On the most fundamental level, a board of directors is put into place to make sure the given cannabis business runs effectively and indeed responsibly. The board is collectively accountable to the company’s shareholders and pursuant to its duty to represent the shareholders’ financial interests, is charged with developing and implementing both short and long-term strategies to maximize the company’s success. Shareholders would be wise then to select this board of directors vary carefully. What does this mean for a cannabis company? Pick board members that know about the cannabis industry.
Who selects the Board of Directors?
Remember, the board of directors is appointed by the company’s shareholders with the express purpose of making sure the company doesn’t fail. It stands to reason then that it is the shareholders, or the individuals who have skin in the game, that have the right to select the board of directors and the method by which the selection process takes place is codified in company’s founding documents (bylaws, operating agreement etc.). While “Board of Directors” is a phrase typically reserved for a Formal Board of Directors, it is worth noting that certain cannabis companies (and certainly those in the earlier stages of the startup evolution) avail themselves of an Advisory Board which carries marketdly different legal implications:
This type of board includes a group of individuals outside the formal construct of the company who advise and guide the founders in matters related to the operation of the business. Because members of the Advisory board are considered to maintain only a very small degree of fiduciary duty to the cannabis company’s shareholders, their recommendations are typically not legally binding and therefore are often much more risk tolerant.
A formal Board of Directors conversly, has very real and enforceable legal responsibilities and fiduciary duties. The Board of Directors has voting rights and decision making powers not available to those merely sitting on an Advisory Board and has the legal authority to compel organizational changes to the company and the sitting officers (including firing even the CEO of the company). Of course, as was once famously quipped, With Great Power Comes Great Responsibility and one can very reasonably expect a Board of Directors to be much more judicious and conservative with its decisions than an Advisory Board. The Cannabis industry, with its matrix of rules and regulations, is an excellent field to observe the cautious approach (responsible) Board’s will take when enacting broad policy changes to the marijuana startup. Thus, selecting Board Members with knowledge and experience in the Cannabis industry truly is a neccecity.
What does the Board of Directors do?
Among other items, the board of directors is in charge of:
· Charting the company’s goals, values, vision and policies
· Reviewing present and future opportunities, against risks in the external environment, while strategizing to harness the company’s strengths
· Ensuring the company has the resources and the framework to implement chosen strategies
· Hiring and firing the senior management (CEO, COO, CFO, President etc.)
· Issuing stock, sanctioning option grants, and setting dividend policies, including salaries of key executives
· Delegating to the management of the business while monitoring the efficacy of internal controls
· Finally, ensuring the shareholders and investors are being represented resopnsibly.
Understanding Fiduciary Duties
The two principle Fiduciary Duties the Board owes the company (and more fundamentally, the shareholders) is the Duty of Care and the Duty of Loyalty. To be short, the Duty of Care boils down to the duty not to screw up and the Duty of Loyalty is more simply, the duty not to screw the company over. For more information on this particular legal complexity, please contact a Marijuana Lawyer.
Consider the Fiduciary Duties in practice:
· Proper purpose – Board members must ensure that decisions are made so that they accord with the company’s higher-level objectives
· Due Diligence – Before making business decisions, proper care must be taken to ensure these are good decisions.
· Business Judgment rule – Board members must act in good faith and with the reasonable belief that such action is in the best interest of the company.
· Loyalty – Board members must avoid conflicts of personal interest at all costs
As is self-evidently the case, running a cannabis business is uniquely challenging because there are so many additional legal hurdles in managing a company that is fundamentally federally illegal. Cannabis startups should take extra effort in selecting a Board that is highly competent and appreciative of the legal idiosyncrasies of this industry.