Build a board of directors

All corporations (including nonprofits) and cooperatives are legally required to have a board of directors.

Do you need a board? → How should you structure your board? → Duties of all directors →

This post is part of a series designed to help you register a high-impact startup. Here, we focus on board requirements specific to the US.

Do you need a board?

The board’s core responsibility is to ensure that your organization fulfils its mission.

A board comprises a number of directors. (Directors can also be called “board members”; they may also be called “trustees” if they’re directors of a nonprofit, though this is rarer.)

Whether or not you need a board depends on your business structure — if you choose a business structure that requires incorporation, you’ll need one.

  • Sole proprietorship: Not applicable
  • Partnership: Not required
  • Corporation: Required
  • LLC: Not required
  • Cooperative: Required

How should you structure your board?

A board is elected by the owners of the business. So, in the case of a corporation, directors must be elected by shareholders (or the founders, if its a nonprofit corporation without shareholders). In the case of a cooperative, directors are elected by its members.

You’ll generally want at least three directors in your board. There’s no legal requirement for them to have individualized titles or responsibilities.

 

Requirements for corporations

Harbor Compliance offers a good overview of corporate governance by state. Here’s how to interpret the data:

  • Directors: The minimum number of directors required to be on the board.
  • Chair or President: Whether chair (or “chairperson,” “chairman,” “chairwoman”) or president is a required office. A chair/president leads the board of directors.
  • Secretary: Whether secretary is a required office. A secretary prepares minutes of the directors’ and members’ meetings and authenticates records of the corporation.
  • Treasurer or FCO: Whether treasurer is a required office. A treasurer is responsible for the financial affairs of the organization.

 

Unless otherwise stated under “Limits”, a given officer (i.e. individual, whether director or not) can typically hold two or more offices (i.e. roles). For example, if “Secretary” and “Treasurer” are both required, a single individual could occupy both these roles.

“Defined in articles” means that whether or not the office is required is defined by either the articles of incorporation or the bylaws. We’ll explore articles of incorporation and bylaws in a future post on creating governing documents.

 

Requirements for nonprofits

Harbor Compliance also offers a good overview of nonprofit governance by state. Here’s how to interpret the data:

  • Directors: The minimum number of directors required to be on the board.
  • Term: The default term during which a director’s role is protected. Maximum terms are indicated — after which a new director (”successor”) must be elected.
  • Committee: The minimum number of directors required to be on a committee of you organization (e.g. an executive committee or litigation committee).
  • Chair or President: Whether chair (or “chairperson,” “chairman,” “chairwoman”) or president is a required office. A chair/president leads the board of directors.
  • Secretary: Whether secretary is a required office. A secretary prepares minutes of the directors’ and members’ meetings and authenticates records of the corporation.
  • Treasurer: Whether treasurer is a required office. A treasurer is responsible for the financial affairs of the organization.
  • Vice President: Whether Vice President is a required office. A vice president generally serves as a backup leader to the board president so the board is never without leadership.

 

A given officer (i.e. individual, whether director or not) can typically hold two or more offices (i.e. roles). For example, if “Secretary” and “Treasurer” are both required, a single individual could occupy both these roles.

“Defined in articles” means that whether or not the office is required is defined by either the articles of incorporation or the bylaws. We’ll explore articles of incorporation and bylaws in a future post on creating governing documents.

Harbor Compliance’s table shows many states that apparently need just one director (e.g. Arizona, California, or Colorado). It’s worth reiterating that these are state requirements; at the federal level, the IRS requires that all nonprofits have three directors in order to qualify for tax-exempt status e.g. 501(c)(3).

 

Choosing directors

When picking your board of directors, look for individuals who are passionate about your cause, aligned with your vision, and can lend their expertise to help your organization:

  • Roles and responsibilities: In order to build your board, it’s helpful to draft a proposal for prospective directors explaining their expected responsibilities, your entity’s expected activities, your funding model, and your route to impact. Given the requirements of a director, and our suggested criteria for assessing the value of potential directors, avoid the temptation to populate the board with friends and people with a similar background to yourself. You’ll typically focus on three criteria for assessing the value of potential directors for your board: governance, strategy, and execution.

 

Governance All boards must have some aspect of governance to remain compliant and focused on their charitable purpose. A core responsibility of directors involved in governance is to assess and determine if the organization’s mission is being fulfilled and it’s having the desired impact.

Outside of determining the organization’s impact, there are several other governing responsibilities a board needs to undertake, including:

  • Making sure the CEO upholds their role and responsibilities.
  • Playing devil’s advocate and asking difficult questions to ensure the mission is upheld at all times.
  • Ensuring that the organization remains legally compliant, including but not limited to state and federal filings.
Strategy Directors involved in providing strategic advice should assist with the following:

  • Providing domain knowledge from their experience and expertise.
  • Providing analysis e.g. of the external environment or opportunities/risks.
  • Bringing an element of prestige through their previous experiences and reputation.
  • Using their own network/connections to help out the organization (via referrals, suppliers, information sources, contractors/freelancers, etc.)
Execution While (some) directors should be able to help you execute your mission, this role is more important for smaller organizations with less capacity. To reduce the risk of conflicts of interest, best practice advises keeping directors from executing day-to-day organizational tasks as much as possible. The execution-related advice and support that directors can offer is most suitable for:

  • Hiring key people such as a CEO.
  • Filling in organizational gaps by providing business acumen or aiding in legal topics.
  • Fundraising

 

  • Skills: Board performance is coming under increasing scrutiny. Building a skills matrix can help you identify your board’s strengths and weaknesses and address any issues. A skills matrix is a short, descriptive, and visual picture of a board’s capabilities. You might use a cross-reference graph format — with names on one axis and skills across the other (defined with some numerical proficiency level).
  • Hiring board members: You’ll want to hire board members using a public job description just as you would with any other hire. You can also headhunt for specific board members, e.g. via the EA Good Governance Project or High Impact Professionals.

 

If you’re the CEO and founder of the organization, you can still be a board member. Once your organization has raised a substantial amount of funds, we generally advise the CEO to step aside from the board (as it limits the board’s independence, muddies lines of authority, and limits the organization’s ability to benefit from the skills, experience, and capacity of another individual).

 

Offices

The following offices are typically mandatory:

  • Chair: Leads the board and presides over meetings.
  • Secretary: Schedules meetings, prepares agenda, and takes notes (”minutes”) during meetings.
  • Treasurer: Prepares annual budgets and ensures tax and legal documents are submitted on time.

 

The individuals holding these offices (”officers”) don’t all need to be on the board, and can often all be the same person.

Duties of all directors

All directors have the following fiduciary duties and legal requirements to adhere to.

 

Fiduciary duties

  • Duty of care
    • Directors must act with the care that a reasonably prudent person would take in similar circumstances.
    • They are required to make informed decisions by staying reasonably informed about the company’s activities and the industry.
    • This involves attending meetings, reviewing relevant materials, and asking pertinent questions.
  • Duty of good faith
    • Directors must act with honesty and integrity.
    • They should make decisions with a genuine belief that their actions are in the best interests of the corporation.
  • Duty of loyalty
    • Directors must act in the best interest of the corporation and its shareholders or beneficiaries, prioritizing these interests over their own personal interests.
    • They must avoid conflicts of interest and disclose any potential conflicts that arise.
    • Transactions involving a director must be fully disclosed and approved by disinterested directors or shareholders.
  • Duty of obedience
    • Directors must ensure that the corporation complies with applicable laws, regulations, and with its own governing documents (such as the articles of incorporation and bylaws).

 

Legal requirements

  • Compliance with corporate governance
    • Directors must ensure that the corporation follows its internal governance rules, including holding regular meetings and keeping accurate records.
  • Disclosure & reporting
    • Directors must ensure that the corporation complies with disclosure requirements, such as filing accurate financial reports with the SEC (in the United States) or other regulatory bodies.
    • They must also ensure timely communication of material information to shareholders and the public.
  • Financial oversight
    • Directors are responsible for overseeing the financial health of the corporation.
    • This includes reviewing and approving budgets, financial statements, and major expenditures.
  • Risk management
    • Directors should oversee the management of risks that could affect the corporation, including financial, operational, and reputational risks.
  • Statutory duties
    • Specific jurisdictions may impose additional statutory duties, such as environmental, labor, and anti-corruption regulations that directors must ensure the corporation complies with.

 

To ensure that directors are fulfilling their fiduciary duties and legal requirements, we recommend implementing a conflicts of interest policy for board members and personnel. We’ll explore this in a future post on maintaining a healthy board.

 

For nonprofits, directors must also meet the following minimum requirements:

  • Board meetings: Directors must attend board meetings at least once a year.
  • Fraud liability: Directors have the legal liability to ensure that nothing fraudulent happens.
  • Charitable purpose: Directors are responsible for ensuring that the nonprofit is pursuing its charitable purpose
  • Mission: Directors must be interested in the organization’s success, meaning that they care about its mission (which isn’t identical to its charitable purpose).

 

Stay tuned for our next post: Create governing documents.

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