Wednesday, April 18, 2007

Startup Boards: Paying Your Chairman

Many of the boards I work with have Chairs who provide invaluable support and guidance to management. But how much should they be paid for their efforts?

Some Chairs will point to compensation paid to public boards as a reasonable proxy, and then propose that they receive the same, less a discount to reflect the lower liability associated with chairing the board of a private company.

I don't necessarily disagree with this approach. Some of the Chairs I work with are essential parts of the startup team. But do they provide equivalent value to the Company as that received from a public company chair?

Here's the description of the role of the Chariman of the board taken from National Association of Corporate Directors. The Chair:

1. Establishes procedures to govern the Board's work

2. Ensures the Board's full discharge of duties

3. Schedules meetings of the full board and (in consultation with committee chairs) committees

4. Organizes and presents the agenda for board meetings with input from the board members

5. Ensures proper flow of information to the board, reviewing adequacy and timing of materials in support of management's recommendation

6. Oversees the preparation and distribution of proxy materials to shareholders

7. Acts as a liason between the board and management

8. Together with the CEO, represents the company to external groups: shareholders, creditors

These functions, as a whole, are the manner in which the Chair ensure that the Board discharges its fiduciary duty to provide oversight. In most startups, these functions end up performed largely by management. I'm not a big fan of this practice - aside from the obvious legal issues associated with delegating what is really a good chunk of your fiduciary process, the Chair is really taking precious time way from management's ability to build the business. However, as long as a Company believes it receives equivalent value, it may be a reasonable approach.

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