The Way I See It… by Michael C. Volker
Building a better board starts with better compensation
Assembling an able and committed board of directors is one of the first, and most important, steps an entrepreneur must take when building a viable venture. However, it is becoming increasingly difficult for a young company to attract quality board members. Due to the poor governance practices we have seen lately in corporate boardrooms, more rules and regulations are imposing an increasing burden on the shoulders of board members. This increased emphasis on good governance is spilling over into the junior public markets and even private companies.
At a recent
An ideal board for an emerging technology firm is a small, three to five person team composed of experienced and committed directors who can also serve as mentors to the CEO. The panelists noted that low profile hands-on directors are much better than highly visible but less involved people. They also noted that chemistry among board members is very important meaning that they respect each other’s views and welcome different perspectives. That’s why board members with complimentary backgrounds, expertise and skills make an invaluable team.
A board’s first task is to define its mandate. What is expected of board members? What’s their role? How can they best contribute their talents? It was noted that, especially for public companies, directors on audit committees must have not only knowledge of accounting matters but also directly related experience. Strategic guidance was noted as being a key part of a board’s mandate – helping the CEO formulate the company’s vision and monitoring its strategy. And, of course, compliance with all applicable laws is a given responsibility.
Being a director of a company, especially a small closely held one, used to be a loosely defined and not particularly onerous undertaking. That’s no longer true. Company directors are facing increasing personal liabilities. These might arise from a company's failure to remit taxes, labor/wage disputes, or defective and claims for harmful products just to name a few. Although Directors and Officers (D&O) insurance may cover some liabilities, it's virtually impossible to get 100% protection. D&O insurance is very expensive – if you can get it. Corporate indemnification may also help somewhat but for cash-starved companies, it provides little support. Bottom line: there is no safety net for a director.
Active directors know that they’ll be spending anywhere from one to three, maybe more, days per month if they’re serious about their role. And, they’re always on call and at risk.
So, what attracts someone to a company’s board? An entrepreneur who exudes passion and commitment to his vision is a great start. An exciting project with interesting people draws others in. Sharing financially in the success of a possible big win, helps too. It’s not a charitable proposition with only remote prospects for a distant payoff.
What is a fair compensation package for a director? Historically, companies have been content to simply allocate a percentage of equity (around 5%) in stock and options to the entire board. Cash fees are rarely given. This is rapidly changing to reflect the increased involvement and liability taken on by directors. Although the panelists offered numerous models for coming up with a fair deal, they all equated to a very practical rule of thumb: take the CEO’s compensation package – stock options and salary – and divide it by a factor of three to five (depending on the number of directors) and use this number of stock options and fee for each director. For younger companies, the fee component may be reduced in favor of increasing the options. In essence, the company is recognizing that a team of five directors would be at least equivalent in value to the CEO. Although time they spend may be less than one-fifth of the CEO’s, the difference is made up by industry experience and know-how.
The way I see it, a start-up venture’s board can make the difference between success and failure. Given the increased risk, commitment, and contribution that directors face, company founders and shareholders will have to revisit their compensation policies.
Michael Volker is a high technology entrepreneur and