July 4, 2017

8 steps to building a strong board of directors

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I’ve gleaned most of this hard-earned knowledge from witnessing what not to do — too many boards are poorly organized, with investor syndication woes and an imbalanced composition of members.

Building a board is incredibly challenging, yet getting it right is critical to setting the tone for success from the start, elevating a burgeoning startup to the next level and meeting the long-term needs of a rapidly growing business.

Here are eight things you should know about the intricate art of building a board of directors:

1. Look beyond your investors

It’s important to remember that investor syndication does not equal board composition, so avoid automatically giving a board seat to all of your investors. This happens far too often, as each share class asks for board representation to look after their own specific interests and agenda. Your board should represent your market, both the current phase of your business as well as your strategic aspirations. In many cases, there are people better suited for this than your investors. Without the operational, market, or global investment expertise to merit a seat, many investors can actually detract from — rather than add value to — a board. Similarly, while the founder is an integral part of the team, he/she is not always the best fit for a board seat.

2. Find a chairman who’s been there

To help set the right tone from the top, find a senior, experienced chairman who’s been there before. Selecting a chairman based on non-board work experience alone is a grave mistake — and one that happens far too often. The person you choose should have at least five to 10 years of experience working on a board and must be able to effectively manage diverse stakeholder interests internally as well as externally to the company (i.e., board members, employees, investors, regulators, bankers, analysts, policy makers, lobbyists), deftly broker solutions, and negotiate with confidence and skill.

The chairman should also play the role of CEO coach — someone who can mentor, redirect by suggesting corrective actions, assist in hiring, work on M&A, liaise with bankers, align investors around fundraising and exit, etc. They should be omeone who can augment the management and make them perform at a higher level. This guiding role is a critical function, so the chairman and CEO should never be one and the same. How a combined chairman and CEO role is so common in many companies is a mystery to me.

3. Be transparent and keep communication channels open

Be upfront about changing board members as your company grows. It is not unusual that a director who helped you at a seed or pre-Series A time is not the right director for a Series E round company. Keep your dialogue with board members consistent, open, and truthful. Doing so will ensure your board members are not blindsided or feel “demoted” when a change becomes necessary. This also applies to identifying new external candidates — it’s important for current members to be part of the conversation and the selection process. The best CEOs I have worked with have mastered this approach to transparency and inclusion.

4. Size up your board’s size

I once sat on the board of a company of 40 employees, four senior executives, and nine board members — which was at least four board members too many! While the ideal board size varies from company to company, experience has taught me that five is often the magic number for a Series B company, growing to seven for a pre-IPO business. Keeping the number of board members low ensures diversity of views while retaining discipline, focus, engagement, and commitment.

5. Plan for the long run

The best boards have the right mix of skills, abilities, and perspectives, so think carefully and holistically about whom you choose for your board. Be particularly thoughtful in selecting your independent director(s) as your organization grows. The independent director will play a critical role in shaping your organization’s culture and guiding it along the path to success. Also consider that you’ll likely work with each person for five to seven years — so make decisions with the long term in mind.

6. Avoid applicants actively seeking board seats

A good rule of thumb is to avoid people who actively put themselves forward for board positions. These people are likely more interested in their own goals than in the goals and interests of your company. Your best choice is likely too busy to worry about their next board position, which means you’ll have to actively convince them to work with you. Trust me, it will be well worth the extra effort.

7. Set clear expectations to build trust

It doesn’t end with putting together the right team. From there, you have to make the board work (and meetings function) to your benefit. Again, transparency and clear communication is critical in building trust and effectively managing the board. The mantra of “under commit and over perform” often works well, but also be careful of “sandbagging,” as timid targeting will not get you far. It’s also important to spend time together outside of the boardroom to cultivate relationships and generate trust among the board members. Schedule an annual, full-day strategy meeting and occasional, informal dinners to help bolster board dynamics.

8. Make meetings meaningful

Board meetings are often considered a drag — I’ve even heard CEOs compare them to dentist visits. Yet the CEO is ultimately responsible for the success — or painful failure — of board meetings. The CEO needs to come to the meeting with a plan of action in place and be prepared to take charge, manage expectations, be demanding when needed, and stay candid about the good, the bad, and the ugly. Pre-meeting preparation is essential; ensure materials are distributed in advance and that board members have had adequate time to review information and arrive at the meeting ready to discuss the real issues. While meeting cadence varies, I urge companies to take advantage of sub-committees and outside experts to address specific issues. This allows smaller groups to meet more frequently to tackle particular matters of regulation, compensation, recruiting, lobbying, etc., and report back results to the CEO and board-at-large.

Building the right board requires work, patience, transparency, and communication. Ultimately, the trust you forge across your board member team will get you through the tough times, while the right mix of players will drive the performance and results needed to succeed.