Role of Directors in A New Company

December 15, 2006

What role do directors play in a new Company?   Are they “advisors?”  What about their fiduciary responsibility to shareholders?  What if the Company is “controlled” by one stockholder?

In start-up situations, Directors are typically chosen by the founders or if venture capital is involved, by the venture capital firm.  Regardless of where they came from, I believe a Director has a number of responsibilities:

1.  To understand the business.  Both the Company’s business and its competitors.  To effectively fulfill this responsibility, a Director must immerse himself/herself in the business and learn everything possible about the operations, product(s), customers and competitors.  This must entail interviews with numerous people and obtaining all written strategic and planning documentation from the Company.    Without this knowledge, a Director cannot adequately fulfill his responsibilities;

2.  To clearly understand the finances of the Company.  This must include corporate structure, balance sheet, P&L, business “model” and financial plan, etc.  Benchmarks should be obtained within the industry to do a “reality check” on business plans.

3.  Of course, the most important responsibility of Directors is ensuring that all stockholders and stakeholders are treated honestly and fairly.  This is the overriding responsibility of Directors.  Thus examining the best way forward for a Company from a financial and strategic point-of-view becomes paramount.

4.  Independence is also critical.  You must have Directors on your Board who are truly independent.  Thus they do not work for the C0mpany either directly or indirectly.

Rich

Bizvice:  Strategy, Marketing & Entrepreneurship

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