BOARD OF DIRECTORS

Directors are elected by shareholders to represent the interest of shareholders. Ultimately, it is the Board of Directors that is accountable for maximizing shareholder value, and the CEO is employed to that end. All the employees of the company ultimately answer to the CEO, but the CEO must answer directly to the board.

An effective board will consist of the CEO and outside directors (i.e. they don't hold any other position at the company). Anyone on the board may hold the Chairman title and be responsible for running the meetings. Ideally, the outside directors of the company serve as coaches to the CEO, offering an unbiased viewpoint during the decision making process and challenging the soundness of the CEO's plans. Having company insiders on the board can create a conflict; the CEO may not feel comfortable openly discussing certain issues with the outside directors in the presence of insiders.

Visit the website of a number of biotech companies to get an idea of who serves on their boards. Typically, you will find investors, executives from other companies, partners of law or consulting firms, and regulatory or manufacturing experts. You want high profile, experienced individuals on your board with whom you will get along. One entrepreneur offered the following litmus test: would you feel comfortable calling the person in the middle of the night if there were an emergency?

Recruit candidates whose strengths complement the weaknesses of the management team. Well known outside directors can add significant credibility, particularly when the company is trying to raise money. If a director is affiliated with a competitor, exchange of information in both directions may be inevitable. If a director is affiliated with a potential customer, other customers may resent this apparent alliance.

People who are selective about the board seats they take will look at who they would work with on the board and what kind of contribution they will be able to make. Less selective individuals may passively participate on dozens of boards and will not want to get involved with startups that may place great demands on their time.

The Board of active startups that require guidance may convene monthly at first and less frequently later. Ideally, meetings only last a few hours and have a clear agenda. Directors should receive in advance news regarding clinical data, development plans, partnership pipeline, recent new hires, unfilled positions, cash burn, etc.

Keeping in mind that the startup will evolve over time and its needs will change, recruiting too many directors early on may limit your ability to add new individuals later with more relevant experience. Instead, consider bringing certain people on as business advisors on similar terms to those offered directors or simply on an hourly basis.

Circumstance may arise when the best judgment of the board overrides the best judgment of the CEO. For example, a large company may offer to buy an ailing startup with the intention of firing everyone and just keeping the intellectual property and equipment. Management may wish to decline the offer and continue to operate the company. However, the less-biased outside members of the board may feel compelled to approve the transaction on behalf of the shareholders who are eager to liquidate their investments.

The members of the board have the power to replace an under-performing CEO. The CEO may wish to retain control of the company by limiting the number of outside directors on the board, figuring that insiders pose less of a threat. Some entrepreneurs even stock their boards with friends and family. For good reason, investors are wary of companies in which the CEO's decisions go unquestioned. When they invest in such companies, it is often under the condition that they be allowed to elect one or more directors of their choosing to the board.

In the aftermath of the scandals that rocked corporate America in 2001/2002 (Enron, WorldCom, etc), directors of public companies realized that they increasingly would be held accountable for negligence, fraud, or just poor management that resulted in loss of shareholder value. These responsibilities can consume a Director's time, making the position feel like a full-time job if the company is executing a complex partnership, financing, or merger. Furthermore, constraints on the compensation that corporations may legally offer directors have made it more difficult to recruit qualified candidates.