Effective Board Management and Governance for Startups and SMEs

This article is for informational purposes only and does not constitute legal or tax advice.

In the dynamic world of startups and small to medium-sized enterprises (SMEs), effective board management and governance stand as pivotal elements that steer a company towards sustainable growth and success. Whether it’s through the strategic guidance of an advisory board or the critical oversight of a formal company board, the governance framework established can significantly impact the company’s strategic direction, financial health, and organizational culture. Understanding the nuances between advisory boards, which offer non-binding strategic advice, and company boards, which carry legal and fiduciary responsibilities, is crucial for business leaders navigating the complexities of growth and scalability.

Within this intricate ecosystem, the Chief Financial Officer (CFO) plays a vital role, acting not only as the guardian of the company’s financial well-being but also as a strategic advisor who bridges the gap between the board’s expectations and the company’s operational realities. This post aims to unravel the layers of board management and governance, shedding light on best practices, common pitfalls, and the indispensable role of the CFO in guiding startups and SMEs towards achieving their full potential.

The Role of Boards in Startups and SMEs

As startups and small to medium-sized enterprises (SMEs) navigate ever changing markets, the formation and management of their boards play a crucial role in charting a course toward long-term success. The distinction between advisory boards and company boards, though subtle, can significantly impact the strategic direction and operational efficacy of a business. Let’s delve into the roles these boards play and highlight the unique contributions of the Chief Financial Officer (CFO) in ensuring their success.

Advisory Boards: Catalysts for Strategic Insight

Advisory boards, often composed of seasoned professionals from various industries, provide non-binding strategic advice to the management of startups and SMEs. These boards serve as a sounding board for ideas, offering insights and expertise that the management team may lack.

For a growing business, having an advisory board can be akin to having a panel of mentors who guide the company through growth phases, help in networking, and provide advice on tackling industry-specific challenges. Advisory boards are found most frequently at early-stage companies that have yet to raise venture capital and are established and often maintained by the management founders.

Since the advisory board and board of directors serve different purposes, some management teams may maintain an advisory board even as the more formal board of directors is put into place. Startups can leverage the insights and networks of their advisory board while still maintaining formal governance and decision-making through their corporate board.

Notes on CFO’s Role:

As a strategic advisor, the CFO leverages the advisory board’s insights to refine financial forecasts and risk management strategies, ensuring that the company’s financial roadmap aligns with its long-term vision.

The CFO acts as a communication bridge, translating the advisory board’s strategic recommendations into actionable financial plans and ensuring that these suggestions are feasible from a financial standpoint.

Company Boards: Guardians of Governance and Strategy

Unlike advisory boards, company boards (also referred to as “board of directors”) have legal and fiduciary responsibilities to the shareholders of the company. They play a critical role in overseeing the company’s management, ensuring financial integrity, and making pivotal decisions that affect the company’s future. The board is instrumental in setting strategic goals, approving budgets, and overseeing major corporate actions such as mergers, acquisitions, or the sale of the company. Arguably the most important role of the board is to hire and fire the CEO. The board can generally be seen as the executive management’s boss, acting on behalf of shareholders.

While it is true that a board of directors remains focused on corporate governance on behalf of shareholders, effective boards will be a tremendous resource for management teams, similar to an advisory board.

Because external investors will typically require a board with representation, formal boards are often created in preparation for a startup’s first venture round. Other times, boards are created for increased governance and oversight in scenarios where a company has grown in sophistication. This is especially common for companies with shareholders who are not a part of senior management.

Note on Board Control: In its simplest form, the board is controlled/elected by shareholders through voting interests that are pro rata to their equity ownership in the company. However, equity and debt fundraisings can complicate things, resulting in multiple classes of stock with different voting powers and certain investors and debtholders with control over a specified number of board seats. For example, many venture capitalists will require the selection of one or two seats on a startup’s board, providing a strong amount of influence on the strategic oversight (and management) of the company. This is how you can get in situations where the founder is ousted from his or her own company.

Instead of a full board seat, VCs might be granted observer rights, allowing them to attend meetings and access information without having voting rights. This arrangement increases transparency without expanding the board size.

Note on Fiduciary Duties: Boards in the U.S. have a fiduciary duty to the shareholders, whereas boards in many other countries that have more firmly adopted stakeholder theory often have a fiduciary duty to numerous stakeholders, including employees, debtholders, and suppliers. For this article, we will mostly discuss boards as it relates to U.S. entities.

Note on Public Companies: Due to regulatory requirements, public company boards are often much more sophisticated than boards at startups and SMEs with many board formalities that must be followed and several board committees. For this article, we will discuss boards in the context of private companies.

Notes on CFO’s Role:

The CFO serves as a linchpin in strategic decision-making, providing comprehensive financial analyses and projections that inform board decisions. By presenting detailed financial reports and forecasts, the CFO ensures that the board has all the necessary information to make informed strategic choices.

Furthermore, the CFO fosters effective communication between the board and the company’s management, ensuring that financial considerations are at the forefront of strategic planning and that the board’s directives are implemented in a financially prudent manner. For more sophisticated boards, much of this role is handed to the corporate secretary.

Both advisory and company boards play distinct yet complementary roles in the development and governance of startups and SMEs. The advisory board drives strategic insight and mentoring, usually through a high degree of specialization, while the company board holds the reins of governance and strategic oversight. At the intersection of these boards’ activities, the CFO emerges as a crucial figure, guiding the company through financial planning and strategy implementation.

Establishing a Board: Key Considerations

For startups and small to medium-sized enterprises (SMEs), establishing a board is a strategic milestone that can significantly influence the company’s trajectory. The composition, size, structure, and operation of the board require careful consideration, as these elements are pivotal in ensuring that the board effectively supports the company’s goals. Furthermore, the Chief Financial Officer (if there is one in place at the time) plays an indispensable role in shaping and maintaining the board’s effectiveness, especially concerning financial oversight and strategic planning. Here, we explore the critical considerations in establishing a board, with a focus on board meetings, size, roles, and how these aspects evolve with the business stage.

Composition and Diversity

A board’s strength lies in its diversity of thought, experience, and expertise. Including board members (also often called “board directors”) from various backgrounds, industries, and specialties can provide a broader perspective, leading to more innovative solutions and strategies. Startups should aim for board members who bring entrepreneurial experience, industry-specific knowledge, and expertise in a multitude of areas, like go-to-market, technology, and finance.

When composing a board, founders should form a list of what the ideal board would look like (the dream team), both in terms of core competencies and core values. Just like choosing investors, founders should make sure board members are a good match—after all, as their equity ownership is diluted in future financing rounds, the board will essentially become the founder’s boss.

Once setting a vision for its board, founders should use whatever means available (e.g., existing network, cold outreach on LinkedIn) to assemble its board. In many ways, the process of finding board members may look and feel very similar to fundraising. Founders can reach out to prospective board members and share their vision, hoping someone will appreciate that vision enough to invest his or her time and resources in a meaningful way. Later in this article we will discuss a related topic, board compensation.

Note on Vanity Board Members: Many founders are excited to have a well-known investor or startup founder sit on the board of its startup. While such individuals can add instant value, especially as it relates to accessing exclusive networks and providing a vote of confidence in your vision, be wary of individuals who are too busy to truly care about your business and their duties as a board member. As a part of the executive team, your life can become extremely difficult if you have to answer to one or more board members who do not take the time to understand your business and the opportunity that lies ahead.

Note on Independent (“Outside”) Board Members: Independent board members are board members who do not have an existing relationship with the company, its executives, or its major shareholders that could influence or appear to influence their judgment. They can be tremendously helpful by adding a reliable voice of reason to the board in highly stressful and emotional situations, especially those that relate to legacy management, ownership, and conflicts of interests between non-independent board members (or, “inside board members”). For this reason, many investors will require a certain number of independent board members to be placed.

Although it can be a scary thing to bring on the first independent board member, investors often see this as a great sign of founder maturity that may benefit founders through increased trust with shareholders, future investors, and other stakeholders.

Notes on CFO’s Role:

The CFO should advocate for including board members with financial acumen or experience in financial markets, as their insights can be invaluable in guiding the company’s financial strategy and risk management. This is especially important for companies that expect to grow inorganically (i.e., through acquisition) or have plans to raise large sums of capital in private or public markets.

Size and Structure

The optimal size of a board can vary based on the company’s stage and needs. For startups, a smaller board of 3-5 members is often more effective, allowing for nimble decision-making and easier consensus. As companies grow, the board might expand to 5-11 members to encompass a broader range of expertise and perspectives.

Most will recommend an odd number of board seats so there is a tiebreaker vote, although in practice, due to certain seats being controlled by certain stakeholders, this will not always be relevant.

Note on Board Composition: As previously mentioned, boards are often required by external investors or other shareholders who are no longer involved with the company’s day-to-day operations. Financing agreements (including those for some debt instruments), will typically specify requirements for the board’s composition, including number of total board seats, number of independent directors, number of seats controlled by the investor/debt provider in providing capital, and certain board procedures and powers.

Notes on CFO’s Role:

An experienced CFO can provide insights into the appropriate size and structure of the board, ensuring it aligns with the company’s financial strategy and governance requirements.

Evolution with Business Stage

As businesses grow and evolve, so too must their boards. Early-stage startups might focus on board members who can provide hands-on guidance and networking opportunities. As the company scales, the emphasis may shift towards governance, financial oversight, and strategic expansion.

Notes/CFO’s Role:

The CFO’s role in board management evolves alongside the business. In the early stages, the CFO may focus on financial modeling and securing funding. As the company grows, the CFO’s involvement in strategic planning, investor relations, and international expansion becomes more pronounced.

In establishing a board, startups and SMEs must be deliberate in their approach, considering the diverse expertise, operational needs, and strategic goals of their business. The CFO, with their comprehensive understanding of the company’s financial and strategic landscape, is instrumental in shaping a board that can navigate challenges and capitalize on opportunities, ensuring the company’s long-term success.

Board Governance in Startups and SMEs

Effective board governance can be the anchor in the sustainable growth and success of startups and small to medium-sized enterprises (SMEs). It encompasses the systems, rules, and practices by which a board of directors ensures proper orientation of a company’s relationship with its stakeholders, ultimately leading to effectively managed risks and the maximization of long-term shareholder value. This section delves into a few best practices for board governance within the context of startups and SMEs, underscores legal and ethical considerations, and highlights the integral role of the Chief Financial Officer (CFO) in reinforcing these governance structures.

Best Practices in Board Governance

Establishing a framework of best practices is crucial for startups and SMEs to ensure their boards are effective and aligned with the company’s goals. These practices include setting clear roles and responsibilities for board members, ensuring effective board leadership, and fostering a culture of open communication and continuous improvement.

Corporate Bylaws: The governing document for a board of directors is typically called the “bylaws.” Bylaws are a set of rules and procedures adopted by a company to govern its operations, including the structure and function of the board of directors. They outline the duties and responsibilities of the directors and officers, the process for electing and removing board members, the scheduling and conduct of board and shareholder meetings, and other essential governance practices. Bylaws serve as a key document to ensure that the board operates in a structured and consistent manner, in alignment with both the company’s objectives and regulatory requirements.

Note on Formation of Bylaws: Typically, bylaws are initially created by the company’s founders or incorporators at the time of incorporation, laying down the rules for governance, board structure, meetings, and other key operational aspects. After their initial creation, the board of directors or the shareholders, depending on the company’s bylaws and applicable laws, have the authority to amend and maintain these bylaws to reflect changes in the company’s needs, regulatory requirements, or corporate governance best practices.

Setting Clear Roles and Responsibilities: Clearly defined roles help in mitigating conflicts and ensuring that board members contribute positively to the company’s strategic and operational goals. This clarity is particularly vital for startups, where the lines between governance and management can be extra blurry.

Separation of Roles: Separating the roles of the CEO and the Chairperson of the Board can prevent a concentration of power, ensuring that the board can effectively oversee management.

Ensuring Effective Board Leadership: The chairperson plays a critical role in shaping the effectiveness of the board. Leadership involves setting the agenda, ensuring that meetings are productive, and that decisions are aligned with the company’s long-term strategy. Other board roles are further discussed later in this article.

Fostering Open Communication and Continuous Improvement: Encouraging an environment where constructive feedback is welcomed and acted upon can significantly enhance board effectiveness. This includes regular evaluation of the board’s performance and the implementation of changes to improve governance practices.

Board Education: Board members need to stay informed about the latest trends in corporate governance, regulatory changes, and industry-specific challenges. To help promote a culture of continuous improvement in a quickly changing world, the company should pay for (and, at times facilitate) key board member education initiatives. For example, a company should likely be supportive of a board member attending a seminar to better understand AI applications for the company’s market.

Board Performance: Regular evaluation of the board’s performance is essential to identify areas for improvement and ensure the board’s activities align with the company’s strategic goals. This can be achieved through self-assessments, peer reviews, or engaging external consultants to conduct board evaluations.

Board Committees: Board committees offer additional focus and specialization on key areas of board oversight, such as executive compensation and financial audits. Committees are further discussed later in this post.

Independent Committees: Establishing committees such as audit, compensation, and nominating committees, predominantly composed of independent directors, ensures focused oversight on sensitive issues like executive pay, financial integrity, and board nominations, respectively. Board committees are further discussed later in the post.

Independent Board Members: As previously discussed, independent directors are those who have no material relationship with the company other than their directorship. Their role is critical in providing unbiased oversight on the company’s management and affairs, particularly in areas like audit, compensation, and governance, where conflicts of interest could arise.

Regular Executive Evaluations and Executive Sessions: Holding executive sessions without the presence of management allows independent directors to discuss issues freely, providing an additional layer of oversight.

Conducting Scenario Planning: The board should engage in scenario planning exercises to anticipate potential market changes and ensure strategies remain relevant and robust against various future states. The CFO may have an outsized role in these exercises.

Board Evaluations: Regular evaluations of the board’s performance, including assessing the effectiveness of its structure, committees, and individual directors, help identify areas for improvement.

Director Qualifications: Setting clear criteria for director qualifications can help ensure that board members have the necessary expertise and independence to effectively oversee the company. Common qualifications include leadership experience, financial literacy, industry expertise, and a commitment to ethical governance.

Staggered Boards (Classified Boards): In a staggered board structure, directors are divided into classes, each serving different term lengths, typically ranging from one to three years. Only a fraction of the board is up for election in any given year, making it more difficult for a complete board takeover in a short period, thus providing continuity and reducing vulnerability to hostile takeovers.

Limited Term Periods and Maximum Tenure: Implementing term limits for directors can prevent board stagnation, ensuring fresh perspectives and dynamism in board governance. Term periods define the length of time a director serves before re-election, promoting regular assessment of director contributions and alignment with current company needs. Some bylaws also specify the maximum total tenure a director may remain on the board. There is not one size fits all for these limits, although the National Association of Corporate Directors recommends total term periods of about 3 years with maximum tenure of 10 to 15 years.

Shareholder Votes: The board has a lot of authority to oversee the senior management team while setting the strategic vision of the company. However, its power is not unlimited. Shareholder votes are often required on issues that fundamentally impact their ownership or the company’s structure, including amendments to the charter and corporate bylaws, major mergers and acquisitions, stock issuances, large changes to dividend policy, dissolutions or liquidations, board elections.

Example of Bylaws: Corporate governance gets increasingly sophisticated as a company grows. Although not a great example of the much simpler corporate bylaws typical of a startup or SME, Apple’s bylaws exhibit many of the key provisions found in most corporate bylaw documents.

Legal and Ethical Considerations

Understanding and adhering to the legal and ethical obligations that come with board governance is essential. This includes compliance with corporate laws, fiduciary duties, and ethical standards. For startups and SMEs, navigating these obligations while quickly growing can be challenging but is essential for long-term sustainability.

Fiduciary Duties: As previously mentioned, board members of U.S. companies have a legal obligation to act in the best interest of the company’s shareholders. This includes duties of care, loyalty, and obedience to ensure that the company adheres to legal and regulatory requirements.

Compliance Issues: Startups and SMEs must be vigilant in their compliance with local, national, and international laws. This includes financial regulations, employment laws, tax laws, data and privacy regulations, and industry-specific guidelines. Board members can often be held liable for breach of fiduciary duties and certain violations of laws and regulations.

Ethics: With oversight of senior management, the board is ultimately responsible for ensuring the company is operating ethically and in alignment with the best interests of the shareholders. This can include the review and approval of the company’s code of ethics.

Notes on the CFO’s Role:

Compliance and Ethics: The CFO leads by example in promoting effective financial reporting while maintaining compliance with relevant laws and regulations. His or her expertise is crucial in navigating complex financial and legal landscapes, ensuring that the company’s financial practices are beyond reproach.

Governance Policies: The CFO assists in the development and implementation of financial governance policies and controls. CFOs ensure that financial reporting is accurate, transparent, and timely, thereby supporting informed decision-making by the board.

Risk Management: Integral to the CFO’s role is identifying and communicating financial risks to the board. By providing comprehensive risk assessments, the CFO enables the board to make well-informed decisions that align with the company’s risk appetite and strategic objectives.

In the dynamic and often uncertain environment of startups and SMEs, effective board governance serves as a stabilizing force, guiding companies through growth and challenges. The CFO, with his or her deep understanding of the financial and strategic facets of the business, plays a pivotal role in ensuring that governance practices not only meet legal and ethical standards but also propel the company towards its long-term goals. By adhering to strong corporate governance practices that foster a culture of accountability and transparency, startups and SMEs can build a strong foundation for success.

The CFO’s Strategic Role in Board Meetings

Board meetings are crucial junctures where significant decisions that shape the future of startups and SMEs are made. Within this context, the CFO typically plays a pivotal role, ensuring that financial considerations are at the forefront of strategic discussions. Meanwhile, the Chief Executive Officer (CEO) and other management team members bring their expertise to provide a comprehensive view of the company’s operational, strategic, and competitive landscape. This collaboration ensures a holistic approach to decision-making and strategic planning.

Note on the Relationship Between the Board and Senior Management: It’s no secret that the relationship between the board and the senior management team can become tumultuous. This division typically forms when a management team underperforms, or when a chasm develops between the strategic vision of the two groups. A little rift can quickly expand as communication and trust breaks down on either (or both) sides.

From the start, it’s important that both sides make an honest and full effort to build strong rapport with each other and clearly communicate expectations and objectives of the relationship.

Preparation and Presentation of Financial Reports

The CFO is tasked with the critical role of preparing and presenting financial reports during board meetings. These reports, which include income statements, balance sheets, cash flow statements, and financial forecasts, provide a snapshot of the company’s financial health and future outlook. It’s crucial that these reports are accurate, comprehensive, and tailored to inform strategic decisions.

The CEO collaborates with the CFO to contextualize financial reports within the context of the broader company strategy and shifting market dynamics. This partnership ensures that the financial data is not just numbers but translates into actionable insights.

Financial Strategy and Forecasting

The CFO provides strategic insights and forecasts to guide board decisions. This involves not just reporting on past and present financial performance but also forecasting future scenarios. The CFO uses financial models to predict the impact of different strategic choices, helping the board make informed decisions about investments, expansions, budget allocations, and risk management.

Other management team members contribute specialized insights that complement the CFO’s financial perspective. For example, the Chief Operating Officer (COO) might discuss operational efficiencies and challenges, while the Chief Technology Officer (CTO) could provide updates on technological advancements and digital strategy. These varied perspectives ensure that financial strategy is aligned with operational capabilities and market opportunities.

Risk Management

One of the CFO’s key responsibilities during board meetings is to highlight and display effective management of financial risks as well as other key risks. This includes discussing potential financial vulnerabilities, changes in market conditions, operational risks, and even legal risks (depending on the firm’s organization structure and sophistication) that could impact financial performance. By providing a risk assessment, the CFO helps the board to take a proactive approach to risk management, incorporating mitigation strategies into the company’s overall strategy.

Again, the CEO, working alongside the CFO, helps to frame these risks within the broader strategic and operational context, ensuring that risk management is integrated into all aspects of company planning and decision-making.

Note on Management Communication: The CEO, CFO, and other members of the senior management team should exhibit strong alignment in board meetings. This ensures trust in the senior management’s ability to work together and maintain the direction set by the board.

Board Member Roles

Corporate boards play a crucial role in the governance and strategic direction of companies. The structure of a corporate board might vary by jurisdiction and company size, but several key roles are often found across boards:

Chairperson (or Chairman/Chairwoman): The chairperson leads the board and ensures its effective functioning in all aspects of its responsibilities, including setting meeting agendas, facilitating board discussions to reach consensus, and representing the company to its shareholders. The chairperson acts as the liaison between the board and the company’s senior management.

Executive Directors: These are members of the board who also hold management positions within the company, such as the CEO and the CFO. They provide the board with essential insights into the company’s internal workings and facilitate the implementation of board decisions.
- Chief Executive Officer (CEO): While not always a member of the board (but more often than not), the CEO is present at board meetings. The CEO is responsible for the day-to-day operations and management of the company, implementing board decisions, and providing strategic recommendations to the board.
- Chief Financial Officer (CFO): While it is less common for the CFO to occupy a board seat than the CEO, the CFO will likely attend a significant portion of board meetings to offer insights on operating and strategic discussions.

Non-Executive Directors: These directors are not part of the company’s management team and are often appointed to bring independent judgment on issues of strategy, performance, and resources, including key appointments and standards of conduct. Note, not all non-executive directors are independent.

Lead Director: In some boards, particularly where the chairperson is not independent, a lead director is appointed from the non-executive directors. The lead director coordinates the activities of the other non-executive directors and ensures there is an appropriate balance of power between the executive and non-executive members of the board.

Committee Chairs: As previously mentioned, boards often have committees (e.g., audit, compensation, governance) that handle specific tasks. Each committee has a chair who leads the committee’s duties, reports its findings to the full board, and ensures the committee is fulfilling its responsibilities effectively.

Secretary of the Board (or Corporate Secretary): The secretary ensures that the board operates efficiently and complies with laws and regulations. This role involves preparing meeting agendas, keeping minutes, and facilitating communication among directors.

Board Committees

Board committees are specialized groups within the board that focus on specific areas, such as audit, compensation, and governance. These committees, most common at companies with a high degree of sophistication, allow for more detailed scrutiny and management of complex issues, which is crucial for maintaining effective oversight and governance.

The formation of board committees is often guided by the company’s bylaws, regulatory requirements, and best practices in corporate governance. Committees are usually composed of board members, with the board itself selecting the committee members and appointing the chair of each committee based on their expertise and interests.

Some of the most common board committees include:

Audit Committee: Typically comprises independent directors with financial expertise, overseeing the integrity of financial statements, the company’s compliance with legal and regulatory requirements, and the independent auditor’s qualifications and independence.

Compensation Committee: Oversees the company’s compensation strategies, ensuring they align with the business’s objectives and governance practices. This committee typically reviews and approves executive compensation packages.

Governance/Nominating Committee: Focuses on the effectiveness of the board itself, including the nomination of board members, board composition, and governance policies and practices.

The frequency of committee meetings can vary depending on the company’s needs, the specific responsibilities of the committee, and regulatory requirements. For example, an audit committee might meet quarterly to coincide with the company’s financial reporting cycle, while a compensation committee might meet more frequently during the annual executive compensation review period. Governance and nominating committees may meet less regularly, perhaps only a few times a year, to address board nominations and governance policies, adjusting their schedule as necessary to respond to the company’s evolving governance needs.

Navigating Board Meetings: Agenda, Communication, and Frequency

Board meetings are pivotal moments for startups and small to medium-sized enterprises (SMEs), serving as a platform for strategic decision-making, oversight, and alignment between the board and management. Establishing the proper agenda, effective communication strategies between meetings, and meeting frequency can significantly enhance governance and operational efficiency. This section delves into these aspects, offering insights into how management teams, particularly the roles of the CEO and CFO, can optimize these interactions.

Board Meeting Frequency

Effective board meetings are crucial for governance and strategic planning. The frequency, timing, and length of these meetings should reflect the company’s operational pace and strategic needs. Initially, monthly meetings might be necessary to navigate the rapid changes in the startup phase (many recommend monthly board meetings for startups). As the business stabilizes, the cadence may shift to quarterly meetings, with special sessions called as needed for urgent matters.

Each meeting can vary in length, often from 2 to 6 hours, depending on the agenda’s complexity. The year-end/annual meeting will often be more in depth, resulting in a longer discussion focused on longer term strategic planning for the coming 1-5 years.

Typical Board Meeting Agenda

A well-structured board meeting agenda ensures that all critical areas of the company’s operations and strategy are covered efficiently. While the specifics can vary depending on the company’s current focus and challenges, a typical agenda might include:

Opening Remarks and Approval of Previous Meeting Minutes: A brief overview to set the tone and formal approval of the last meeting’s minutes for the record.
CEO’s Report: An overview of the company’s performance, recent milestones, upcoming challenges, and strategic opportunities. This section is crucial for setting the context of the discussions to follow.
CFO’s Financial Update: A detailed report on the financial health of the company, including revenue, profit margins, cash flow, and a comparison against the budget or forecasts.
Operational Highlights and Issues: Departments or project leads might present updates on operations, highlighting successes, challenges, and areas requiring attention or decision-making.
Strategic Initiatives: A more detailed discussion of long-term strategic initiatives, including market expansion, product development, and strategic partnerships or acquisitions.
Governance and Compliance: Updates on governance practices, compliance issues, and any legal matters affecting the company.
Executive Session: A session without the management team present, allowing board members to discuss sensitive issues, including leadership performance and governance concerns.
Closing Remarks and Action Items: Summary of decisions made, action items assigned, and setting the date for the next meeting.

Communication Between Board Meetings

Effective governance extends beyond the boardroom. Continuous communication between board meetings is essential to keep board members informed and engaged. This can take the form of:

Monthly or Quarterly Interim Updates: Brief reports from the CEO and CFO on financial performance, key operational changes, and progress on strategic initiatives.

Ad Hoc Communications: Immediate communication regarding unexpected challenges or opportunities that require quick attention or decision-making. With time-sensitive matters, timeliness of management communication should often be prioritized over the accuracy of the information shared.

Pre-Meeting Packets: Distribution of detailed reports and documents well in advance of the meeting (typically 7-21 days prior to the meeting), allowing board members to prepare and ensuring productive discussions.

Note on Best Practices:

Clarity and Conciseness: Ensure communications are clear, concise, and focused on the most relevant information.

Regular Schedules: Establish a regular cadence for updates to create a rhythm of communication and expectation.

Open Dialogue: Encourage an open dialogue environment where board members feel comfortable asking questions and offering feedback outside formal meetings.

Board Member Compensation: Expectations and Evolution

Compensation for board members is a nuanced aspect of corporate governance that varies significantly across different stages of a company’s growth, the nature of the board position (independent director, advisory board member, etc.), and the specific demands placed upon the board members. This section explores the compensation frameworks for board members, how these frameworks evolve with the company’s stage of development, and the expectations and involvement required from key board members.

Compensation Structure

Board member compensation typically consists of a mix of equity and sometimes ancillary benefits. For more mature businesses, board members may also be paid in cash, although this is usually avoidable and undesirable for companies in earlier stages, as equity compensation better aligns board member and shareholder interests. Board compensation structure is highly dependent on the company’s life stage, its financial situation, and the strategic value the board member brings to the table.

Early-Stage Startups: At this stage, companies often have limited cash resources and will compensate board members primarily with equity. At early stages, 0.50%-2.00% equity vested over 2-4 years or the life of the board member’s term is common. Advisory board members might receive smaller equity grants compared to company board members, reflecting their less intensive involvement. Board members who represent an investor and are placed as the result of a financing round should not be compensated.

Established SMEs: As a company matures and its financial situation stabilizes while approaching enterprise status, board member total compensation may increase, although compensation as a percentage of fully diluted shares outstanding will likely decrease to 0.1%-0.5% per board member. Independent directors may receive higher compensation than other board members to reflect their additional commitment to governance and oversight. Total compensation will also increase as the size and sophistication of the business grows.

Note on Total Compensation: Effective board member compensation depends on balancing the company’s needs and financial capabilities with the value and involvement expected from board members. Clear communication about roles, expectations, and compensation packages is essential from the outset to align the interests of the company and its board members. As the company evolves, regular reviews of board compensation can ensure that it remains competitive and appropriate for the level of involvement and expertise required, thereby sustaining a governance structure that supports the company’s long-term success. Corporate Governance Institute, a global leader in corporate governance research and education, has a number of interesting articles about total board compensation. This article reviewing startup board compensation suggests board director compensation is typically around $1,500-$3,00 per meeting, whereas some of the highest-paid board directors are paid in excess of $200,000 per year.

Conclusion

Effective board management and governance are crucial for the growth and success of startups and SMEs. Advisory and company boards offer unique benefits, including strategic guidance and compliance oversight, with the CFO playing a pivotal role in aligning financial strategies with the company’s goals. As companies evolve, understanding the intricacies of board composition, meetings, and member compensation becomes essential.