After more than 30 years of hard-earned experience in both operations and investing, I may have developed a few distinguished gray hairs as a board member at more than 20 companies, but I’ve also gleaned invaluable insights into what it takes to create a successful and efficient board.
Unfortunately, my knowledge didn't come from witnessing exemplary boards, but from observing poorly organized ones that suffer from investor syndication woes, inexperience, and an imbalanced composition of members.
Creating a well-functioning board is a daunting challenge but getting it right can mean the difference between soaring success and dismal failure. It's the starting point for taking a budding startup to the next level and meeting the long-term needs of a rapidly growing business.
So, let's not sugar-coat it. Building a board is tough, but the payoff is huge. If you're looking to establish a board, buckle up because I'm about to share with you the most important insights I've learned throughout my career.
Here are 9 things founders 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 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 a founder is an integral part of the team, he/she is not always the best fit for a board seat.
2. Find a chair who’s been there
To help set the right tone from the top, find a senior, experienced chair who’s been there before. Selecting a chair 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 ten 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, policymakers, lobbyists), deftly broker solutions, and negotiate with confidence and skill.
The chair 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, exit, and more. They should be someone 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 chair and CEO role is so common in many companies is a mystery to me. In brief, the chair should be a coach, not a cheerleader.
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 counting thirteen members four senior executives, and nine board members. The company had 40 employees!!
While the ideal board size varies from company to company, experience has taught me that five is often the magic number for a Series A company - comprising of 1 Seed investor, 1 Series A VC investor, 2 co-founders, and 1 independent director – and 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. A large board suspends responsibility and human nature simply means that fewer people engage or feel empowered to participate.
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 startup grows. The independent director will play a critical role in shaping your company’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 a person 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 must 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. These personal connections will stand you in good stead as you are likely to have to deal with crisis situation together.
8. Make meetings meaningful
Board meetings are often considered a drag — I’ve even heard CEOs compare them to dentist visits; painful during, but relief after. 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 the information and arrive at the meeting ready to discuss the real issues. CEOs often forget to use the board meeting to tee up discussions for decisions, and they often revert to result reporting that should be covered by pre-reading of material.
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.
9. Diversify to avoid groupthink
Diversity on company boards is important for several reasons. First and foremost, it promotes better decision-making by bringing together people with different perspectives and experiences. When a board is diverse, it is more likely to consider a wider range of ideas and viewpoints, leading to more informed and effective decisions.
Diversity on boards also helps to promote a culture of inclusion and equity within the company. When people from different backgrounds are represented at the highest levels of an organization, it sends a message that the company values and respects diversity. This can help to attract and retain diverse talent, as well as build trust with customers and stakeholders.
Having a diverse board can also help a company manage risk. By including people with different areas of expertise and perspectives, a board can better identify and address potential risks and opportunities. For example, a diverse board may be better equipped to identify and address issues related to cybersecurity, regulatory compliance, or environmental sustainability.
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.
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