If you run your own small business, there’s a good chance that you don’t want it to stay small forever. Yet, in its early days, a business has a very simple management and organisational structure. It’s only as it grows in terms of scope, cash flow and propensity for capital investment that the running of a business becomes more of a conversation and less one founder’s vision. If you are currently your business’ CEO you probably have complete autonomy over all strategic decisions your business makes from how your company is branded to which suppliers you use. But as your business grows, and more investors develop an interest in its operations, you can expect them to want to make their voices heard. At the very least they might expect more structure in your company’s governance or demand a clear and coherent vision from you.
This is where it may be both helpful and pertinent to appoint a board of directors. But if this is your first business and / or your operation has remained small for a while, you may never have considered appointing a board of directors.
You may not know how a board functions, whom to appoint or what the roles of its constituent members are. Don’t worry, we’re here to explain it all in no-nonsense terms.
Let’s start at the beginning… What is a board of directors?
A board of directors is a group of people who share the responsibility of protecting the best interests of a company and their shareholders. As much as entrepreneurs may value their autonomy, being able to rely on a strong board with experienced and knowledgeable advisors is highly advantageous founders as they can provide advice and assistance on a range of issues for the betterment of the company.
Each board member has a discrete role which brings its own set of responsibilities. Let’s take a look at the responsibilities of each role on the board;
Executive Directors are appointed by the shareholders to represent their interests in the company and help manage day-to-day affairs. In most cases, business founders are executive directors. While they have a great deal of influence in the decision making processes of day to day operations and strategic decisions, they are not free to act alone.
Under the Companies Act 2006 they also have a personal responsibility to ensure that all the company’s practices are above board. Some of their legal responsibilities include:
- Act with due care and diligence and within their powers
- Promoting the success of the company and the security of employees
- Exercise independent judgment
- Avoid conflicts of interest
- Declare any personal interests in business arrangements or transactions
- Not accept benefits (monetary or otherwise) from third parties
Non Executive Directors (NEDs)
A NED is an impartial advisor who is formally appointed at Companies House. As such they are not involved in the company and have no personal interest in its success or failure.
This can make them invaluable as they can offer an outsider’s perspective while also offering complete impartiality. NEDs can offer valuable insights as they are usually highly experienced professionals with decades of industry experience not to mention a wealth of potentially valuable contacts and connections.
As well respected business leaders, they can also lend credibility to your company and prestige to your brand, making you a more appealing prospect to a broad range of investors. Like Executive Directors, NEDs also have their own similar set of duties and legal obligations.
Rarely can a business grow sustainably on the strength of its own profits alone. It usually requires investors to bring seed capital to the business to propel its growth. And it stands to reason that many such investors will want to play an active role in how their investment is handled by the company. As such, an investor may request to sit on the board as an Investor Director.
Investor Directors are also formally appointed at Companies House and are also subject to the same duties as EDs and NEDs under the Companies Act 2006. The prospect of an Investor Director may not sit easy with many founders. They may have a vested interest in the company’s success and their goals are generally aligned, but an Investor Director doesn’t always have the requisite experience and knowledge to add value to the board. What’s more, they can be known to push their way onto the board. While founders can (and should) push back against decisions not in the company’s interests, a NED can provide a useful counterbalance to an unruly Investor Director with their sober insights and impartial analyses.
Investor Directors are usually paid an hourly fee, especially if they do not draw a salary from the company. This is usually paid to cover their contributions to meetings without paying an Investor Director more than they’re worth in terms of the value they bring to meetings and strategy.
The Chairman is appointed by the board itself, and it is their primary responsibility to ensure that the board’s strategy is implemented both properly and effectively. A Chairman may work full-time or part-time, and has the same duties and responsibilities as directors under the under the Companies Act 2006.
Other duties incumbent upon the Chairman include:
- Managing the board’s structure
- Managing board and general meetings- deciding on agendas, steering the conversation, establishing a consensus and condensing meetings into actions that need to be taken.
- Managing communications with shareholders and stakeholders
- Representing and promoting the company to the outside world
- Board Advisor
A Board Advisor attends board meetings and has the opportunity to share their insights and make their voice heard, However, they are not a director and as such are not beholden to a director’s duties. They function in a similar way to a consultant, although unlike a consultant they are not expected to achieve or drive specific outcomes. They just lend advice and expertise when needed and are usually paid an hourly fee.
Finally, a Board Observer is similar to an Investor Director but doesn’t have the same duties, responsibilities or powers. They are usually stakeholders who want to play an active role in the company’s management and governance but are unwilling or unable to serve as Directors. They can attend meetings and make their voices heard but they do not have any voting power on the board.
If you have an investor that wants to get more involved but you don’t feel comfortable making them an Investor Director, this can be an amiable compromise.