Establishing a Board of Advisors for Your Company

There is a painting on the wall of the main conference room in my law office. It comes from the cover of the October 1939 edition of Fortune magazine, and was painted by Antonio Petruccelli. The painting is square. Within the square, however, is a series of objects, arranged in a circular form, which, at first glance, would possibly seem to represent the image of a wheel. Upon closer examination, however, you soon realize the objects consist of, starting from the center, a large round conference table, at which are seated, each in a high-backed red leather chair, nine, similarly bald-headed men, each wearing a dark suit and white shirt. Each has, neatly placed in front of him, in uniform fashion, a white piece of paper, a coaster and a drink.

This probably doesn’t sound either too interesting or relevant to the topic at hand, but let me try to connect the dots. When you first look at the painting, your eye seems to see a consistent, geometric figure. The closer you look, the more you notice details with a difference. Some of the figures have slightly different colored suits and ties, but this subtlety is minor. The vision is of uniformity and conformity, and this is just what most of us expect from a board of directors.

What intrigued me about the work, is what the artist probably intended you to notice last. Each little bald-headed man is subtly leaning his right hand on the circular conference table, pointing his index finger accusingly at the board member to his left. You don’t know who is in charge, nor do you know who is first in rotation or last. The following quote, again from Fortune magazine, sets the mood:

'Planning Board' photo (c) 2010, Cushing Memorial Library and Archives, Texas A&M - license: you have five directorships it is total heaven, like having a permanent hot bath…. No effort of any kind is called for. You go to a meeting once a month in a car supplied by the company, you look grave and sage, on two occasions say, “I agree,” say “I don’t think so” once, and if all goes well you get 500 pounds a year”

Chamberlain, Why It’s harder and Harder to Get a Good Board, Fortune 109 (Nov. 1962)

There are all sorts of boards of directors. Historically, corporate law has deemed this board as a group of wise individuals, legally mandated to manage the business and affairs of a corporation. The board does not manage on a day-to-day basis, but meets periodically, having appointed officers to deal with daily operations. Classically, the stockholders elect the members of the board on an annual basis, although many corporations utilize a staggered board system to provide continuity. With a staggered board term, some directors go on and come off the board at intervals longer than one year, and a portion of the full board will remain in office as the next group comes in. In not-for-profit corporations, the members of the organization may select or elect the board of directors.

One of the best known cases in early American jurisprudence on the issue of liability of a member of a board of directors of a company, involved a man by the name of Andrews. He became a member of the board of directors of a company during its start-up phase and served for about eight months. His only attention to the business of the company seems to have been a few discussions with the president of the company, when they met from time-to-time.@

The business later went into receivership, due in no small part to the incompetence and extravagance of the officers of the corporation, and the receiver sued Andrews for mismanagement. There were two primary issues in the case, relevant to this subject. The first dealt with the issue of negligence of the director, in terms of attending meetings. Since there were only two meetings during this director’s term, having attended one and missed the other with valid excuse, no negligence was found. The issue of the importance of attending meetings, as a matter of a finding of negligence, however, was firmly established.

The second issue was the attention to detail required of a director. The following quote from Judge Learned Hand in this early, landmark case, should help to demonstrate that duty:

[He] did not press [the president] for details, as he should. It is not enough to content oneself with general answers that the business looks promising and that all seems prosperous. Andrews was bound…to inform himself of what was going on with some particularity, and if he had done so, he would have learned that there were delays in production which were putting the enterprise in most serious peril.

Barnes v. Andrews, 298 F. 614 (S.D. N.Y. 1924)

This case stands for the proposition that members of a board of directors have a substantial duty to look beyond the “herd” and personally investigate the affairs of the business. The depth of the investigation is beyond this piece, but it has repeatedly been found to exist. Members of a board of directors are typically held to a standard of care similar to that of others in a fiduciary relationship. This means they can be found to have a degree of personal liability.

'Business Card 4' photo (c) 2009, Duane_Brown - license: typically are legally required to discharge their duties, at a minimum:

  • ∙ in good faith;
  • ∙ with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
  • ∙ in a manner the director reasonably believes to be in the best interest of the business.

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