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Small Talk: Putting a board of directors together

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.

Joyce Rosenberg
SMALL TALK

http://www.sltrib.com/business/ci_2431787

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’re 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’ll 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’ll 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 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 some day, keep in mind that any exchange you want your company listed on will also have requirements on the size of the board.

Expect a search for outside directors to take time, and do it in the same methodical way that you would search for a key employee.

Protocall Technologies Inc., which recently went public, is in the process of putting its seven-member board together. CEO Bruce Newman said the company has already filled the seats required by law, such as the audit committee, and expects to take another few months to find the rest of the board. He’s now looking for directors who can help in development, ”people who would be strategic in helping us build the business.”

Newman said the Commack, N.Y.-based software company is relying on referrals from current board members, attorneys, accountants and other professionals to find candidates.

It’s not just a company that needs to look a prospective director over carefully. The board candidate also needs to scrutinize the company.

”Directors ultimately have a responsibility to the shareholders, and they want to do their due diligence on the company and be sure they fully understand the details of the company,” Newman said.

Brooke Savage, CEO of Pragmatech Software, said that ”the key thing to look for in outside directors in my experience, has been finding people who have expertise in the field your company is involved in, that have successfully grown their companies into a larger organization than your own, so you can benefit from their experience.”

The privately held Nashua, N.H., company has six directors, two from inside the company and four from outside. He warned fellow business owners against making boards too insider-heavy, saying: ”You might as well have a management meeting. It’s not productive.”

He said of his outside directors, ”They see things that you never see – they come to it from another perspective.”

Directors also shouldn’t be chosen with the idea that they’ll be on the board indefinitely. Kevin Greaney, CEO of privately held Children’s Progress Inc. in New York, said the boards of the companies he has owned have evolved along with the business.

In the early phases of the company, ”you need people with access to capital,” said Greaney, whose company manufactures software that assesses early childhood development. Later on, he said, the business may need directors with different kinds of expertise.

Joyce Rosenberg writes about small business for The Associated Press.

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