what you are getting and how it will change the way you have operated as a pure owner/CEO.
Commentary by Jim Alampi, the founder of Alampi & Associates, a Detroit-based executive- leadership firm and the author of "Great to Excellent; It's the Execution!" He is also the former CEO and chairman of three public companies. Follow him on Twitter @jimalampi.