Insight into the Role of Boards of Directors

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This article abstracted with permission from the Financial Management Network.

The rapid growth rate of venture-backed companies makes it exceedingly difficult yet increasingly important to build and maintain a company's team, which includes the board. That team must grow and change as the company matures. To address some of the challenges emerging companies face, Boardroom Consultants and the Silicon Valley Bank hosted a conference for senior executives of early-stage companies in which we brought them together with several leading thinkers on governance leadership. In this article, we distill some of their wisdom on effective board practices.

It is often more difficult to give advice to a successful company than to a troubled one. How can directors of very successful, early-stage companies provide more value?

According to Henry Wendt, “Success today is not a precursor of success tomorrow. So the terrain that is ahead of the company is as much the responsibility of the full board as anything I can think of. While we may all feel very successful today, most managers are scared of tomorrow. Defining tomorrow in a strategic sense, and the requirements for success in that competitive terrain, is where the board can be most helpful.”

George Grodahl adds that “since there are so many things to do in a company, the board can make sure the company is focused on the most important objectives. It is easy to lose sight of them with everything coming together at once.”

Ram Charan suggests that one of the greatest contributions a board member can make to a successful company is to ask insightful questions about the external environment. “Questioning can open the mind. It's not just the advice a board gives, but also the questions they ask - that's where contributions are possible.”

What's your view of having at least one director with experience completely outside of your industry?

“For a board to be effective,” answered Charan, “diversity of backgrounds is very important. In this day and age of globalization, you want a number of directors who come from outside of your industry. In addition to keeping a company focused, a board can give their instinctive feel about the people. It's uncanny how, after five or six observations, board members can begin to share their instincts, telling you a great deal about the management players. It is also their insights about the external environment that raises the bar for the company and allows them to make a contribution.”

On the other hand, Paul Goddard points out, “If you choose someone who is very far outside of your industry, he or she may not understand what you are talking about. It is important that directors have some kind of common language to rally around. They should come from different, but related, industries.”

Is there any feel for how long a director can serve on a board before becoming tired?

Goddard answers that “the CEO knows when a director is getting tired and it is up to the CEO to ‘have a little chat' with that director.”

Term limits have become a fashionable way of dealing with keeping the board fresh. While Wendt sees some benefit in having term limits, “a formal appraisal program for director performance and effectiveness is even more important.” That is one reason for having a non-executive chairman. But if that structure is absent, a lead director or governance committee can play a role in board evaluation. If performance is “not up to snuff,” according to Wendt, “then changes should be made.” He also confirmed that when a board goes through an evaluation process as a regular part of board activities, and when directors are changed for malperformance, “the level of performance goes up.”

Roger Kenny shared the view held at Boardroom Consultants that if the board does a good job of evaluating the performance of the CEO and themselves, then you've got a good board.

One of the conventional views of governance is that the most important responsibility of the board is to select, evaluate, and reward the CEO. What about at an early-stage company?

Advises Grodahl: “Typically, in start-up, high-tech companies, the CEO is most likely the founder. These companies go through some very critical phases in development where it is very difficult to make a change. I think the best thing to do, in these cases, is to have an active and supportive board that can help the executive surround himself with very competent people, and then coach him and support him.”

Should directors actively communicate with members of the management team other than the CEO?

“In order for directors to perform their duties responsibly,” says Henry Wendt, “they must believe they have access to senior management. I have seen situations where the board had access only to the CEO, and I think that is dangerous. It is particularly important to have access to the chief financial officer, but also, more broadly - particularly in technology-intensive companies - the leaders of the technology effort. The CEO must be very secure about this.”

He continues, “Directors may not use the access, but they must know they have it and, in a situation where it is required, that they can pick up the telephone and talk to the chief financial officer or chief technical officer or vice president of sales if they feel it is important to do so. They can tell the CEO that they are doing it either before or after it's done, but direct access is vital to the health of the company.”

“But,” Grodahl adds, “particularly in a start-up, where there is a young, close team, directors have a very important responsibility to ensure that they do not subvert the CEO. They should be supportive and involved, they should gather information and make contributions, but they should not give active direction.”

How do you deal with the issue of boards that are made up of your investors?

There was a general consensus that investor directors should eventually give way to independent directors - and the sooner the better. Our concluding recommendation is that when you recruit independent directors, you have to expect that they will want greater dialogue than the venture directors are used to. This means that the board's agenda is going to have to change; otherwise, you won't be able to attract the best to your board.

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