The board of directors has an essential role in company governance and setting the strategic direction of the business. The right board of directors brings your company specialist knowledge and expertise in key business areas, such as management, finance or technology.
By analysing your own strengths and weaknesses, you can appoint a board of directors that helps to fill gaps in your own business skills and experience. As with any key appointment, you should think carefully about how you hire, retain and make the best use of your directors.
1. The make-up of your company board
By law, every private limited company must have at least one company director
- The directors of the company make up its board of directors. At least one director must be a natural person (as opposed to another company).
- A public limited company must have at least two directors.
- Company directors are responsible for ensuring the business complies with company law. They can be found personally liable for the firm’s failings.
- Other individuals can be invited to attend board meetings. To achieve the right balance it might sometimes be necessary to include employees who are not classed as directors to link up relevant parts of the board meeting.
- The company secretary (if one has been appointed) acts as the chief administrative officer for the company.
- Employees can have the term director in their job title, such as a sales director, without being company directors.
Decide who will be legally recognised as a company director
Directors must ensure that:
- key information is sent to Companies House
- the company produces annual accounts
- the board of directors approves the annual accounts
- minutes are taken as a record of board meetings
- the company complies with employment and health and safety law
- the business pays the correct amount of tax, VAT and National Insurance on time
- they avoid conflicts of interest, declare any conflicts of interest and do not accept benefits from third parties
Decide if you want to appoint a company secretary
- It is no longer obligatory to appoint a company secretary, although you may still choose to do so.
- The company secretary is usually appointed by the company directors. As with company directors, a company secretary has responsibilities under company law and can be prosecuted if they fail in their duties.
- The roles of company director and company secretary can be held by the same person.
Aim to create a fair representation of your firm's interests
- Make sure the spread of board members represents all areas of the business. It is very important to include someone with a close understanding and knowledge of the financial aspects of the company.
- Try to assemble a variety of personalities. If everyone has the same viewpoint and agrees with one another then the company may not progress.
Assess the number of people you want on your board
- More than seven board members could prove unwieldy and make decision-making difficult.
- Remember that you might also decide to appoint non-executive directors.
Check each director is legally allowed to sit on your board
- Previously disqualified directors are not allowed to hold the position again unless a court grants permission.
- Directors over the age of 70 in public limited companies must have their appointment approved at a company general meeting.
- All directors must be at least 16 years of age.
Decide on your governance structure
- The most usual board structure in the UK is a unitary board, in which all members attend board meetings at the same time.
- Some businesses have a tiered board structure consisting of an operational board and a supervisory board. One board reports to the other, but the same chairperson sits on both.
2. Non-executive directors
Decide whether your board could benefit from using non-executive directors
- Non-executive directors are not involved in the day-to-day running of the business, but can bring many business benefits, possibly as a chairman. For example, specialist knowledge, industry contacts or money to invest.
- You can use non-executive directors’ experience and objectivity to help make difficult decisions. For example, setting directors’ pay levels or deciding if your firm should undertake legal proceedings.
Check where your business could benefit from particular knowledge or contacts
- Define what you want your company to achieve in the future in terms of strategy and growth. Refer to your business plan for guidance.
Identify where the skills and knowledge gaps are
- Assess the executive directors who work for the company. Decide what skills and knowledge they lack and whether it would be valuable to find non-executives who could fill such gaps.
- For example, if you are developing an innovative process but lack know-how about protecting your intellectual property (IP), an IP lawyer could be an invaluable addition.
- If you are looking to raise investment, you may need to show that you have a strong board. Appointing an accountant as a non-executive director could provide investors with evidence of financial rigour.
3. Hiring directors
Identify the skills you need on your board
- Think carefully about how you will fill positions on your management team and whether these will lead to a place on your board. Consider which skills you want in-house and which you might fill through non-executive directors.
- Find people who can help you achieve the goals you have set out in your business plan.
- It is good to have a mix of personalities and approaches on your board to generate diverse ideas and solutions. Try to ensure that any conflicts between your directors create a healthy tension rather than cause problems.
- Be wary of creating a management team of people who are too similar. You may all dislike - and neglect - the same aspects of the business.
- Aim to build a board that has the contacts and knowledge you need. For example, if you want to raise venture capital you might look for someone who has previous experience or who has a network of relevant contacts.
- Ensure your board looks credible to outsiders. This will make potential investors, future management candidates and business partners take your business more seriously.
- A board should contain individuals with hands-on business experience who can look at your company's problems and goals strategically.
- Look for people who are honest and trustworthy and who can help in a mentoring capacity where necessary.
Look for suitable board members
- Ask your business advisers, such as your accountant and solicitor, whether they know of potential candidates.
- Contact relevant trade associations to see if they can recommend suitable candidates.
- Attend business seminars, conferences and exhibitions that offer opportunities to network with director-level candidates.
- Consider using a professional recruitment company.
- Advertise in relevant business or trade media that might attract the type of candidate you are looking for.
Take professional advice regarding taking on a non-executive director
- Take detailed financial advice about their terms of employment or service and taxation liabilities. You should arrange a contract of employment or a service agreement with them prior to their involvement.
- As a rule, any directors' fees should be paid through PAYE and are liable to National Insurance contributions, even if the director is self-employed.
- If a non-executive director uses a personal services company, the position can be complicated. You should take advice from your accountant.
Invest time in the recruitment process
- Compile a shortlist of potential candidates.
- Meet up with those on your shortlist more than once.
- Be prepared to sell the benefits of becoming a director or non-executive director for your company and to answer questions they might have.
- Assess each person's skills and experience and explore their motives for wanting a position on your board.
- Check the person has good references.
Make sure you are appointing the right people for the roles you want to fill
- People who act as so-called 'professional directors' and make all of their income from sitting on various boards may not have enough time to dedicate to your needs.
- An investor in your firm may require a place on the board in return for their capital. Make sure you agree how active a role they want to take and whether they will be entitled to any fees.
4. Retaining board members
Brief new executive or non-executive directors properly before they join the board
Give them all the information they need such as:
- notes of previous board meetings
- an up-to-date copy of your business plan
- biographies of existing board members
Review board members’ roles regularly
- Take time to assess whether the company and individual board members are getting what they want out of the relationship.
- Use this information to decide whether you need to make any adjustments to your board.
- Reviews are often carried out by the chairman or a non-executive. Board members could also take it in turns to appraise one another.
Offer a good remuneration package
- Employees who sit on your board may expect some extra benefits for the additional legal responsibilities they take on.
- There are no set payment rates for non-executive directors. Some may initially offer their services for free if they feel the company will become a success. Other non-executive directors may charge you.
- Even though non-executives are not involved in the day-to-day running of the business, they still carry the same legal responsibilities as other directors and should be suitably remunerated.
Consider offering shares in the company instead of fees or additional salary
- If you want to appoint someone as a non-executive director but cannot afford to pay them, you could consider offering them shares in the business instead.
- Review the package being offered to your directors and non-executives on a yearly basis.
Make sure you know your position on dismissing directors
- Dismissing a person from their office as a director needs careful consideration. If you are unsure of your position, seek legal advice before taking action.
- A company director may also work as an employee of the company. If you also dismiss them as an employee, they will have the same legal protection against unfair dismissal as other employees.
5. Board meetings
Choose a suitable chairperson
- It is a good idea to have a chairperson, but this is not a legal necessity. It can be useful to have someone running board meetings, making sure everyone has their say and that all points of view are considered.
- In a smaller company, the chairperson and the managing director will often be the same individual. However, where possible, someone should be appointed to each role to provide diverse viewpoints.
- The chairperson is responsible for setting the agenda, running the meeting and summarising what has been decided.
Decide how often you are going to hold board meetings
- While your company is growing quickly, you might want to hold monthly board meetings to keep the direction of the business on course.
- If you have external shareholders, they may want to sit on your board and they may require frequent meetings.
- Small companies are no longer obliged to hold an annual general meeting (AGM). They must hold one and give adequate notice for one if any director or at least 5% of shareholders request it.
The chairperson normally sets the agenda for board meetings
A typical board meeting will:
- approve the minutes of the last meeting
- look at matters not due to be covered by the agenda
- look at procedural and compliance issues
- review the business’ financial performance
- look at foreseeable threats and opportunities
- take decisions on strategic issues, such as buying another company or bringing in new shareholders
Choose a suitable location
- Look at holding some board meetings away from your workplace. This can help to give people a fresh perspective.
Ensure everyone has the opportunity to prepare
- The company's articles association may say how much notice is required before a board meeting. In any case, board members must be given reasonable notice.
- Send your board members the monthly management accounts even when there is no scheduled meeting.
- Send out any information due to be discussed or reviewed at least seven days before the meeting, such as minutes from the previous meeting and financial statements.
- Board members must also be given notice of any general shareholders meeting. Private company general meetings generally require 14 days' notice.