- The Washington Times - Tuesday, October 26, 2004

When a small company is incorporated, managers — who are often the big shareholders — have to start putting together a board of directors. It should be a painstaking, time-consuming task, and one that ultimately will help a new corporation flourish.

The stereotype of the family run corporation, where board seats are filled with parents, children and siblings, is not a good way to go. A board should have members with expertise in finance, human resources and the industry that the company is involved in, and many people advocate that even private companies should have independent directors who have a perspective from outside the business.

There are several important reasons why you should fill your board carefully. One is that it’s critical that you have directors who can advise you about running the company, and who will tell you if you are making mistakes. You really don’t want a board filled with “yes” people.

Equally important is that how you build your board makes a statement to outsiders about how serious you are in running your business. Related to that, if you go in search of venture capital or contemplate going public at some point, you will need a strong board behind you to get funding or investment banking help.

“There should be a primary focus on finding board members who can assist in the capital-raising process, either private capital or going to the public,” said Michael Keane, who teaches corporate finance at the University of Southern California.

Another consideration: If you go public, you will need a board that’s compliant with the Sarbanes-Oxley Act, which among other things requires that independent directors oversee auditing and compensation matters. That means you need to search for directors who aren’t your company’s managers or employees.

Dick McCallister, an executive recruiter who helps companies find directors, said it’s most important for a company to get a financial expert as a board member.

“That person would probably become chairman of the audit committee. That will give you credibility with insurance companies, financial institutions and credibility with public accountants,” he said.

The second-most-important director is one with expertise in compensation and benefits, said Mr. McCallister, who is a Chicago-based managing director of Boyden World Corp.

As you start working on your board, you need to be familiar with any state laws governing the number of directors that a corporation must have. And, if you are thinking of going public someday, keep in mind that any exchange you want your company listed on will also have requirements on the size of the board.


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