Monday, October 02, 2006

How to build a board

The board of directors for most startup companies is an accidental and ineffective club. The board members don’t really know why they are there, the CEO doesn’t really know how to use them, so mostly everybody just goes through the motions (no pun intended). It is time for some clear talk on how to build an effective board.

Given that board of directors is the only group that can fire the CEO, it is extraordinary how little thought CEOs give to the composition of their boards. A typical startup board consists of several venture capitalists, a couple of people chosen purely for their impressive resumes and a smattering of founders.


The accidental board
Now, given that the purpose of a board is to provide advice to the CEO, how effective is this “accidental” board likely to be?

  • Venture capitalists: The venture capitalists are there purely because they invested money in the company, not because they have a relevant business background that gives them insight into the strategy or operations of the company. They may even have objectives around growth and liquidity that are counter to the best interests of the company. Most importantly, VCs have famously itchy trigger fingers – if a VC decides the CEO is not executing well enough, they often push to replace the CEO rather than coaching them.
  • Impressive people: The people who are on the board purely because of their resume are not much more likely than the VCs to be helpful. Their experience running a big company may have little to do with the challenges facing a small company. Their time commitment to the company may be minimal. Finally, if things start going poorly, they may worry more about the impact on their reputation than on how to help the company overcome its challenges.
  • Founders or executives: Small company boards often have company executives sitting on the board. If you consider that the purpose of the board is to advise and if necessary replace the CEO, it is bizarre to think that executives who report to the CEO would also be determining the CEOs fate. For example, a current executive or former founder may have an incentive to make the CEO look bad so that they get a shot at the top job. This is not to say that executives should not attend parts of the board meeting, just that they should not be formal board members, nor should they attend the opening or closing session of the board.

What should a board do?
The CEO’s job is to create a strategy that maximizes the value of the company and then manage the execution of that strategy. In this context, the job of the board is simple: to help make the CEO successful in creating and executing a strategy.

The board has three ways to do this:

  • Challenge the existing strategy: the board’s most valuable role is to provide input into the strategy – is it sound, is it realistic, what are the potential risks?
  • Raise difficult questions that the CEO is not focused on: the board’s second role is to probe how well the strategy is being realized – are the metrics right, are they being achieved, what is being overlooked?
  • Suggest ways to grow the CEO: the CEO role is an impossible job – nobody has all the skills required to handle every aspect of the job. The board should be looking ahead and constantly helping the CEO build skills that they will need 12 to 18 months from now. The board should also be looking out at the point where it will be necessary to bring in new CEO skills and start a dialogue for a smooth transition well before it needs to take place.

Boards and CEOs often fall into somewhat adversarial roles that are damaging for the company and ensure that the CEO shares a minimum of information with the board. Given the disruption caused by replacing a CEO abruptly, an effective board should see its first and foremost role to support the CEO.

The 3 people you need for an effective board
Boards should have five to six members, but as a CEO you need three people on the board who play very specific roles. These are:

  1. Investor: Venture capitalists are pack animals and the venture capital world has very clear hierarchies. On any board, there should be one venture capitalist who all the other venture capitalists respect and who can effectively speak for the others. As a CEO, you should create a good relationship with your strongest VC and look to them to represent the overall voice of the investors
  2. Customer: it is very important to have a person on the board who can speak for the customers. This person is not necessarily an actual customer, but someone who can give the customer’s point of view on the company strategy, industry trends and competitor actions. Having someone who can speak for the customers on the board eliminates a great deal of second-guessing during board meetings.
  3. Experienced CEO: the most important member of the board from the CEO’s perspective is a person who has been a successful CEO of a comparable company. They should suggest ways to build the CEOs skills to meet the company’s next challenges. This is the person who has the credibility for example to suggest alternatives to firing the CEO when the VC’s are frustrated with the company’s progress. Ideally, this person should also be chairman of the board.

A board that has these three roles will give the company a huge advantage over the more common accidental boards. Having clear leadership among the investors ensures that future funding and liquidity events will happen smoothly. Having a respected customer perspective on the board greatly helps in assessing company strategy. Finally, having an experienced CEO on the board helps ensure that the company CEO is building the skills needed to be successful for the next phase of company growth.


A typical board agenda
Board meetings have very specific objectives. One of the most important elements of a meeting is to have a closed session at the beginning and the end for candid discussion with the board.

  • Board introduction (closed session, no executives other than the CEO): the CEO gives state of the union, a very candid assessment of where the company is right now. The CEO asks board members for any issues that they want to make sure are addressed during the rest of the meeting. 15 minutes.
  • Strategic review: the CEO or an executive make a presentation on a major element of the company strategy. 60 minutes.
  • Functional reviews: the executive staff make short presentations on their objectives from the last board meeting, their progress against those objectives, and their objectives for the next board meeting. Four 15 minute sessions.
  • Board business: this is where formal motions are passed, usually having to do with stock, audits, legal documents and benefit plans. 30 minutes.
  • Board close (closed session, only external board members): the Chairman meets without the CEO and probes the board members for how they thought the meeting went, and what concerns they may have that should be addressed before the next board meeting. It is critical that the CEO not attend this session, so that board members can be candid with concerns. It is equally critical that the Chairman meet with the CEO afterwards to share these concerns and discuss how to address them. This is the mechanism for defusing board concerns before they become critical enough that the board. 15 minutes.
  • Total time = 3 hours

2 comments:

Ben Kepes said...

One of the many soap boxes that I stand upon is the need for independent governance for companies. The issue that I come up against (and I suspect more of an issue downunder than stateside), is finding independents with both attributes;
1) An understanding of business in general
2) An understanding of the tech sector

It's the very reason that we're going to see a rapidly decreasing average age of board members over the next few years.

ckeene said...

Ben - this is a good and laudable soapbox to stand on. One big problem is how people get onto boards - it is common to find the board dominated by investors who have neither a good understanding of business nor an understanding of the tech sector. At some point, taking money from someone who is going to be a liability on the board is a bad business decision, but it is hard to take this principled stand when you have only 2 weeks of cash left in your bank account!