I couldn’t agree more.
The financial aspect is often meaningless for the directors, either because they are already made, or because they are compensated through cash or a one-way option on the company.
So yes – directors need to feel committed and involved – on both the upside and the downside. It’s not merely financial – we need to hold directors from poor performing boards to “professional account”, which means they should take a meaningful reputation hit and struggle to get or retain other board positions.

Many superstar CEO’s have enjoyed a period where they have received the rewards that have historically been reserved for owners of a business.

They have done so without any of the risk that owners would have experienced and continue to face (i.e. shareholding, the pain of getting the business to a point of wealth creation, the possibility of bankruptcy in bad times).

A lot of these superstar CEO’s are now becoming Directors so they still have little or no downside to their cushy fees paid for a part time job. So you have no incentive at governance or management to do right by your shareholders. It’s only down to best intentions.

While this situation continues to excerbate you won’t have well run businesses and shareholders will get short shrift.

So perhaps when choosing a board or CEO the best practice might be to have them assume more personal liability for poor performance. Start hitting their pockets and you are likely to have a good governance structure and excellent management.

the reply I was writing got out of hand – so expect a blog post soon.

Nik
I feel you should always have a board (and it is a legal requirement), even if it is just the founders.
The question of when you need external directors is a bigger one. Having just one external director means that you should be having regular meetings, and that you will should keep your internal reporting and plans up to date. My quick answer would be “as soon as you can see the viability and growth”.

Once you start growing in earnest, then it is time to add directors that have skills and experience you require. A lawyer, super connected sales person, deal maker, accountant and of course people that really get what you are doing. These can be added progressively as you grow – after all at least some of them will expect to be paid.
The directors can grow with you as well – I would not be afraid of tapping friends from universisty, peers at a junior level in a large law firm and so forth. They would leap at the opportunity to be on a board, and will early stage companies seriously.

I’m wondering, at what stage of a company should you begin looking for directors, or start having a board?

Once the shareholding passes beyond just the original founders? (Once you take money?)

Another great article, thank you again. I agree with what you are saying. I do have one comment/question where you say to a director “Your responsibility is to the shareholders, and you are their representative.”

I would say instead a directors responsibility is to the company, and to act in the best interests of the company. And, even though they are appointed by the shareholders, they are not on the board to represent the shareholders, nor to represent the interests of the shareholders.

I think this is an important distinction particularly when a company is making decisions that may have a day-to-day impact on a shareholder. The duty is for the directors to act in the best interests of the company, and this is specifically stated in the Act. (Companies Act 1993 Section 131)

http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320657.html

Having said that, this is no way takes away from the duty to maximise shareholder value. In the long term, all decisions should increase the value of the company.

This can be very apparent with startup companies who begin with a board appointed as “shareholder representatives”, quite often the shareholders and founders themselves. As the company matures, the board will transition to a more professional board where the directors are appointed for their specific skills and experiences in areas the board requires.

Keep up the great writing.

Andrew