Chapter 2 Types of Boards – Get on Board

CHAPTER 2

Types of Boards

Many people who refer to corporate boards of directors think only of large public companies. As noted earlier, there are many other types of boards, such as startup boards, various types of private boards, family-owned boards, advisory boards, and nonprofit boards. Serving on these non-Fortune 500 boards can be a valuable professional and personal experience. It can also serve as a launching point to leverage into a position on a public company’s board.

This chapter further describes various types of boards and the opportunities that they present. Educating yourself about all the choices in board services will assure success in obtaining both the director position and satisfaction of board services. After all, we generally make better choices after we are educated. Board service is no exception!

What Are the Different Types of Boards?

All types of boards need strong leadership and operational powers regardless of purpose and size. Every board needs a complete delineation of expectations and responsibilities. They must also present a clear framework to support the organization to the best of their capabilities, including interacting with stakeholders and other company leadership. Their job is to do the best things for the organization, even beyond the walls of the board room.

As you know, boards are important because they are responsible for effectively serving their companies. There are generally four types of boards. Each has its own unique responsibilities, major roles, and compositions. Here are the four types of boards:

  • Nonprofit boards

    Nonprofit boards serve a tax-exempt organization. Directors on these boards make a commitment to a cause that that they are passionate about. Board service for nonprofits often involves volunteering, fundraising, or philanthropic donation.

    The primary reason to serve on a nonprofit board should be an interest in the nonprofit’s mission and impact. Serving on a nonprofit board is a satisfying experience when your interests are aligned with the mission of the nonprofit organization.

    Depending on who else is serving, how structured and organized the board is, and what your specific role is, nonprofit board service may be an opportunity to learn and network while working hard for a cause that you believe in. Depending on the nonprofit, prior board experience may not be required. One benefit is that you can learn fiduciary responsibility by serving on a nonprofit board.

    These opportunities are almost never paid but can be well worth it in terms of fulfillment and experience. Consider being clear about your responsibilities, time commitment, and expectations to make sure there are no surprises. Also, consider attending a few meetings to determine whether you really connect with the board’s mission, structure, and people.

    To be clear, serving on nonprofit boards may or may not help to obtain a position on the for-profit board. Almost always, service on the nonprofit board does not lead to an appointment on the for-profit board. While this should not be a primary reason to join a nonprofit board, depending on how the board is structured, who serves, and the level of notoriety of the nonprofit, serving on a nonprofit board may be a useful learning or networking opportunity. Connections that you make with corporate board members or chief executive officers (CEOs) on a nonprofit board may be a great way to get recommendations or referrals to a for-profit board. If a corporate board member sees the value that you can bring to a nonprofit board and your overall approach to board work, he or she may be the perfect recommendation for your next step in board service.

  • Advisory boards (aka councils)

    Advisory boards offer fine expertise and excellence to other boards or executives such as the CEO. They often complement other functional areas of the organization, such as the management team or task forces.

    For a startup venture, the advisory boards are often highly prioritized. Founders often set up an advisory board as part of the initial planning stage. Over time and as the startup matures or transforms, other advisory directors may be added. A well-managed and well-structured advisory board can enhance any startup and organization, whether be it profit or nonprofit.

    Advisory boards are non-governing boards with no fiduciary duties. Because of this, some do not agree that advisory boards should be called “boards.” Even if you prefer to call them “councils” instead of boards, they still merit consideration. Advisory boards often offer valuable professional opportunities and are a great way to start your board journey. Plus, those boards may be the precursor to a fiduciary board at a company. If the CEO sees you as an asset here, he or she may lobby for you as a true board member when such a time comes. And other advisory board members may recommend you for other boards if you shine in this role.

    Advisory boards may provide a good first introduction to corporate board service. If you join one, consider being clear about your expectations and what you will be able to contribute.

  • Private company boards

    The working zone of the private company board is vast. Private company boards serve not only small businesses but also companies of all sizes. Some private companies are quite large. These opportunities include large multinational private companies, co-ops, venture-backed startups, family businesses, and numerous others.

    Private company board service opportunities exist in many industries and geographies. It is worth exploring the richness and wealth of your options when it comes to private corporate boards. Private boards do not have as many legal and regulatory requirements as do public corporate boards. Therefore, private boards are often great starting blocks for corporate board service.

    Many directors also find private boards more satisfying and less structured than the board service on public company boards. Your private company board experiences will widely vary across companies, industries, and geographies.

  • Public company boards

    Public company boards are highly regulated. As a result, they are very structured. It is a serious, time-consuming role, though it may be well-compensated. As a public company director, you must allocate significant time to prepare and attend meetings, serve on committees, and fulfill other responsibilities, especially during times of crisis. Public corporate board positions take significant time to obtain as they are relatively rare and very selective and exclusive.

What Is a Startup? What Is a Startup Board?

A startup, usually a privately held business, is a new business that is still being built. For new entrepreneurs, starting their own company is a huge undertaking. Most of them think that a startup board is not of importance, at least for the groundbreaking process. Over time, many startups that survive the first few years may rethink this position as they educate themselves about their industry, their business, and the value that directors bring.

The Need for a Startup Board

For every company, a board may be very important, if not necessary. When an entrepreneur is building her empire, she will assess her business, its needs, and the value that she hopes the prospective director would bring. The truth may be that startup businesses can be successful with or without a startup board. However, often the need for a board arises if there is an investor who demands that a board be formed. A board may also become necessary if an entrepreneur wants to address certain needs of her company.

Startup Board Composition

The people an entrepreneur chooses for her board are critical to her business’ performance. As time progresses, she may need to involve more people with certain expertise, knowledge, or experience. Executives, senior management, officers, former regulators, and industry leaders are among the people who may be included on a startup’s board. They may become key decision makers and even be involved hands-on in a startup (aka a working board).

The Role of the Startup Board

Because there may not be a lot of information available about a startup, completing your due diligence on a startup company and its founder is especially important. Every startup board or advisory director should work well together and have a shared understanding of the company, its founders, its goals, its investors, and its numerous other stakeholders.

What Is the Difference between a Board of Directors and an Advisory Board?

A board of directors, also known as the governing body of the institution, company, or organization, is a group of individuals that are normally elected to act as representatives of the stockholders to establish corporate management-related policies and to make decisions on major company issues. The board of directors’ key purpose is to ensure the company’s prosperity by collectively directing the company’s affairs, while meeting the appropriate interests of its shareholders and stakeholders.

Normally, under the law, only governing directors and officers hold fiduciary responsibility to the institution, company, or organization where they serve. Fiduciary responsibility entails three duties to the institution, company, or organization where they serve. These are commonly known as the fiduciary duties of care, loyalty, and obedience. The corporate board of directors may be present in both for-profit and nonprofit organizations.

In contrast, an advisory board comprises of a few individuals whose work is to provide advice to the CEO, other executives, senior managers, or the board of the company to ensure the effective functioning of the company. Usually these are appointed not elected roles. Most importantly, the members of the advisory boards do not owe a fiduciary duty to the institution, company, or organization where they serve.

In addition to these key distinctions between a board of directors and an advisory board, the following may also apply:

  • Terms, conditions, structure, and code of conduct

    A board of directors follows very strict terms, is elected at a certain regularity, has fiduciary obligations to shareholders, must abide by strict laws and regulations (e.g., Securities and Exchange Commission (SEC), New York Stock Exchange, Nasdaq Stock Market), and follows a prescribed strict code of conduct.

    In contrast, advisory board opportunities tend to be more flexible, informal, less regulated; require fewer terms; and almost never impose fiduciary obligations to shareholders.

  • Responsibilities and working

    A board of directors generally advises across disciplines, subject matters, geographies, and problems. They tend to focus on all material issues that may affect the long-term returns for company’s shareholders.

    In contrast, the members of the advisory boards tend to be much more specialized on a certain subject matter or problem. In fact, they are often engaged because of their expertise, experience, or achievement. Therefore, its involvement tends to be much more limited in scope and duration.

  • Influence, power, and voting rights

    There is a major difference in the voting powers of a board of directors and an advisory board.

The members of a board of directors are the governing body in their company. They have a superior position in the company, with ample powers resting with them. A board of directors has the legal right to create or alter certain decisions and directions of the institution, company, or organization.

Advisory boards are less influential and powerful. They advise the CEOs, leaders, senior managers, or the board of directors on certain subjects. They do not have to take the advice from advisory board members. It is normally completely voluntary to follow an advisory board’s advice. In other words, if the advisory board’s advice is not followed, there is nothing an advisory board can do in terms of enforcement.

How to Join a Startup Board of Directors or Advisory Board?

Any intentional board search starts with self-reflection. Ask yourself if you are ready to join the board, how much time you can invest in board service, and what you expect from the company that you are going to join. You will need to determine what your specific target audience is as well as a process to leverage your network.

It is also very important to honestly consider the following issues:

  • Understand the time commitment

    To join a startup board and to serve it successfully you need hands-on experience and a well-built network. Securing these is, of course, a time-consuming matter. If you are on one of the board’s special committees, you must also dedicate time to solving any unique problems that arise. Before joining a board, be clear about the time that you can give to your job and your organization to make it successful. In the context of a startup it is even more important to be clear about the expectations and time commitment because much of the information is usually private and the needs of the company may be rapidly shifting as it is being built.

  • Clearly articulate your value proposition to the board

    You will have a huge responsibility as a startup director. The board will expect several commitments from you that may include financial investments, philosophical boundaries, and much more. Only you can articulate what you can offer, and only you can understand your true capacity. Ask yourself: Considering your education, experience, and expertise, what value could I bring to the companies I would like to serve? Also, make sure you know the unique angle that you want to bring to the board, such as a fresh industry perspective or a perfected, expert financial strategy. Am I able to give to this startup what it expects to gain from our relationship?

  • Craft your target market

    Determine your target market and know everything about it. Research will uncover the essentials, such as location, size, and industry. What companies am I a particularly good fit for? What industries? What experience, knowledge, and expertise do I have that is particularly valuable to them, and why is it so valuable? Make sure to ask the startup founders and senior personnel about the skills, expertise, and experience they are looking for to fill.

  • Actively conduct due diligence on the company that you want to join

    After knowing your own strong points, do the reverse by conducting due diligence on the startup. What follows is a list of basic items to research before you decide to join a startup:

    • Check all the signed reports that are prepared generally for the governing body or the team of directors of the company.
    • Read all the signed resolutions of the committee, including written copies of notices and all the paperwork details of the shareholders, partners, and the members of the company.
    • Review all the press releases and news that are issued by the organization or are relevant to the organization.
    • Inspect a complete summary of the personal relationships; business relationships; and affiliation details of the company’s customers, shareholders, members; and so on.
    • Know more about the business structure and strategies of the company, including areas where the business needs to expand or where you can use your knowledge and skills.
    • Research the skills, capabilities, and reputations of the founders, investors, and current officers and directors.

What Is a Startup Advisory Board? What Are the Factors to Be Considered before Joining a Startup Advisory Board?

Many startups also create an advisory board. An advisory board offers advice to the board, CEO, or to another executive that runs the startup. An advisory board offers business insights, expertise, industry knowledge, or experience. An advisory board also assists with other important business transaction decisions. Consider the factors below in assessing startup advisory board opportunities.

  • Familiarize yourself with existing directors and advisors

    What directors and advisors are already included in the startup? Do you know them? If not, you need to learn more about them and their roles. You may eventually have to create a rapport with them. Make sure you know the professionals you will be working with and what they do. This will help you work more effectively and efficiently.

  • Identify with the company’s values

    Understand the company, its history, and values. What are its goals, mission, and plan? Does its niche interest you? What value will it add to your personal or professional life? This will be a key determinant in deciding whether to join a startup advisory board.

  • Determine compensation

    Advisory directors may be paid in one way or another, and it is important to understand what that means. For the first few years of the company’s life, expect payment through equity of the company only, though there may be notable exceptions.

    If you were expecting cash, then your reasoning may not be in line with the startup’s objectives. If this is a problem for you, you should be prepared to have a conversation about it, likely with the CEO and cofounders. Depending on your involvement with the startup and its industry, it is not unusual for a startup advisory board to award up to 1 percent in equity, depending on your background, involvement, and commitment.

  • Consider possible challenges

    Every company has its challenges, including startups. But this does not mean that you should not join a startup advisory board. It means that you should carefully educate yourself about the advisory board opportunity that you are considering. One person’s challenge is another’s valuable learning opportunity.

When you have an advisory board offer on the table, it is a good idea to do your research and think it through to ensure your fit considering your experience, expertise, availability, and relationship with other directors. Consider reaching out to other advisors to gain insights about the role, industry, and compensation.

What Is a Family Business? What Kind of Board Opportunities Do Family Businesses Have?

A family business, another example of a privately held business, is owned by an individual or family, often consisting of two or more generations. The ownership lies in the family and the generations to come. Achieving success within a family business may become challenging as the family and its wealth increase. Navigating the conflict among generations may be particularly challenging.

There are several board opportunities that a family business can provide. Board opportunities at a family business are based on four different kinds of governance models. They include compliance boards, insider boards, inner circle boards, and the independent (sometimes called “non-influential”) boards.

  • Compliance boards. Compliance boards are meant to comply with the laws and regulations that the family business must meet. The family can decide to appoint someone, either a family member or someone outside the family, to serve on the company’s compliance board.
  • Insider boards. On the insider boards, it is all about the family—no outsiders allowed. Each family member is given a position, and each one is responsible for ensuring he or she plays their part for the success of the family business. The leadership of an insider board will change with different family generations.
  • Inner circle. The inner circle board is partly family and partly friends. It is often a one-person affair where the company’s CEO selects people who are trustworthy within their individual inner circle. All three of these board structures are associated with and influence the company’s chair of the board in one way or another.
  • Independent boards. To get rid of that influence, a family business can choose to take a different direction. The independent board is made up of outside directors that have no association with the CEO. They are indifferent to personal matters, and they work professionally. These directors bring their own insights to the company’s board, and each one expects that their opinions will be regarded. As a result, transactions are more corporate, and business deals are made solely to make the entity prosper. The independent board has immense benefits on a family business, precisely because the directors have no direct ties to the company.

What Can Independent Directors Bring to a Family Business?

Independent directors can do a lot to add value to a family business board. In fact, hiring directors that have no relationship to the business or the family has incredible advantages. Comparing the board of a family company to that of a public company, the family business boards tend to be more flexible. This is because they are usually free of U.S. SEC regulations and stock exchange listings rules that must be adhered to by public companies.

Once a family business embraces an independent board of directors, they may include them in many, if not all, company matters. This may lead to a very hands-on board experience that some former or retired executives crave. Thus, as an independent director, there are numerous ways you can add value to a family business.

  • Operations and risk management

    Every business—including a family business—needs a board that has operations experience. As a director, you may provide necessary data and benefits to help the company’s executives run a smoother operation.

    This also relates to risk management. All companies, public or a family business, are prone to risks. As an independent director you may be well positioned to flag, address, and mitigate various risks. The independent directors are uniquely positioned to offer solutions and techniques to control risks.

  • Significant skills and assessment

    A board may provide the missing skills to facilitate the company’s success. Family businesses may not create a diversified board, especially because inner circle boards are made up of family members and friends. This can be a problem because diverse boards are important for business success. However, by creating an independent board, a family business can attract directors with diverse skills, knowledge, expertise, and experience to improve the performance of the company.

  • CEO evaluation and succession debates

    CEOs are not always hands-on, or they may not have the right knowledge, experience, or expertise. Under such circumstances, independent directors may add value. As a director, you may have knowledge, expertise and experience on the different business aspects that the company can benefit from, in which case you can advise the CEO.

    Similarly, sometimes the next person in line for family business succession is not the best choice. They may have little knowledge the business, not be interested, or need orientation prior to being appointed as the new company president. Independent directors can help the outgoing CEO choose and prepare the best successor for the business.

  • Contributing to corporate strategy

    Developing the corporate strategy for a family business lies in the hands of the company’s leadership and managers, most of whom may be family members and friends. However, before implementation, the board needs to discuss and approve strategies. This is where the independent board of directors may add a lot of value.

    For every goal that a family business wants to achieve, members of the board of directors may significantly contribute to what is right for the company and create strategies to do so. Due to their diverse experiences, they may also be knowledgeable about more effective ways to achieve different goals. Without an independent board, family businesses may face the issue of different agendas, which can result in a poor choice of strategies.

  • Important investments and transformational transactions

    As an independent director, you may be well positioned to differentiate between valuable and bad transactions and investments. Based on your experience, expertise, knowledge, and connections you may advise the CEO and family business leaders to enter better transactions and make more sound investments.

  • Monitoring company performance

    Once the corporate strategy is applied to the company’s performance, there needs to be a follow-up and monitoring. This is also where an independent director may add value by inquiring about the progress.

  • Influencing company behavior to the community

    The success of a family business is also dependent on its behavior in the community. The services they offer may be part of the larger community where they live and hire their employees. Therefore, it is only right to give back and be involved in the community. As an independent director, you may be in a good position to build community relationships, serve as an ambassador, and generally help the company to grow a positive reputation in its immediate community and beyond.

  • Managing external communications

    Finally, you may be well positioned to help with external communications. Shareholders, investors, family members, industry insiders, regulators, and authorities are all part of the bigger picture, and maintaining a great line of communication with them is paramount. This is where the guidance from an outside director may be very valuable.

What Are Advisory Boards?

An advisory board is a group of people who give non-binding, strategic advice to the boards of a company or organization, CEOs, or other executives. The nature of the advisory board is informal and flexible.

Although an advisory board has no role to interfere in cooperative matters, they may serve as great recognition of one’s skills and provide opportunities to network. Occasionally, serving on an advisory board can be a stepping stone toward larger roles including leadership roles and board service.

Examples of Advisory Boards

There is a lot of variation in how and why advisory boards are created and operated. Therefore, you need to do a lot of due diligence and understand all your potential commitments and obligations before you join.

While there may be others, what follows is a list of examples of advisory boards that are somewhat common. Ultimately, it is up to a company to decide what advisory board to form, if any, and how to run it.

  • Risk advisory board

    The role of the risk advisory board may vary from company to company, depending on the scope of the business. The main role of the risk advisory board is often to bring people together for risk management. The risk advisory board can also help the board, the company leadership, and numerous other company stakeholders in making difficult and strategic decisions.

  • Environmental advisory board (EAB)

    The EAB tackles social and environmental responsibility. The EAB reviews the new strategies that other boards are planning to ensure that the company’s actions do not harm the environment. In some companies, they also advise boards or executives to come up with sustainable products and use products which are eco-friendly.

  • Innovation advisory board

    This is a new way to address any product and innovation made by the company. The innovation advisory board helps the company create new innovations which are more beneficial to the company. Often the goal is to help the company to lead innovation or keep up with changes in technology. This board may also help to improve the design of new innovations and get them trending in the market. This advisory board helps to sustain the company’s competitive position in the market.

  • Technology advisory board

    The technology advisory board helps to upgrade the technology of the respective company. A technology advisory board often recruits young, talented members, who may not be hired as regular employees due to their very high salary expectations or because they are still in school or have other commitments. This role involves an understanding of social media, data analytics, and mobility, which are the main topics of today’s technology advisory boards.

Why Consider Serving on the Advisory Boards?

Advisory boards may have a lot to offer to some professionals. The advisory board team has a wealth of expertise that can help you to enhance your decision-making skills and develop your network. Serving on an advisory board can also provide an opportunity to work on cutting-edge problems, at a reputable company, or on high-profile projects. What follows are examples of five ways an advisory board can create value for professionals:

  • Intellectual challenge

    Advisory boards provide you with social, creative, and intellectual capital. The members focus on specific issues and may be valuable advocates for a company or organization.

  • Learning to manage risks

    Advisory boards play an important role in risk mitigation. Due to their knowledge, experience, expertise, and connections they may provide a valuable experience to mitigate risks.

  • Staying ahead

    Advisory boards are usually composed of subject-matter experts and industry leaders. Therefore, they may be helpful for a professional to stay current and relevant.

  • Anticipating the next big thing

    Similarly, to stay ahead, serving as an advisory board member may help professionals to anticipate the next big thing, especially as part of the technology advisory board. After all, technology is transforming all industries around us, and every professional is doing their best to keep up.

  • Expanding and deepening your networks

    Members of advisory boards can help secure opportunities in other industries and geographies. They may prove to be a valuable source of information, resources, and referrals in the future.