1. CONSIDERATIONS WHEN ESTABLISHING
YOUR FIRST BOARD OF DIRECTORS
This document was prepared solely for use in a February 2, 2017 Minnesota CLE Webcast.
Reproduction or dissemination without permission is prohibited.

2. Paul Knapp
Has served on 24 private, 2 public, and 9 non-profit boards
30 years of family business office experience including commercial
real estate, operating companies, investments
Graduate of The College of St. Thomas, B.S., Finance, and William
Mitchell College of Law, J.D.

3. John Bergstrom
Has served on 25 private, 5 public, and 7 non-profit boards over his
30 years in the growth company advisory business
Focus of expertise on strategic alternatives planning, executive
compensation and corporate governance
Graduate of Gustavus Adolphus College, B.A. and University of
Minnesota M.B.A.

4. The board-centered governance method developed over the past 500
years to provide for the representation of all who have an interest in
an enterprise based on three concepts:
• Shareholders elect directors
• The board has the ultimate authority to select and supervise the
company’s chief executive
• Directors, as peers, make decisions as a group subject to majority
rule
Board-centered Corporate Governance

5. • Ensure the representation of all shareholders
• Access valuable talent, expertise and insight
• Present a better face to the community
• Facilitate transition and management succession
• Review/approve material transactions
• Manage the CEO
• Approve strategic plans
• Approve budgets and supervise independent audit process
Why Have a Board?

6. • Advisory boards are normally intended to merely advise the CEO or
the company
• Advisory boards are not governing boards and do not have the
duties or authority of a board of directors
• Advisory board members be exposed to personal liability without
corporate (articles/bylaws) protection or statutory protections or
directors’ and officers’ liability insurance
Advisory Boards

7. • Familiarity with shareholder goals
• Enthusiastic about the company’s mission, vision, and values
• Proven integrity
• Articulate
• Collaborative
• Respectful of others’ opinions
• Strategic thinker – not focused on minutiae
• Functional expertise e.g. audit, governance or compensation
Identifying Prospective Board Members

8. • A majority of board members of public companies must be
independent: they cannot derive significant income from the
company
• A minority of board members of closely-held private companies are
likely to be independent: a majority are likely to be owners and
managers of the business or family members of owners
• The number of independent board members generally increases as
a company’s ownership becomes more widely-held
“Independent” Board members

9. • Identify the talents, expertise and experience of the prospect on
which you hope to draw
• Describe the board meeting commitment as well as the time
commitment outside of board meetings
• Identify the committee on which you expect the board member to
actively serve, if any
• Describe the compensation you intend to provide
• Identify the term limit
Soliciting Prospective Board Members

10. • Company mission, value and ethics statements
• Company financial and operational history
• Company strategic plan
• Chain of command and organizational structure
• Fiduciary and functional duties of the Board
• Director communication with management, shareholders, and others
• Confidentiality
• Role of Chairman
Board Orientation

11. Duty of Care
A director is required, by statute in Minnesota, to act in good faith,
using the care that an ordinarily prudent person in a like position
would exercise under similar circumstances, and in a manner that
he or she believes to be in the best interests of the company
Duty of Loyalty
Directors must protect the interests of the corporation and act in
the best interests of its shareholders
Duty of Obedience
Directors must follow the organization’s governing documents
and policies as well as state and federal laws
Board Member Fiduciary Obligations

12. In the absence of fraud, conflict of interest or other breaches of loyalty,
a director will not be held liable to his or her corporation if he or she
acted in an informed manner, in good faith and with a reasonable basis
for believing that the action he or she authorized was lawful and in
furtherance of the company’s purposes
The Business Judgement Rule

13. • Hire, fire, manage and compensate the CEO
• Plan for CEO succession
• Review and authorize the company’s strategic plan
• Manage budgeting and financial reporting to ensure short term
visability
• Manage risk
• Establish and keep current the ethical conduct policies and
procedures which govern the company’s operations
The Board’s Functional Duties

14. Directors should take all reasonable steps to avoid conflicts of interest
with the company and promptly disclose any actual or potential conflict
to the Governance Committee of the Board
Conflicts of Interest

15. • Depends on the financial strength of the company and the quality and experience of the
directors
• Varies widely ranging from equity-only consideration to cash only programs
• Independent director compensation is typically structured as some combination of annual
cash retainer, board meeting fees, equity awards (full-value shares or stock options), and
committee chair premiums
• The most recent National Association of Corporate Directors (NACD) Private Company
Governance survey reported average total compensation of $33,000 for $25 to $50 million
revenue companies and $36,000 for $100 to $250 million companies
• Board members who are also full-time employees of the company are typically not
provided separate compensation for their role as a board member
Board Compensation

16. • Typically elected from among the non-management directors
serving on the company’s board of directors to act as a liaison
between non-management directors and company management
• Manages the board, does not manage the CEO
• Organizes the Board’s evaluation of the CEO
• Consults with management on Board meeting agendas and leads
the board meeting
• Leads the executive session of the board and communicates key
outcomes of that session back to the CEO
The Role of the Board Chair

17. • Most common standing committees of the board are
oAudit
oCompensation
oGovernance
• Board committees enable critical work to be completed outside the
board meeting
• Good committee management enables the larger board to address
strategic rather than operational details
• Committees arise and evolve as the company grows and as the
shareholder bases becomes less closely held
Committees

18. • Reviews the accounting and financial reporting and control policies
and procedures
• Recommends to the Board of Directors the firm of certified public
accountants to be retained as the company’s independent auditors
• Reviews policies and procedures relating to business conduct
(“compliance”)
• Establishes and manages the whistle blower process
• Manages risk
Audit Committee

19. • Recommends to the Board the compensation of the CEO and often
other executive management
• In more formal private boards that seek to emulate public company
practice, the committee may be entirely empowered to establish
compensation plan without involvement of the full board
• Recommends to the Board the compensation of independent
directors
• Helps Chair conduct the annual evaluation of the CEO
Compensation Committee

20. • Nominates directors for election or re-election and manages
ongoing board succession planning
• Develops and maintains a succession plan for the CEO and policies
regarding succession
• Recommends to the Board a set of corporate governance principles
• Reviews executive and board member conflicts of interest and
recommends resolution to the board
• Conducts a periodic board self-evaluation
Governance Committee

21. • Directors direct, CEOs lead and managers manage
• The board oversees management but does not manage
• The board works to ensure that the CEO manages the company’s
financials well, exercises strong leadership, develops a strong team
of senior staff, and communicates well with all stakeholders
The Board’s Relationship with the CEO

22. • Rolling one year board calendar
• Tie committee meeting schedule to board meetings
• Schedule shareholder meetings, nomination and election of officers,
board self-evaluation, election of officers and directors, orientation,
and retreat
The Year Long Schedule

23. • Provide agenda and other advance materials to the directors no
later 48 hours before the meeting
• If possible, hold a board dinner the night before the meeting,
particularly if the directors are coming from out of town
• Include a consent agenda that includes all financial and operational
information and metrics presented in a consistent fashion from
meeting to meeting
• Maintain confidentiality
Managing Board Meetings

24. • An extended half or full day meeting once a year to consider
important topics in-depth
• Sample topics include strategic issues affecting the company, the
mission, vision, and values statements, succession planning,
acquisitions, sale or recapitalization of the company
• Scheduling opposite time of year from annual planning and
budget approval
The Board Retreat

25. • Board members should generally have complete access to the CEO
and CFO and to information regarding the company’s operations
• Board member access to other executives should generally be
provided subject to advance notice to the CEO of such meetings
• The CEO should bring managers into Board meetings to provide
additional insight regarding items in their areas of expertise
• Directors generally refer all inquiries from the media, shareholders,
or customers to management and do not individually speak for the
corporation
Board Interaction with Management,
Employees and Shareholders

26. • Mission – What the company does
• Vision – What the company will become
• Values – How the company will behave
The Mission, Vision and Values Statements

27. • Hire outside party to manage the review process and report the
results in an independent fashion back to the board
• Ask that directors rate the CEO and their fellow directors on
preparedness, insight, contribution, judgment, knowledge and
overall effectiveness
• Deliver all results to Chairman and specific results to specific
directors
Periodic Board Review

28. • Death/disability/departure of CEO
• Product liability incident/recall
• Major lawsuit filed or legal decision issued
Crisis Management

29. • Clearly articulate board member term limits
• Consider tying board service to the board member’s current status,
responsibilities and activities
• Ensure that the company’s by-laws provide a simple, easy and
convenient method to remove directors
Term Limits

30. • Private companies and their boards are exposed to ever increasing
potential liabilities from an ever increasing universe of potential
litigants: shareholders, employees, customers, vendors, acquirers
and acquires.
• Many states have adopted statutes that limit the personal liability of
a director in actions brought by the company or its shareholders for
monetary damages for breach of fiduciary duty of care as a director,
provided this provision is contained within the company’s articles of
incorporation
• Directors and Officers (“D&O”) protects directors from litigation
Board Member Liability and Insurance

31. • Prepare for and attend meetings
• Understand the business judgement rule
• Ask questions and get professional advice if necessary
• Make note of your disapproval
• Make sure the company’s articles, bylaws and D & O insurance
provide maximum protection
Director Guidelines to Avoid Liability

32. The Balance Point, Cary J. Tutelman and Larry D Hause
The Board Game, How Smart Women Become Corporate Directors, Betsy Berkheimer-Credaire
Boards of Directors and the Privately Owned Firm: A Guide for Owners, Officers, and Directors (Hardcover) by Roger H.
Ford
Boards that Deliver, Ram Charon
Boards that Make a Difference: A New Design for Leadership in Nonprofit and Public
Building Better Boards: A Blueprint for Effective Governance (J-B US non-Franchise Leadership), David A. Nadler
Directors and Boards, Tom Horton
Fundamentals of Corporate Governance, Varallo, Dreisbach and Rohrbacher, ABA, 2001
Governance is Governance, Kenneth N. Dayton, Independent sector, 2001
Great Companies Deserve Great Boards, A CEO’s Guide to the Boardroom, Beverly Bahn
The Handbook of Corporate Governance, Edited by Richard LeBlanc, Wiley, 2016
The Historical and Political Origins of The Corporate Board of Directors, Frankin A Gervurts, Hofstra Law Review
Organizations, by John Carver
Owning Up, Ram Charan
Running Board Meetings: How to Get the Most from Them, Patrick Dunne MBA
The National Association of Corporate Directors and national accounting and law firms also routinely generate
interesting papers on current governance topics affecting private companies.
Private Company Governance Resources

33. Thank You