The Four Different Types of Boards
When business owners say, “I would like to form a board!” They usually mean an advisory board. I’m not sure if they know that there are four types of boards. So, how are they different? Johanne Bouchard is a governance and leadership advisor to boards, CEOs, executives, and entrepreneurs, as well as an expert in board composition and dynamics.
I agree with Johanne on two key items:
- Owners underestimate the strategic thinking and execution that goes into forming and running aboard. Owners who tried to create a board, or developed an unsuccessful board, understand the level of dedication it takes to nurture your board. You cannot form a board and think it will manage itself.
- Most boards don’t include a lawyer to help the owner with building, maintaining, augmenting, refreshing, and dissolving aboard. Owners think it’s too much of a cost and they can do it themselves! This is always food for thought because if you are making such an effort NOT to show a document, you intrinsically know that you are skipping steps! Owners are not usually skilled at identifying the type of board they need.
There are four types of boards:
Advisory Board
“Advisory Boards should be one of the highest priorities for startups and for new initiatives that are being tested or pioneered within an organization,” said Joanne. An advisory board should be formed when you need expertise not present on your team or in your employees. It should complement the management team. An advisory board is essential for the early stages since your board can grow with you. Don’t be afraid to change board members if they have outgrown their usefulness in your current stage of business.
Private Board
Private boards are not just for small businesses – large private companies, family businesses, and startups have private boards.
- The majority of boards are volunteers where the members have no fiduciary responsibilities and participate as coaches/mentors to the owner. Board members are invited to participate. The owner is in control of the board and can make changes without ramifications to the company. Retired executives are great for this type of board. Advisory boards are usually private boards.
- For hi-tech companies, private paid boards can be lucrative for the advisor as the company can pay the advisor in stock options in preparation for a massive round of funding or to be sold. They are brought on for their expertise and knowledge of a particular market to raise capital. This type of board also gives the advisor experience with M&A or if the company’s exit strategy is an Initial Public Offering (IPO).
Non-Profit Board
501[c](3) organizations have non-profit boards. If you are on this board, you’re not getting paid and you’re giving big donations to support your cause, and giving your time. Non-profit boards are usually a pay-to-play event. The more significant donors have the most say and are often ineffective. The board is primarily a volunteer one as money donated is used to provide services.
Public Board
The compensation is excellent for public boards; however, you’ll need to get educated about governance and regulations. There are strict rules around how a board is run; it’s a regulated entity and, as such, you have a fiduciary responsibility to the company. You need to prepare for board meetings and ensure you are available for the prescheduled meetings. Diversity for women and minority candidates is a current hot topic and action item for most boards. Board members are nominated and elected, so friends recommend other friends who look like them, minimizing diversity.
Now that you know a little more about boards, which type of board suits your company?
And now you know you need one!