Board of Directors is often a black box for startups — one is rarely exposed to them in academia or even industry, unless you have already been a founder. Whatever we do hear in the media is often about fractious Boards ie when things have already gone wrong. This post will try to illuminate some practical principles around the Board, focused especially on tech startups, so you can avoid the pitfalls and instead best leverage this key partner to manage your business.
1) Who and How Many?
Most Boards are an odd rather than even number of people for the very obvious reason that it is easier to break ties. Most Boards are also in the single digits lest it be unwieldy. The most common number is 5 ie 2 representatives from the management, 2 from the investors, and 1 independent either suggested by the management and approved by the investors or vice-versa. There is such a thing as professional board members who earn a living serving as the independent, they tend to be very senior folks at the end of their careers. Many companies will also have board observers who will represent smaller investors; startups will often have clauses around the percent ownership that will qualify for a board observer seat lest there be too many of them also. Finally, most Boards meet on a quarterly basis and the company will cover travel costs for board members, but not board observers.
2) Governance, not Strategy
A Board can hire and fire a CEO, it approves equity packages and mergers, it flags concerns and celebrates achievements, it can help introduce to clients and partners, or convince a key hire to join. What they do not do is run the company. A good CEO will consult the Board on strategy but he / she is really the one in charge of the vision of the company. If that is not the case then there is a serious problem in the company. As a core principle, the Board represents the interests of the shareholders* and exists as a check and balance on the management providing governance. A good Board is a partner for the CEO and his / her team and will also know when to push back or take a step back.
* Shareholders means owners and is the norm in the US. In Europe though Boards typically represent stakeholders, which means a broader set of constituents such as families, clients and general society. There are obvious trade-off in each definition, a matter for a separate post.
3) Who Should be Chairperson?
The Chairperson is responsible for setting the agenda, calling votes and establishing the overall norms in the Board. Most Boards are chaired by the CEO, in which cases it is crucial for discussions around CEO performance and compensation be led by a separate committee within the Board. There are also many cases when it makes more sense for someone else to be Chairperson, say if if the CEO is a new hire into the company. Sometime the independent board member is the best choice for Chairperson since he / she is not beholden to anyone’s interests and can best juggle the various dynamics within the group. A good Board will also have a process on assessing the Chairperson role — if you don’t have an agreed understanding around this then you are simply asking for trouble in ever trying to transition the role.
4) Promoting Good Discussion
Management will know the day to day of a company far deeper than investors and investors in their turn might be representing various financial and strategic interests. All of this means Board discussions can quickly turn confusing and even acrimonious, besides the usual dynamics of any group such as being dominated by the strongest personality. On the other extreme Boards have the danger of becoming purely social clubs or to follow whatever the CEO says. It’s the Chairperson who has the biggest responsibility in enforcing the norms that govern a board, including setting agendas and sending materials in advance with the right set of expectations. A functional Board can help the company make and execute its biggest decisions successfully, a dysfunctional one can lead to absolute disaster.