Chapter 6: Forming and Working with the Board

Why do founders often resist creating an independent board?

They fear losing control, being replaced, or having their vision challenged. They may dislike criticism, hesitate to share confidential information, distrust outsiders’ understanding, or feel unprepared for an active board.

How does an independent board improve CEO performance and decision-making?

It provides complementary expertise, objective criticism, accountability, and internal discipline. Directors can also act as mentors and emotional support, helping CEOs evaluate strengths and weaknesses before making difficult decisions.

How can independent directors benefit a company strategically and financially?

They help develop realistic long-term strategies, provide credibility when raising funds, and connect the company with investors, partners, customers, advisors, and professional networks. In family businesses, they can also ease generational transitions and reduce family politics.

What is the ideal board size, and how should insiders and outsiders be balanced?

Early boards may include only founders. Once operational, 5–7 directors is typical (many VC-backed companies have 5). Outsiders should outnumber insiders, usually with no more than 2 insiders.

How often should boards meet?

VC-backed private companies often meet monthly; private companies focused on major issues may meet quarterly. Larger companies tend to meet monthly. CEOs should stay in touch with directors between meetings and avoid surprising them during meetings.

What is the ideal board meeting length, and how should directors prepare?

Meetings ideally last 3–5 hours. Directors should spend at least half a day preparing with materials sent in advance and participate in a few hours of informal CEO discussions each quarter.

How much time do directors typically spend on board work, and what are off-site meetings for?

A quarterly-meeting private-company director spends about 8 days per year on board work, including preparation and discussions. Off-sites, such as Hartford’s annual two-day meetings, allow focused strategic planning but can be costly and difficult to schedule.

What skills and perspectives should an effective board include?

Assess the CEO’s strengths and weaknesses and fill gaps with industry experience, financial and marketing expertise, startup experience, and technical knowledge. Balance relevant expertise with diversity of perspectives.

Why are diversity and specialized experience important on a board?

Diversity can include gender, age, culture, education, and professional background. Studies associate female board representation with higher ROI and returns on sales. International expansion may require directors with international or target-market experience; family businesses may benefit from a director who can support the next generation of leadership.

What are the benefits of including company insiders on the board?

Insiders provide valuable management expertise and specific operational perspectives. Inviting non-director executives to relevant discussions also lets directors observe potential successors and supports succession planning.

Which potential board members should companies approach cautiously, and why?

Avoid members whose interests may conflict with the company or whose expertise is already accessible. A banker’s interests may conflict with strategy; including lawyers may risk waiving attorney-client privilege. CEO-hired consultants may hesitate to challenge the CEO because they fear losing their jobs.

What roles do venture capitalists play on boards?

VC financing agreements usually give investors the right to elect one or more directors. VCs are often active and effective board members and can introduce potential directors. If a company misses milestones, board control may shift to investors under certain financing terms.

Why is personality compatibility important on a board, and what behaviors should be avoided?

Individual directors have no formal power; the board acts as a body. Members must respect one another and work cohesively. Avoid directors who focus only on representing their own constituencies or dominate discussions. The chair must prevent excessive influence, including their own.

What does the Dole Food case illustrate about domineering leadership and board independence?

In 2013, Dole CEO, chair, and 40% owner David Murdock took the company private through a freeze-out transaction after allegedly manipulating its stock price. Murdock and COO/president/general counsel Michael Carter were held liable for more than $148 million in damages for breaching their duty of loyalty. Murdock’s controlling behavior included forcing an outside director off the board after the director questioned him. The case illustrates how unchecked power and weak board independence can harm shareholders.

What makes a board appropriately hands-on without interfering with management?

Include directors with practical experience and business judgment, not only theoretical or technical expertise. An effective board actively helps develop long-term strategy, selects key officers, reviews budgets and actual performance against plans, and challenges or revises important assumptions—without improperly managing daily operations.

How can boards divide responsibilities and strengthen governance, especially in private companies preparing for public-company requirements?

Boards may separate the CEO and chair roles or appoint a lead director. Committees help distribute work: audit committees often consist entirely of independent directors, while compensation and nominating committees are primarily or entirely independent. Public and listed companies face additional requirements under SOX, the NYSE, and Nasdaq. Private companies anticipating an IPO or acquisition by a public company should consider selectively adopting SOX requirements in advance.

What does the duty of loyalty require of corporate directors?

Directors must act in good faith and in the corporation’s best interests, putting the corporation’s interests ahead of their own financial or professional interests and avoiding self-dealing. They cannot take a corporate opportunity for themselves without disclosing it to the board and obtaining permission.

How should boards handle decisions involving potential conflicts of interest?

Disinterested directors should make decisions involving conflicts, including executive compensation and the acquisition of corporate assets by a director or controlling shareholder. In some jurisdictions, having a majority of outside directors helps establish that the board is sufficiently disinterested. Outside directors who receive fees but not salaries may be less motivated by personal interests.

What should directors do when a disinterested board vote is impossible, and who bears the burden of proof if the transaction is challenged?

Directors should ensure that:

• They are fully informed.

• They have access to independent advice.

• The transaction is fair to the corporation and all shareholders.

If a transaction approved only by interested directors is challenged, the interested directors bear the burden of proving that it was fair.

What does the duty of good faith require regarding board oversight?

The duty of good faith, as part of the duty of loyalty, requires directors to make a genuine effort to fulfill their oversight responsibilities. They cannot passively ignore potentially troubling developments once they become aware of them.

What does the duty of care require?

Directors must act as a reasonably prudent person would and make reasonable efforts to make informed decisions.

Can directors rely on officers or outside experts?

Yes, but not blindly. Further inquiry is required when circumstances warrant it.

What did SCM Corporation’s directors do wrong?

They accepted Goldman Sachs’ valuation without question despite knowing two businesses drove over half of earnings.

What does the duty of oversight require?

Directors must ensure adequate procedures prevent legal violations and cannot ignore signs of impropriety.

How can corporations limit directors’ liability and attract qualified directors?

States such as California and Delaware allow charter provisions limiting/abolishing liability for duty-of-care breaches, except for bad faith, willful misconduct, or fraud. Corporations can also provide indemnification and advancement of legal expenses to the maximum extent allowed by state law, reducing reliance on costly D&O insurance.

What are the standards for bad faith and failure-to-monitor liability?

Gross negligence alone is not bad faith. Failure to monitor requires persistent, knowing inaction—an “indolence” so extreme that it shows the directors knowingly chose not to ensure officers were pursuing legal compliance. If advanced legal fees are ultimately not justified, the director should reimburse the company.

What does the Abbott Laboratories case illustrate?

Abbott had eliminated director liability for duty-of-care breaches, yet directors were still potentially liable after $100 million in FDA fines and inventory destruction. They knew of repeated FDA violations but took no action. The court found a sustained and systematic failure of oversight, establishing lack of good faith.

What does the business judgment rule protect directors from?

It protects disinterested, informed directors from liability for business decisions that turn out poorly. A plaintiff must prove gross negligence or bad faith to establish a duty-of-care breach.

What does the Citigroup case illustrate about the business judgment rule?

Citigroup directors were not personally liable for billions in losses because they failed to predict the subprime mortgage crash. Business decisions involve unavoidable risk, imperfect information, and uncertain outcomes; courts generally do not punish directors simply for making a “wrong” decision.

Why do people serve on private-company boards, and should they be compensated?

Directors often serve for satisfaction, prestige, and the opportunity to advise entrepreneurs, rather than money. Still, companies should provide some monetary compensation as a token of appreciation and generally cover meeting expenses such as travel and meals. Compensation data from firms such as Spencer Stuart, Korn Ferry, and Heidrick & Struggles can provide benchmarks.

How can private companies compensate directors when cash is limited?

A quarterly board typically requires about 8 working days/year, making 2–3% of the CEO’s annual salary a reasonable cash benchmark based on time alone. However, small companies often cannot afford this, so they may use stock options or restricted stock, which also align directors’ incentives with shareholders. Directors who already own shares may accept less compensation.

What should entrepreneurs consider when compensating informal advisors?

Even if compensation is not discussed initially, entrepreneurs should address it before the advisor makes important introductions or performs significant work. Otherwise, the advisor may expect monetary or other compensation, creating misunderstandings later.

What topics might a typical board meeting agenda cover?

Review prior minutes; engineering/operations, executive hiring, regulatory approval strategy/timelines, business development, financials, financing plans, patent strategy, competitive updates, and equity/option grants.

What information should management provide to directors before board meetings?

Management should provide a clear, coherent, and appropriately limited set of facts and figures. It should include overall company performance statistics, financial information, competitive position, organizational health, executive development, and succession planning. Too much data can bury important information.

What longer-term information should directors receive?

Directors should receive information on long-term company trends, including financial performance, competitive position, organizational health, R&D plans, and future goals. Management should quantify R&D plans and establish measurable goals so directors can effectively evaluate the company and identify potential problems.

What are the board’s key strategic responsibilities?

The board should develop and periodically reevaluate the company’s long-term strategy and its operational implementation. It should focus on “big picture” issues such as growth vs. profit, organizational learning, employee empowerment, risk, adaptability, preparedness for political/economic changes, and responsible corporate citizenship. Tasks outside these functions should generally be handled by management.

How should the board evaluate the CEO and what role should KPIs play?

The board should regularly evaluate the CEO, often annually, based on the company’s long-term strategy and performance. KPIs can provide objective benchmarks, including sales, costs, profits, product/service quality, customer and employee satisfaction, and operational excellence. The board should ultimately ask whether the CEO is a good leader and intervene if employees are treated unfairly.

How should the board balance oversight with CEO autonomy?

The board should give the CEO clear goals and autonomy to achieve them lawfully and with integrity, rather than running the business itself. However, the board must maintain an independent perspective and should not simply rubber-stamp the CEO’s decisions, especially regarding compensation and succession planning.

What other responsibilities should the board regularly perform?

The board should set the CEO’s compensation based on CEO and company performance, continuously plan for CEO succession, and regularly evaluate its own performance and individual directors. Governance/nominating committees should use these evaluations when deciding whether to renominate directors or select replacements.

What does the Genesist example illustrate about building an effective board?

Alexei and Piper selected directors who filled their weaknesses and added different perspectives: Keith Tinsley brought 3D-printing expertise, entrepreneurial experience, industry connections, and market insight; Sue Quinn brought extensive CFO/accounting experience and financial credibility. Nonemployee directors received stock options + $900 per meeting, while Genesist had $3 million D&O insurance, liability limits, indemnification, and advancement of expenses.