WHEN SHOULD A BUSINESS HAVE A BOARD?

Rodney Davis: The reality is every company has a board. As long as you’re incorporated, you have a board. So exclude partnerships, exclude sole proprietorships. But every corporation has a board, even if it’s just one person that you’ve named as a director. And a lot of small businesses don’t actually recognize or acknowledge that. The question really is, at what point should you activate your board so that you should actually use that board in a conscious and deliberate way to make decisions? And then once doing that, the question is, is it all internal or insiders, or do you have a mix of insiders and external people participating?

So the role of a board in a company is to carry out the will of the shareholders. So often in very small organizations, the board is made up of one or more shareholders because the organization is small enough and the distance between making a decision and carrying out the process of approving that decision is one to one. It’s the shareholder sort of saying, I want to do this. And so therefore you have to legally execute that by the will of the board. A shareholder is not actually authorized to make a decision by law. Only an officer or a director of a corporation can actually make a binding decision for a corporation. So only a director or an officer, meaning officer, meaning a manager of the company who’s duly authorized by the board can actually make a decision and bind you by legal contract. So it’s actually impossible for a shareholder to legally bind the corporation except in their capacity as a director of the board. So that’s the importance of the board. They are that important in an organization.

HOW DO YOU COMPENSATE BOARD MEMBERS?

Rodney Davis: You can’t do business without a board. So you can’t even enter into contracts. You can’t open a bank account. You can’t authorize a purchase. So all authority that’s vested in the management of a company is done so by virtue of authority granted by the board. So the value of a board it’s indefinable, because without a board you can’t function. In terms of how do you compensate board members, that boils down to who are your board members? When it’s internal board members, meaning shareholders, they don’t often think about compensation as a board member. Typically when you appoint management to a board, you don’t typically compensate management for sitting on your board. It’s actually something that management wants to do because they want to be closer to the governance and decision-making of the organization. They want to have a say in the governance and the policies and the high level sort of strategic direction of the organization. Where compensation becomes important is in a couple of scenarios. Scenario one is where often shareholders are directors and they run the business. And as they get ready to transition, you might want to migrate their role from a manager to a director, and therefore you might want to use that as a basis to form a compensation level that allows them to transition away from staff or management compensation to director compensation. And then secondly, if it’s an external party. When it’s an external party, you typically do it just as if you would hire an employee, like what are the comparable rates for the type of work that the board is going to be performing? And you actually use market pegs often to determine what’s the right rate to pay a board member.

WHAT ISSUES DO BOARDS GET INVOLVED WITH?

Rodney Davis: When you’ve got more staff within your organization, you probably want to start thinking about how do we determine staff policies? Now up to a certain size you hire an HR manager, you make those decisions. But when you get into really complex issues as an organization, whether it’s about raising money, whether it’s about recruiting and attracting top talent, whether it’s about growing the business, whether it’s about selling the business, whether it’s about expanding into different markets so diversifying the business. Those are the types of things that you might want someone or a purview that’s outside of the day to day operations. And that’s where a board really comes in handy.

THE BOARD SHAREHOLDER DYNAMIC — WHO’S IN CHARGE?

Rodney Davis: The shareholders appoint the board members, so that’s how they get their power. If you have a large block of shares behind you then you know that your will will be carried out, because you know that those shareholders will support the decisions that you make. So even though most board decisions are done by unanimous or by majority even consent on a, on a vote. You may recall a situation in the news in 2022 where even though there was a majority who voted against the will of the chairman who represented a large shareholder block, they just replaced the entire board and did the vote again. Ok, so the shareholders came in and said, we’re firing all of you, we’re putting in board members who are going to vote the way we want them to and we’re going to recast this vote. So that’s how that power comes because ultimately, if you don’t carry out the will of the shareholders in most circumstances, if not all, there’s a way for shareholders to remove board members.

HOW DOES FINANCE SUPPORT THE BOARD?

Rodney Davis: Well the role of finance in board meetings, in the whole functionality of a board, is to provide the board with the necessary insight about how the business is performing, is to take the results of the business and to take the forecasts and the outlook for the business and compress it into a format that’s easily digestible by a board to deal with the types of decisions that boards might have to make. So if a board is trying to decide to expand our operation into Europe or into Asia from only a place in Canada, finance is going to put together the forecasts of what might happen if you were to go into those markets and provide enough of a reverse engineer-able reporting that the board can actually look at that and determine, ok, we understand what would happen if we make those decisions and we understand what would happen under various scenarios. So it’s typically finances’ job to put together the financial metrics and the related metrics that go with the financial metrics so that a board can decide, how are we doing?

It’s not uncommon for a chief financial officer to be a board member. It’s more common for the CEO to be a board member, the second most likely member of management to sit on a board is going to be your CFO. In many cases the CFO is a board member, but it’s not necessary. But it’s quite often. I would challenge you to find a successful board that ignores the role of finance.