Making Board of Directors work for the entrepreneur

I, personally, feel that the founder / entrepreneur should exit their company’s day to day operations after it comes to a certain stage. It would be difficult for any company to grow out of its founders shadows / strengths and actually reach its full potential.

I was doing research on how Board of Directors can be constituted & prepared this notes, which i thought would be of interest to all Entrepreneurs, especially, for the founders who are conscious of CEO’s accountability.

There are three sets of principal/agent problems which are inherent in the structure of large companies:

  1. Those arising between management and the shareholders as a class;
  2. Between majority shareholders and minority shareholders;
  3. Between the controllers of the company (whether managers or majority shareholders) and non-shareholder stakeholders.

Formation of Board of Directors is a mechanism to solve them, if they are well chosen and work effectively.

Type of Board Compositions by popularity:

  1. Majority Outsiders and CEO as Chairman
  2. Majority Outsiders & Independent / Non-Executive Chairman – Leads to Board Leadership
  3. Majority Insiders and CEO as Chairman
  4. Majority Insiders and Independent / Non-Executive Chairman

Just formation of the Board is not enough, we have to align their interests with shareholders. Also, the management should also be aligned with shareholders interest. There are two methods to do it:

  1. Requiring officers and directors to own substantial blocks of the corporation’s stock;
  2. Increasing the extent to which officer and director compensation is contingent upon performance measures that reflect increased shareholder value.

References Used:

  1. Board of Directors: Composition, Meeting and Committee
  2. Corporate governance: fact or fiction? – composition of board of directors
  3. Free Complete Toolkit for Boards
  4. The Board of Directors: Composition, Structure, Duties and Powers
  5. 10 “STOP” Signs on the Road to Board Recruitment
  6. Compensation for Board Members

Please share your opinion on this?

Making Board of Directors work for the entrepreneur

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