The Good, the Bad, and the Boardroom

Picture this.

A brother and sister own a successful IT consulting business organized as a 2-member LLC. They have been in business for 5 years, generate roughly $2 million in annual revenue, keep immaculate books, and have a CPA, bookkeeper, business attorney, and tax attorney on call.

So far so good, right? They also have a 7-member “board of directors” made up of the two of them as well as family members, friends, investors, and former colleagues. Their board votes on major business decisions, approves all budgets, and has the final say on corporate strategy. Does that sound a little…off to you? If it does, that’s because it is.

Unlike corporations, LLCs generally don’t need a board. While an LLC can create a board or similar governing body, doing so often adds a layer of unnecessary complexity and imports corporation-style governance mechanics into a business structure designed to be flexible.

We often see growing businesses assume that having a board somehow makes them seem more serious and sophisticated. But every governance decision needs a “why” behind it, and “it seemed legit” doesn’t count. So before you start handing out board seats, ordering engraved nameplates, or fighting over who gets the corner office, ask yourself something simpler:

Do You Actually Need a Board?

For corporations, the answer is usually yes. State corporate statutes generally require every corporation to have a board of directors, even if that board consists of a single individual (who can of course be a shareholder). The board is generally responsible for overseeing the corporation’s affairs, appointing officers, approving major corporate actions, and fulfilling fiduciary duties owed to the corporation and its shareholders.

For LLCs though, the answer is usually no. Unless the members agree otherwise, management typically rests with the members or managers. Many successful LLCs operate for years without ever holding what would traditionally be considered a board meeting. Having a board is not inherently good or bad, though having the right board for the right business is what matters.

So, What Does a Board Actually Do?

Despite what TV would have you believe, a board doesn’t run day-to-day operations…that’s management’s job. The board’s job is oversight.

Directors establish long-term strategy, monitor financial performance, approve significant transactions, hire and evaluate executive leadership, oversee major risks, and ensure the company is being managed in the best interests of the corporation. To put this in illustrative terms, while management drives the car, the board makes sure the car doesn’t drive off of a cliff.

An effective board brings experience and strategy that management may not have. For example, a founder may know everything there is to know about the services and products being provided, and an experienced director may know everything about scaling a business, raising capital, navigating a recession, or preparing for an acquisition. Their role, at its core, is to make decisions that are in the best interests of the company, not any one individual.

What Could Ever Go Wrong?!

If you’ve ever been a part of a group project where no one could agree on strategy and/or one person did all of the legwork, you already know what a bad board looks like. Some boards become nothing more than a group of figureheads. Others become paralyzed by disagreement or dominated by stubborn personalities.

Let’s take a trip down memory lane, shall we? Theranos. The board included former cabinet members, military leaders, and distinguished public figures, but very few individuals with expertise in laboratory science, medical diagnostics, or medical devices. Ultimately, the company collapsed. There’s of course a LOT more there but we don’t got all day here. The point is, building a board, as with any corporate decision, should be a thoughtful and purposeful endeavor.

Board Seats Are Not Participation Trophies

One of the biggest mistakes founders make is treating board seats like thank-you gifts. There are many people who deserve your appreciation, but they don’t need to be directors. Directors owe fiduciary duties to the company. They are expected to exercise independent judgment, make informed decisions, and sometimes disagree with the very people who appointed them, and a failure to recognize those responsibilities or placing personal interests above the company’s can result in significant consequences.

A board seat is one of the most significant governance positions within a company. Not a status symbol or a collection of your smartest friends gathered around a solid wood hand-carved conference table. The goal is to build the right governance structure for your business. Oh and please make sure you get directors and officers insurance, your future board will thank you for it.

If you have a board and have no clue what it’s actually doing, or are still not sure if you even need one, as always, if you’ve got questions, you know we’ve got answers!